((("bitcoin", "defined", id="GSdefine01")))Bitcoin is a collection of concepts and technologies that form the basis of a digital money ecosystem. Units of currency called bitcoin are used to store and transmit value among participants in the Bitcoin network. Bitcoin users communicate with each other using the Bitcoin protocol primarily via the internet, although other transport networks can also be used. The Bitcoin protocol stack, available as open source software, can be run on a wide range of computing devices, including laptops and smartphones, making the technology easily accessible.
Behind the scenes, Bitcoin is also the name of the protocol, a peer-to-peer network, and a distributed computing innovation. Bitcoin represents the culmination of decades of research in cryptography and distributed systems and includes four key innovations brought together in a unique and powerful combination. Bitcoin consists of:
* ((("mining and consensus", "consensus rules", "satisfying")))A set of rules for independent transaction validation and currency issuance (consensus rules)
As a developer, I see Bitcoin as akin to the internet of money, a network for propagating value and securing the ownership of digital assets via distributed computation. There's a lot more to Bitcoin than first meets the eye.
In this chapter we'll get started by explaining some of the main concepts and terms, getting the necessary software, and using Bitcoin for simple transactions. In the following chapters, we'll start unwrapping the layers of technology that make Bitcoin possible and examine the inner workings of the Bitcoin network and protocol.((("", startref="GSdefine01")))
((("digital currencies", "prior to bitcoin")))The emergence of viable digital money is closely linked to developments in cryptography. This is not surprising when one considers the fundamental challenges involved with using bits to represent value that can be exchanged for goods and services. Three basic questions for anyone accepting digital money are:
Issuers of paper money are constantly battling the counterfeiting problem by using increasingly sophisticated papers and printing technology. Physical money addresses the double-spend issue easily because the same paper note cannot be in two places at once. Of course, conventional money is also often stored and transmitted digitally. In these cases, the counterfeiting and double-spend issues are handled by clearing all electronic transactions through central authorities that have a global view of the currency in circulation. For digital money, which cannot take advantage of esoteric inks or holographic strips, cryptography provides the basis for trusting the legitimacy of a user’s claim to value. Specifically, cryptographic digital signatures enable a user to sign a digital asset or transaction proving the ownership of that asset. With the appropriate architecture, digital signatures also can be used to address the double-spend issue.
When cryptography started becoming more broadly available and understood in the late 1980s, many researchers began trying to use cryptography to build digital currencies. These early digital currency projects issued digital money, usually backed by a national currency or precious metal such as gold.
((("decentralized systems", "vs. centralized", secondary-sortas="centralized")))Although these earlier digital currencies worked, they were centralized and, as a result, were easy to attack by governments and hackers. Early digital currencies used a central clearinghouse to settle all transactions at regular intervals, just like a traditional banking system. Unfortunately, in most cases these nascent digital currencies were targeted by worried governments and eventually litigated out of existence. Some failed in spectacular crashes when the parent company liquidated abruptly. To be robust against intervention by antagonists, whether legitimate governments or criminal elements, a _decentralized_ digital currency was needed to avoid a single point of attack. Bitcoin is such a system, decentralized by design, and free of any central authority or point of control that can be attacked or corrupted.
Satoshi Nakamoto withdrew from the public in April 2011, leaving the responsibility of developing the code and network to a thriving group of volunteers. The identity of the person or people behind Bitcoin is still unknown. ((("open source licenses")))However, neither Satoshi Nakamoto nor anyone else exerts individual control over the Bitcoin system, which operates based on fully transparent mathematical principles, open source code, and consensus among participants. The invention itself is groundbreaking and has already spawned new science in the fields of distributed computing, economics, and econometrics.
((("bitcoin", "use cases", id="GSuses01")))Bitcoin is an innovation in the ancient technology of money. At its core, money simply facilitates the exchange of value between people. Therefore, in order to fully understand Bitcoin and its uses, we'll examine it from the perspective of people using it. Each of the people and their stories, as listed here, illustrates one or more specific use cases. We'll be seeing them throughout the book:
((("use cases", "retail sales")))Alice lives in Northern California's Bay Area. She has heard about Bitcoin from her techie friends and wants to start using it. We will follow her story as she learns about Bitcoin, acquires some, and then spends her bitcoin to buy a laptop from Bob's online store. This story will introduce us to the software, the exchanges, and basic transactions from the perspective of a retail consumer.
Carol is an art gallery owner in San Francisco. She sells expensive paintings for Bitcoin. This story will introduce the risks of a "51%" consensus attack for retailers of high-value items.
((("offshore contract services")))((("use cases", "offshore contract services")))Bob, the cafe owner in Palo Alto, is building a new website. He has contracted with an Indian web developer, Gopesh, who lives in Bangalore, India. Gopesh has agreed to be paid in bitcoin. This story will examine the use of Bitcoin for outsourcing, contract services, and international wire transfers.
