When I first started learning about Bitcoin, I found plenty of information, but nothing that directly answered the most burning question:. First and foremost, a bitcoin is a unit of accountin the same sense that a gallon is a unit of volume, or a gram is a unit of mass. These three properties, combined, allow bitcoins to function correct horse battery staple bitcoin to usd as a system of distribution of wealth.
When you think about it, what makes dollar bills good at distributing wealth, anyway? You can possess a dollar bill by putting it in your pocket. You can transfer it to somebody else by giving it to them. And dollar bills are pretty difficult to copy. Hence, cold, hard cash is one good way to distribute wealth, and bitcoins are another.
Since bitcoins are not physical objects, but merely units of account, there needs to be some other way to keep track of them. There are, in fact, thousands of servers keeping track of bitcoins. Every such server in the Bitcoin network is called a full node. A full node is basically an electronic bookkeeper, and anybody in the world can set up and run one. As of today, the public ledger contains more than 30 million transactions and requires 13 GB of disk space.
To actually use bitcoins, you need some kind of device which functions as a wallet. It can be an application running on your computer, a mobile app, a service offered by a website, or something else entirely.
Your wallet can add a transaction to the public ledger by informing a single node on the Bitcoin network. That node will relay the transaction to other nodes, which will relay it to others, and so on — similar to the way BitTorrent works. It only takes about 7 seconds for a transaction to propagate across the entire Bitcoin network. Instead, correct horse battery staple bitcoin to usd wallet reassigns those bitcoins, from one owner to another, by adding a transaction to the public ledger.
As you can see, every transaction correct horse battery staple bitcoin to usd a set of inputs and a set of outputs. The inputs identify which bitcoins are being spent, and the outputs assign those bitcoins to their new correct horse battery staple bitcoin to usd. Each input is just a digitally signed reference to some output from a previous transaction. Once an output is spent by a subsequent input, no correct horse battery staple bitcoin to usd transaction can spend that output again.
You could even go so far as to say that the unspent outputs are the bitcoins. A Bitcoin address is like a numbered bank account, correct horse battery staple bitcoin to usd much easier to create, and each person can have a potentially unlimited number of them. Obviously, if you want to receive bitcoins, you need to have a Bitcoin address. Correct horse battery staple bitcoin to usd wallet can generate addresses for you.
In order to generate an address, your wallet first generates a private key. A private key is nothing but a large number roughly between 1 and 2 Next, your wallet converts that private key to a Bitcoin address using a well-known function. This function is very straightforward for a computer to perform. If anyone knows your private key, they could easily convert it to a Bitcoin address, too.
In fact, many Bitcoin wallets have a feature allowing you to import private keys. Typically, your wallet keeps track of your private keys for you, usually by storing them in an encrypted wallet file, either on correct horse battery staple bitcoin to usd hard drive, on a server on the Internet, or elsewhere.
To see how, take a closer look at the second transaction in the above listing, b6f4ecaac…. This transaction spends the bitcoins from previous output ec1db98a52…: It stands to reason that this transaction should be authorized by whoever generated that address in the first place. Just as a private key was required to correct horse battery staple bitcoin to usd that address, the same private key is required, once again, to generate a valid digital signature. A digital signature is only valid if a specific equation is satisfied by the address, the previous output and the signature.
It only needs to verify that the equation is satisfied. The concept of digital signatures is based on old idea known as public-key cryptography. Bitcoin is not the first digital currency to secure transactions using such cryptography, but it is the first to do so without relying on a single, centralized server.
Your private keys are stored locally, in a file somewhere on your hard drive such as wallet. Exceptionally, Bitcoin QT also turns your computer into a Bitcoin node, and therefore requires much more disk space and bandwidth than the other applications. There are also web wallets such as Coinbase or Blockchain.
Some web wallets are also Bitcoin exchanges, such as Bitstamp or Virtexwhere bitcoins can be traded for US dollars and other currencies. A mobile wallet is an app you install on a smartphone or tablet. Many mobile wallets, such as the Coinbase appare simply interfaces to a web wallet, which means that your private keys are once again stored online. One notable exception is Bitcoin Wallet for Androidwhich stores private keys directly on your mobile device.
Since virtually all smartphones have a built-in camera, QR codes have become a popular way to communicate Bitcoin addresses. You can send bitcoins to someone by scanning their QR code with your mobile wallet. QR codes can be dynamically generated, too, and can include additional information such as the exact quantity of bitcoin the recipient expects to receive. This allows some mobile wallets to function as point-of-sale devices.
There is even such a thing as a paper wallet. A paper wallet serves just one purpose: Some of the above wallets can print your private keys for you, but you can also generate a brand new private key and address pair without an existing wallet.
Once your private keys are printed, you can lock them away in a safe place, such as a safety deposit box, and wipe them from your computer. This is referred to as cold storage. In effect, the entire Bitcoin ecosystem has been crowdsourced. The landscape is changing constantly. Unfortunately, this openness also creates an opportunity for scammers. Do some research before deciding that your wallet provider is trustworthy.
In the case of a web wallet, you must trust that website with your bitcoins exactly as you would trust a bank with your cash. A desktop wallet lets you correct horse battery staple bitcoin to usd your own bank, but you must still trust that the desktop wallet correct horse battery staple bitcoin to usd functions as advertised.
It helps to choose a wallet that is open source, is actually built from that source, and has a good reputation on discussion forums such as the Bitcoin subreddit and bitcointalk. Certainly, every fraction of a bitcoin is backed by one. And once bitcoins are sent to an address, the corresponding private key becomes extremely valuable.
It currently contains bitcoins. A new breed of wallet-stealing malware has already emerged. When you own bitcoins, what you have is the exclusive ability to add specific transactions to the public ledger. Your bitcoins exist as unspent outputs from previous transactions on the ledger, sent to an address that your wallet created out of thin air, waiting for you to use as inputs in a future transaction.
Your wallet is correct horse battery staple bitcoin to usd only wallet that can digitally sign those inputs, because it contains a private key that no one else has. The entire public ledger is stored, redundantly, on thousands of nodes scattered across the globe. Shutting down Bitcoin at this point would be very difficult indeed. By now, you should recognize that such illustrations are largely symbolic.
When I first started learning about Bitcoin, I found plenty of information, but nothing that directly answered the most burning question: When you buy bitcoins… what is it that you own, exactly? Bitcoins can be possessed. Bitcoins can be transferred. Bitcoins are impossible to copy. Where Do Addresses Come From? How Are Transactions Authorized?
To store your private keys. To send bitcoins to other people. To generate addresses, so you can receive bitcoins from other people. To view your transaction history and current balance. Summary So, when you buy bitcoins… what it is that you own, exactly? Since the blockchain is totally public, people have built websites to interactively browse its contents, such as Blockchain. Therefore, mining is not the first concern to novice Bitcoin users.
Khan Academy has a fairly comprehensive series of videos diving into the guts of Bitcoin. The original white paper by Satoshi Nakamoto is what started it all.
Almost all other cryptocurrencies in existence, including Litecoin, Peercoin, Namecoin, Dogecoin and all those listed on CoinWarzare cloned and derived from the reference Bitcoin implementation on GitHub. This post presented a simplified description of a Bitcoin transaction.
Real Bitcoin transactions are based on scriptswhich allow various other kinds of financial instruments to exist on the Bitcoin platform.
Please leave comments for questions you have - I respond after every video. BTC on exchanges including Bitcoin Indonesia, Stocks. I should really set up proper testing frameworks, just haven't had the time to do so.