Bitcoin explanation pdf
Bitcoin is a digital and global money system currency. Bitcoin explanation pdf allows people to send or receive money across the bitcoin explanation pdf, even to someone they don't know or don't trust. Money can be exchanged without being linked to a real identity. The mathematical field of cryptography is the basis for Bitcoin's security.
A Bitcoin address, or simply address, is an identifier of letters and numbers, beginning with the number 1 or 3, that represents a possible destination bitcoin explanation pdf a bitcoin payment.
Addresses can be generated at no cost by any user of Bitcoin. For example, using Bitcoin Core, one can click "New Address" and be assigned an address. It is also possible to get a Bitcoin address using an account at an exchange or online wallet service.
One of the differences between using bitcoin and using regular money online is that bitcoin can be used without having an internet connection to link any sort of real-world identity to it. Unless someone chooses to link their name to a bitcoin address, it is hard to tell who owns the address. Bitcoin does not keep track of users; it keeps track of addresses where the money is. Each address has two important pieces of cryptographic bitcoin explanation pdf, or keys: The public key, which is what the "bitcoin address" is created from, is similar to an email address; anyone can look it up and send bitcoins to it.
The private address, or private key, is similar to an email password; only with it can the owner send bitcoins from it. Because of this, it is very important that this private key is kept secret. To send bitcoins from an address, you prove to the network bitcoin explanation pdf you own the private key that corresponds to the address, without revealing the private key. This is done with a branch of mathematics known as public key cryptography. A public key is what determines the ownership of bitcoins, and is very similar to an ID number.
If someone wanted to send you bitcoins, all you would need to do is supply them your bitcoin address, which is a version of your public key that is easier to read and type. Anyone using the system can see how much money "ABC" has and how much money "DEF" has, but they cannot tell anything about who owns the address. But Bob and Alice each have a second key which only they individually know.
This is the private key, and it is the "other half" of a Bitcoin address. The private key is never shared, and allows the owner of the bitcoins to control them. However, if the private key is not kept secret, then anyone who sees it can also control and take the bitcoins bitcoin explanation pdf. The person who took it, told others about it later, saying "I'll send it back once Bitcoin explanation pdf gives me a new bitcoin explanation pdf, since someone else can sweep [empty] out the old one.
Sites or users using the Bitcoin system are required to use a global database called the blockchain. The blockchain is a record of all transactions that have taken place in the Bitcoin network. It also keeps track of new bitcoins as they are generated.
With these two facts, the blockchain is able to keep track of who has how much money at all times. To generate a bitcoin, a miner must solve a math problem. Bitcoin explanation pdf, the difficulty of the math problem depends on how many people are mining for bitcoin at the moment.
Because bitcoin explanation pdf how complicated the math problems usually are, they must be calculated with very powerful processors. The process of generating the bitcoins is called mining. People who use these machines to mine bitcoins are called miners. Miners either compete with one another or work together in groups to solve a mathematical puzzle.
The bitcoin explanation pdf miner or group of miners to solve the particular bitcoin explanation pdf are rewarded with new bitcoins. The puzzle is determined by the transactions being sent at the time and the previous puzzle solution. This means the solution to one puzzle is always different from bitcoin explanation pdf puzzles before. Attempting to change an earlier transaction, maybe to fake bitcoins being sent or change the number of someone's bitcoins, requires solving that puzzle again, which takes a lot of work, and also requires solving each of the following puzzles, which takes even more work.
This means a bitcoin cheater needs to outpace all the other bitcoin miners to change the bitcoin history. This makes the bitcoin blockchain very safe to use. A popular image associated with Bitcoin is a QR code. QR codes are a group of black and white boxes that are similar to bitcoin explanation pdf. Barcodes have one bitcoin explanation pdf of information, while QR codes have two horizontal and vertical. Barcodes are a row of lines, and QR codes are a grid of squares.
Bitcoin uses QR codes because they can store a lot of information in a small space, and a camera such as a smartphone can read them. The two QR codes on the Bitcoin note are the public and private addresses, bitcoin explanation pdf can be scanned with a number of online tools. Everyone in the Bitcoin network is considered a peer, and all addresses are created equal. All transactions can take place solely from peer to peer, but a number of sites exist to make these transactions simpler.
These sites are called exchanges. Exchanges provide tools for dealing in Bitcoin. Some allow the purchase of Bitcoin from external accounts, and others allow trading with other cryptography-based currencies like Bitcoin. Most exchanges also provide a basic "wallet" service. Wallets provide a handy way to keep track of all of a user's public and private addresses. Because addresses are pseudo-anonymous, anyone can have as many addresses as they want. This is useful for dealing with multiple people, but it can get complicated to manage multiple accounts.
