Ownership of bitcoin is established through _digital keys_, _bitcoin addresses_ and _digital signatures_. The digital keys are not actually stored in the network, but are instead created and stored by end-users in a file, or simple database, called a _wallet_. The digital keys in a user's wallet are completely independent of the bitcoin protocol and can be generated and managed by the user's wallet software without reference to the blockchain or access to the Internet. Keys enable many of the interesting properties of bitcoin, including de-centralized trust and control, ownership attestation and the cryptographic-proof security model.
Every bitcoin transaction requires a valid signature to be included in the blockchain, which can only be generated with valid digital keys, therefore anyone with a copy of those keys has control of the bitcoin in that account. Keys come in pairs consisting of a private (secret) and public key. Think of the public key as similar to a bank account number and the private key as similar to the secret PIN number, or signature on a cheque that provides control over the account. These digital keys are very rarely seen by the users of bitcoin. For the most part, they are stored inside the wallet file and managed by the bitcoin wallet software.
In the payment portion of a bitcoin transaction, the recipient's public key is represented by its digital fingerprint, called a _bitcoin address_, which is used in the same way as the beneficiary name on a cheque (i.e. "Pay to the order of"). In most cases, a bitcoin address is generated from and corresponds to a public key. However, not all bitcoin addresses represent public keys; they can also represent other beneficiaries such as scripts, as we will see later in this chapter. This way, bitcoin addresses abstract the recipient of funds, making transaction destinations flexible, similar to paper cheques: a single payment instrument that can be used to pay into people's accounts, company accounts, pay for bills or pay to cash. The bitcoin address is the only representation of the keys that users will routinely see, as this is the part they need to share with the world.
In this chapter we will introduce wallets, which contain cryptographic keys. We will look at how keys are generated, stored and managed. We will review the various encoding formats used to represent private and public keys, addresses and script addresses. Finally we will look at special uses of keys: to sign messages, to prove ownership and to create vanity addresses and paper wallets.
Since the invention of public key cryptography, several suitable mathematical functions, such as prime number exponentiation and elliptic curve multiplication, have been discovered. These mathematical functions are practically irreversible, meaning that they are easy to calculate in one direction and infeasible to calculate in the opposite direction. Based on these mathematical functions, cryptography enables the creation of digital secrets and unforgeable digital signatures. Bitcoin uses elliptic curve multiplication as the basis for its public key cryptography.
In bitcoin, we use public key cryptography to create a key pair that controls access to bitcoins. The key pair consists of a private key and -- derived from it -- a unique public key. The public key is used to receive bitcoins, and the private key is used to sign transactions to spend those bitcoins.
There is a mathematical relationship between the public and the private key that allows the private key to be used to generate signatures on messages. This signature can be validated against the public key without revealing the private key.
When spending bitcoins, the current bitcoin owner presents their public key and a signature (different each time, but created from the same private key; see <<signature>>) in a transaction to spend those bitcoins. Through the presentation of the public key and signature everyone in the bitcoin network can verify and accept the transaction as valid, confirming that the person transferring the bitcoins owned them at the time of the transfer.
In most wallet implementations, the private and public keys are stored together as a _key pair_ for convenience. However, the public key can be calculated from the private key, so storing only the private key is also possible.
A bitcoin wallet contains a collection of key pairs, each consisting of a private key and a public key. The private key (k) is a number, usually picked at random. From the private key, we use elliptic curve multiplication, a one-way cryptographic function, to generate a public key (K). From the public key (K), we use a one-way cryptographic hash function to generate a bitcoin address (A). In this section we will start with generating the private key, look at the elliptic curve math that is used to turn that into a public key, and finally, generate a bitcoin address from the public key. The relationship between private key, public key and bitcoin address is shown below:
A +private key+ is simply a number, picked at random. Ownership and control over the private key is the root of user control over all funds associated with the corresponding bitcoin address. The private key is used to create signatures that are required to spend bitcoins by proving ownership of funds used in a transaction. The private key must remain secret at all times, as revealing it to a third party is equivalent to giving them control over the bitcoins secured by that key. The private key must also be backed up and protected from accidental loss, since if lost it cannot be recovered and the funds secured by it are forever lost too.
The bitcoin private key is just a number. You can pick your private keys randomly using just a coin, pencil and paper: Toss a coin 256 times and you have the binary digits of a random private key you can use in a bitcoin wallet. The public key can be then generated from the private key.
The first and most important step in generating keys is to find a secure source of entropy, or randomness. Creating a bitcoin key is essentially the same as "Pick a number between 1 and 2^256^". The exact method you use to pick that number does not matter as long as it is not predictable or repeatable. Bitcoin software uses the underlying operating system's random number generators to produce 256 bits of entropy (randomness). Usually, the OS random number generator is initialized by a human source of randomness, which is why you may be asked to wiggle your mouse around for a few seconds. For the truly paranoid, nothing beats dice, pencil and paper.