((("use cases", "web store")))Gabriel is an enterprising young teenager in Rio de Janeiro, running a small web store that sells Bitcoin-branded t-shirts, coffee mugs, and stickers. Gabriel is too young to have a bank account, but his parents are encouraging his entrepreneurial spirit.
((("charitable donations")))((("use cases", "charitable donations")))Eugenia is the director of a children's charity in the Philippines. Recently she has discovered Bitcoin and wants to use it to reach a whole new group of foreign and domestic donors to fundraise for her charity. She's also investigating ways to use Bitcoin to distribute funds quickly to areas of need. This story will show the use of Bitcoin for global fundraising across currencies and borders and the use of an open ledger for transparency in charitable organizations.
((("use cases", "import/export")))Mohammed is an electronics importer in Dubai. He's trying to use Bitcoin to buy electronics from the United States and China for import into the UAE to accelerate the process of payments for imports. This story will show how Bitcoin can be used for large business-to-business international payments tied to physical goods.
((("use cases", "mining for bitcoin")))Jing is a computer engineering student in Shanghai. He has built a "mining" rig to mine for bitcoin using his engineering skills to supplement his income. This story will examine the "industrial" base of Bitcoin: the specialized equipment used to secure the Bitcoin network and issue new currency.
Each of these stories is based on the real people and real industries currently using Bitcoin to create new markets, new industries, and innovative solutions to global economic issues.((("", startref="GSuses01")))
((("security", "wallet selection")))Bitcoin wallets are one of the most actively developed applications in the Bitcoin ecosystem. There is intense competition, and while a new wallet is probably being developed right now, several wallets from last year are no longer actively maintained. Many wallets focus on specific platforms or specific uses and some are more suitable for beginners while others are filled with features for advanced users. Choosing a wallet is highly subjective and depends on the use and user expertise. Therefore it would be pointless to recommend a specific brand or wallet. However, we can categorize Bitcoin wallets according to their platform and function and provide some clarity about all the different types of wallets that exist. Better yet, moving keys or seeds between Bitcoin wallets is relatively easy, so it is worth trying out several different wallets until you find one that fits your needs.
Desktop wallet:: A desktop wallet was the first type of Bitcoin wallet created as a reference implementation and many users run desktop wallets for the features, autonomy, and control they offer. Running on general-use operating systems such as Windows and Mac OS has certain security disadvantages, however, as these platforms are often insecure and poorly configured.
Of note, when receiving funds to a new mobile wallet for the first time, many wallets will often re-verify that you have securely backed-up your mnemonic phrase. This can range from a simple prompt to requiring the user to manually re-enter the phrase.
Alice is now ready to start using her new bitcoin wallet. ((("", startref="GSquick01")))((("", startref="Wquick01"))) Her wallet application randomly generated a private key (described in more detail in <<private_keys>>) which will be used to derive Bitcoin addresses that direct to her wallet. At this point, her Bitcoin addresses are not known to the Bitcoin network or "registered" with any part of the Bitcoin system. Her Bitcoin addresses are simply random numbers that correspond to her private key that she can use to control access to the funds. The addresses are generated independently by her wallet without reference or registration with any service.
In most wallets, there is no association between a Bitcoin address and any externally identifiable information including the user's identity. Until the moment an address is referenced as the recipient of value in a transaction posted on the bitcoin ledger, the Bitcoin address is simply part of the vast number of possible addresses that are valid in bitcoin. Only once an address has been associated with a transaction does it become part of the known addresses in the network.
==== Receiving bitcoin
Alice uses the _Receive_ button, which displays a QR code along with a Bitcoin address, shown in <<bluewallet_receive>>.
[[bluewallet_receive]]
.Alice uses the Receive screen on her Bluewallet mobile Bitcoin wallet, and displays her address to Bob in a QR code format
image::images/mbc2_0101.png["BluewalletWelcome"]
The QR code is the square with a pattern of black and white dots, serving as a form of barcode that contains the same information in a format that can be scanned by Joe's smartphone camera. Next to the wallet's QR code is the Bitcoin address it encodes, and Alice may choose to manually send her address to Joe by copying it onto her clipboard with a tap.
[WARNING]
====
Do not send money to the addresses in this book, it will be lost. Despite this warning people try to scan and send money, so the QR codes and addresses are blurred in the wallet screenshots.
((("getting started", "acquiring bitcoin")))The first and often most difficult task for new users is to acquire some bitcoin. Unlike other foreign currencies, you cannot yet buy bitcoin at a bank or foreign exchange kiosk.
Bitcoin transactions are irreversible. Most electronic payment networks such as credit cards, debit cards, PayPal, and bank account transfers are reversible. For someone selling bitcoin, this difference introduces a very high risk that the buyer will reverse the electronic payment after they have received bitcoin, in effect defrauding the seller. To mitigate this risk, companies accepting traditional electronic payments in return for bitcoin usually require buyers to undergo identity verification and credit-worthiness checks, which may take several days or weeks. As a new user, this means you cannot buy bitcoin instantly with a credit card. With a bit of patience and creative thinking, however, you won't need to.