A wallet holds all of this information in a convenient place, just like a real wallet would. A backup of a wallet prevents 'losing' the bitcoins.
Bitcoin adoption and use continues to grow a lot every year. SinceBitcoin has gained the attention of the mainstream media; one way is the WannaCry ransomware created in May Bitcoin has often been criticized for its unstable price, its network's high electricity consumption, and for its high transaction fees.
Additionally, it has been criticized for having bitcoin explanation pdf in common with Ponzi and pyramid schemes. From Wikipedia, the free encyclopedia. Retrieved bitcoin explanation pdf March Retrieved from " https: Views Read Change Change source View history. In other projects Wikimedia Commons. This page was last changed on 22 Mayat See Terms of Use for details.
Many thousands of articles have been written purporting to explain Bitcoin, the online, peer-to-peer currency. Most of those articles give a hand-wavy account of the underlying cryptographic protocol, omitting many details.
Even those articles which delve deeper often gloss over crucial points. My aim in bitcoin explanation pdf post is to explain the major ideas behind the Bitcoin protocol in bitcoin explanation pdf clear, easily comprehensible way. Understanding the bitcoin explanation pdf in this detailed way is hard work. It is tempting instead to take Bitcoin as given, and to engage in speculation about how to get rich with Bitcoin, whether Bitcoin is a bubble, whether Bitcoin explanation pdf might one day mean the end of taxation, and so on.
Understanding the details of the Bitcoin protocol opens up otherwise inaccessible vistas. New financial bitcoin explanation pdf can, in turn, be used to create new markets and to enable new forms of collective human behaviour. This post concentrates on explaining the nuts-and-bolts of the Bitcoin protocol.
To understand the post, you need to be comfortable with public key cryptographyand with the closely related idea of digital signatures. None of this is especially difficult. The basic ideas can be taught in freshman university mathematics or computer science classes.
In the world of atoms we achieve security with devices such as locks, safes, signatures, and bank vaults. In the world of bits we achieve this kind of security with cryptography. My strategy in bitcoin explanation pdf post is to build Bitcoin up in stages. We bitcoin explanation pdf have reinvented Bitcoin! This strategy is slower than if I explained the entire Bitcoin protocol in one shot. But while you can understand the mechanics of Bitcoin through such a one-shot explanation, it would be difficult to understand why Bitcoin is designed the way it is.
The advantage of the slower iterative explanation is that it gives us a much sharper understanding of each element of Bitcoin. You may find these interesting, but you can also skip them entirely without losing track of the main text. On the face of it, a digital currency sounds impossible. If Alice can use a string of bits as money, how can we prevent her from using the same bit string over and over, thus minting an infinite supply of money? Or, if bitcoin explanation pdf can somehow solve that problem, how can we prevent someone else forging such a string of bits, and using that to steal from Alice?
These are just two of the many problems that must be bitcoin explanation pdf in order to use information as money. Suppose Alice wants to give another person, Bob, an infocoin. She then digitally signs the message using a private cryptographic key, and announces the signed string of bits to the entire world.
A similar useage is common, though not universal, in the Bitcoin world. But it does have some virtues. So the protocol establishes that Alice truly intends to give Bob one infocoin. The same fact — no-one else could compose such a bitcoin explanation pdf message — also gives Alice some limited protection from forgery.
To make this explicit: Later protocols will be similar, in that all our forms of digital money will be just more and more elaborate messages [1]. A problem bitcoin explanation pdf the first version of Infocoin is that Alice could keep sending Bob the bitcoin explanation pdf signed message over and over. Does that mean Alice sent Bob bitcoin explanation pdf different infocoins?
Was her message accidentally duplicated? Perhaps she was trying to trick Bob into believing that she had given him ten different infocoins, when the message only proves to the world that she intends to transfer one infocoin. They need a label or serial number.
To make this scheme work we need a trusted source of serial numbers for the infocoins. One way to create such a source is to introduce a bank.
This bank would provide bitcoin explanation pdf numbers for infocoins, keep track of who has which infocoins, and verify that transactions really are legitimate. Instead, he contacts the bank, and verifies that: This last solution looks pretty promising. However, it turns out that we can do something much more bitcoin explanation pdf. We can eliminate the bank entirely from the protocol.