Here are some methods for getting bitcoin as a new user:
* Find a friend who has bitcoin and buy some from him or her directly. Many bitcoin users start this way. This method is the least complicated. One way to meet people with bitcoin is to attend a local bitcoin meetup listed at https://bitcoin.meetup.com[Meetup.com].
* Use a classified service such as pass:[<a class="orm:hideurl" href="https://localbitcoins.com/">localbitcoins.com</a>] to find a seller in your area to buy bitcoin for cash in an in-person transaction.
* Earn bitcoin by selling a product or service for bitcoin. If you are a programmer, sell your programming skills. If you're a hairdresser, cut hair for bitcoin.
* ((("Coin ATM Radar")))((("ATMs, locating")))Use a bitcoin ATM in your city. A bitcoin ATM is a machine that accepts cash and sends bitcoin to your smartphone bitcoin wallet. Find a bitcoin ATM close to you using an online map from http://coinatmradar.com[Coin ATM Radar].
* ((("exchange rates", "listing services")))Use a bitcoin currency exchange linked to your bank account. Many countries now have currency exchanges that offer a market for buyers and sellers to swap bitcoin with local currency. Exchange-rate listing services, such as https://bitcoinaverage.com[BitcoinAverage], often show a list of bitcoin exchanges for each currency.
Alice was introduced to bitcoin by a friend so she has an easy way to acquire her first bitcoin. Next, we will look at how she buys bitcoin from her friend Joe and how Joe sends the bitcoin to her wallet.
((("getting started", "exchange rates")))((("exchange rates", "determining")))Before Alice can buy bitcoin from Joe, they have to agree on the _exchange rate_ between bitcoin and US dollars. This brings up a common question for those new to bitcoin: "Who sets the bitcoin price?" The short answer is that the price is set by markets.
((("exchange rates", "floating")))((("floating exchange rate")))Bitcoin, like most other currencies, has a _floating exchange rate_. That means that the value of bitcoin vis-a-vis any other currency fluctuates according to supply and demand in the various markets where it is traded. For example, the "price" of bitcoin in US dollars is calculated in each market based on the most recent trade of bitcoin and US dollars. As such, the price tends to fluctuate minutely several times per second. A pricing service will aggregate the prices from several markets and calculate a volume-weighted average representing the broad market exchange rate of a currency pair (e.g., BTC/USD).
http://bitcoinaverage.com/[Bitcoin Average]:: ((("BitcoinAverage")))A site that provides a simple view of the volume-weighted-average for each currency.
http://coincap.io/[CoinCap]:: A service listing the market capitalization and exchange rates of hundreds of crypto-currencies, including bitcoin.
http://bit.ly/cmebrr[Chicago Mercantile Exchange Bitcoin Reference Rate]:: A reference rate that can be used for institutional and contractual reference, provided as part of investment data feeds by the CME.
In the input field for the Bitcoin address, there is a small icon that looks like a QR code. This allows Joe to scan the barcode with his smartphone camera so that he doesn't have to type in Alice's Bitcoin address, which is quite long and difficult to type. Joe taps the QR code icon and activates the smartphone camera, scanning the QR code displayed on Alice's smartphone.
Joe now has Alice's Bitcoin address set as the recipient. Joe enters the amount as $10 US dollars and his wallet converts it by accessing the most recent exchange rate from an online service. The exchange rate at the time is $100 US dollars per bitcoin, so $10 US dollars is worth 0.10 bitcoin (BTC), or 100 millibitcoin (mBTC) as shown in the screenshot from Joe's wallet (see <<bluewallet-mobile-send>>).
The price of bitcoin has changed a lot over time, and an incredible amount since the first edition of this book was written. As of October 2021, a person would need approximately $67,000 USD to purchase one whole bitcoin. When the first edition of this book was written, a bitcoin was worth less than $500 USD.
He also selects a transaction fee for his transaction. The higher the transaction fee, the faster his transaction will be confirmed (included in a block by a miner). He selects the minimum transaction fee possible at that time (1 satoshi/vbyte).
((("getting started", "confirmations")))((("confirmations", "bitcoin wallet quick start example")))((("confirmations", see="also mining and consensus; transactions")))((("clearing", seealso="confirmations")))At first, Alice's address will show the transaction from Joe as "Unconfirmed." This means that the transaction has been propagated to the network but has not yet been recorded in the bitcoin transaction ledger, known as the blockchain. To be confirmed, a transaction must be included in a block and added to the blockchain, which happens every 10 minutes, on average. In traditional financial terms this is known as _clearing_. For more details on propagation, validation, and clearing (confirmation) of bitcoin transactions, see <<mining>>.
Alice is now the proud owner of 0.002 BTC that she can spend. Over the next few days, Alice buys more bitcoin using an ATM and an exchange. In the next chapter we will look at her first purchase with bitcoin, and examine the underlying transaction and propagation technologies in more detail.((("", startref="BCbasic01")))