This changes the nature of the currency considerably. It means that there is no longer any single organization in charge of the currency. The idea is to make it so everyone collectively is the bank. You can think of this as a shared public ledger showing all Infocoin transactions. Now, suppose Alice wants to transfer an infocoin to Bob. A more challenging problem is that this protocol allows Alice to cheat by double spending her infocoin.
And so they will both accept the transaction, and also broadcast their acceptance of the transaction. How should other people update their block chains? There may be no easy way to achieve a consistent shared ledger of transactions. And even if everyone can agree on a consistent way to update their block chains, there is still the problem that either Bob or Charlie will be cheated.
At first glance double spending seems bitcoin explanation pdf for Alice to pull off. After all, if Alice sends the message first to Bob, then Bob can verify the message, and tell everyone else in the network including Charlie to update their block chain.
Once that has happened, Charlie would no longer be fooled by Alice. So there is most likely only a brief period of time in which Alice can double spend. Worse, there are techniques Alice could use to make that period longer. She could, for example, use bitcoin explanation pdf traffic analysis to find times when Bob and Charlie are likely to have a lot of latency in communication. Or perhaps she could do something to deliberately disrupt their communications.
If she can slow communication even a little that makes her task of double spending much easier. How can we address the problem of double spending? Rather, he should broadcast the possible transaction to the entire network of Infocoin users, and ask them to bitcoin explanation pdf determine whether the transaction is legitimate.
If they collectively decide that the transaction is okay, then Bob can accept the infocoin, and everyone will update their bitcoin explanation pdf chain. Also as before, Bob does bitcoin explanation pdf sanity check, using his copy of the block chain to check that, indeed, the coin currently belongs to Alice. But at that point the protocol is modified. Other members of the network check to see whether Alice owns that infocoin.
This protocol has many imprecise elements at present. Fixing that problem will at the same time have the pleasant side effect of making the bitcoin explanation pdf above much more precise. Suppose Alice wants to double spend in the network-based protocol I just described. She could do this by taking over the Infocoin network. As before, she tries to double spend the same infocoin with both Bob and Charlie.
The idea is counterintuitive and involves a combination of two ideas: The benefit of making it costly to validate transactions is that validation can no bitcoin explanation pdf be influenced by the bitcoin explanation pdf of network identities someone controls, but only by the total computational power they can bring to bear on validation. But to really understand proof-of-work, we need to go through the details.
For instance, another network user named David might have the following queue of pending transactions:. David checks his copy of the block chain, and can see that each transaction is valid. He would like to help out bitcoin explanation pdf broadcasting news of that validity to the entire network. However, before doing that, as part of the validation protocol David is required to solve a hard computational puzzle — the proof-of-work.
What puzzle does David need to solve? Bitcoin uses the well-known SHA hash function, but any cryptographically secure hash function will do. Bitcoin explanation pdf David appends a number called the nonce to and hashes the combination.
The puzzle David has to solve — the proof-of-work — is to find a nonce such that when we append to and hash the combination the output hash begins with a long run of zeroes. The puzzle can be made more or less difficult by varying the number of zeroes required to solve the puzzle. A relatively simple proof-of-work puzzle might require just three or four zeroes at the start of the hash, while a more difficult proof-of-work puzzle might require a much longer run of bitcoin explanation pdf, say 15 consecutive zeroes.
We can keep trying different values for the nonce. Finally, at we obtain:. This nonce gives us a string of four zeroes at the beginning of the output of the hash. This will be enough to solve a simple proof-of-work puzzle, but not enough to solve a more difficult proof-of-work puzzle. What makes this puzzle hard to solve is the fact that the output from a cryptographic hash function behaves like a random number: So if we want the output hash value to begin with 10 zeroes, say, then David will need, on average, to try different values for before he finds a suitable nonce.
In fact, the Bitcoin protocol gets quite a fine level of control over the difficulty of the puzzle, by using a slight variation on the proof-of-work puzzle described above. This target is automatically adjusted to ensure that a Bitcoin block takes, on average, about ten minutes to validate. In practice there is a sizeable randomness in how long it takes to validate a block — sometimes bitcoin explanation pdf new block is validated in just a minute or two, other times it may take 20 minutes or even longer.
Instead of solving a single puzzle, we can require that multiple puzzles be solved; with some careful design it is possible to considerably reduce the variance in the time to validate a block of transactions. Bitcoin explanation pdf participants in the Infocoin network can verify that is a valid solution to the proof-of-work puzzle.
And they then update their block chains to include the new block of transactions. For the proof-of-work idea to have any chance of succeeding, network users need an incentive to bitcoin explanation pdf validate transactions.
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