More accurately, the private key can be any number between +1+ and +n - 1+, where n is a constant (n = 1.158 * 10^77^, slightly less than 2^256^) defined as the order of the elliptic curve used in bitcoin (see <<elliptic_curve>>). To create such a key, we randomly pick a 256-bit number and check that it is less than +n - 1+. In programming terms, this is usually achieved by feeding a larger string of random bits, collected from a cryptographically-secure source of randomness, into the SHA-256 hash algorithm which will conveniently produce a 256-bit number. If the result is less than +n - 1+, we have a suitable private key. Otherwise, we simply try again with another random number.
Do not write your own code to create a random number or use a "simple" random number generator offered by your programming language. Use a cryptographically-secure pseudo-random number generator (CSPRNG) with a seed from a source of sufficient entropy. Study the documentation of the random number generator library you choose to make sure it is cryptographically secure. Correct implementation of the CSPRNG is critical to the security of the keys.
The size of bitcoin's private key space, 2^256^ is an unfathomably large number. It is approximately 10^77^ in decimal. The visible universe is estimated to contain 10^80^ atoms.
To generate a new key with the Bitcoin Core Client (see <<ch03_bitcoin_client>>), use the +getnewaddress+ command. For security reasons it displays the public key only, not the private key. To ask bitcoind to expose the private key, use the +dumpprivkey+ command. The +dumpprivkey+ shows the private key in a base-58 checksum encoded format called the Wallet Import Format (WIF), which we will examine in more detail in <<priv_formats>>. Here's an example of generating and displaying a private key using these two commands:
The +dumpprivkey+ command opens the wallet and extracts the private key that was generated by the +getnewaddress+ command. It is not otherwise possible for bitcoind to know the private key from the public key, unless they are both stored in the wallet.
The public key is calculated from the private key using elliptic curve multiplication, which is irreversible: latexmath:[\(K = k * G\)] where +k+ is the private key, +G+ is a constant point called the _Generator Point_ and +K+ is the resulting public key. The reverse operation, known as "finding the discrete logarithm" -- calculating +k+ if you know +K+ -- is as difficult as trying all possible values of +k+, i.e., a brute-force search. Before we demonstrate how to generate a public key from a private key, let's look at Elliptic Curve Cryptography in a bit more detail.
Elliptic Curve Cryptography is a type of asymmetric or public-key cryptography based on the discrete logarithm problem as expressed by addition and multiplication on the points of an elliptic curve.
Bitcoin uses a specific elliptic curve and set of mathematical constants, as defined in a standard called +secp256k1+, established by the National Institute of Standards and Technology (NIST). The +secp256k1+ curve is defined by the following function, which produces an elliptic curve:
The +mod p+ (modulo prime number p) indicates that this curve is over a finite field of prime order +p+, also written as latexmath:[\(\mathbb{F}_p\)], where p = 2^256^ - 2^32^ - 2^9^ - 2^8^ - 2^7^ - 2^6^ - 2^4^ - 1, a very large prime number.
Because this curve is defined over a finite field of prime order instead of over the real numbers it looks like a pattern of dots scattered in two dimensions, which makes it difficult to visualize. However, the math is identical as that of an elliptic curve over the real numbers shown above. As an example, below is the same elliptic curve over a much smaller finite field of prime order 17, showing a pattern of dots on a grid. The +secp256k1+ bitcoin elliptic curve can be thought of as a much more complex pattern of dots on a unfathomably large grid.
[GCC 4.2.1 Compatible Apple LLVM 5.1 (clang-503.0.38)] on darwin
Type "help", "copyright", "credits" or "license" for more information.
>>> p = 115792089237316195423570985008687907853269984665640564039457584007908834671663
>>> x = 55066263022277343669578718895168534326250603453777594175500187360389116729240
>>> y = 32670510020758816978083085130507043184471273380659243275938904335757337482424
>>> (x ** 3 + 7 - y**2) % p
0
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In elliptic curve math, there is a point called the "point at infinity", which roughly corresponds to the role of 0 in addition. On computers, it's sometimes represented by x = y = 0 (which doesn't satisfy the elliptic curve equation -- but it's an easy separate case that can be checked).
There is also an operator "+", called "addition" which has some properties similar to the traditional addition of real numbers that grade school children learn. Given two points P~1~ and P~2~ on the elliptic curve, there is a third point P~3~ = P~1~ + P~2~, also on the elliptic curve.
Geometrically, this third point P~3~ is calculated by drawing a line between P~1~ and P~2~. This line will intersect the elliptic curve in exactly one additional place. Call this point P~3~' = (x, y). Then reflect in the X axis to get P~3~ = (x, -y).
There are a couple of special cases which explain the need for the "point at infinity".
If P~1~ and P~2~ are the same point, the line "between" P~1~ and P~2~ should extend to be the tangent on the curve at this point P~1~. This tangent will intersect the curve in exactly one new point. You can use techniques from calculus to determine the slope of the tangent line. These techniques curiously work even though we are restricting our interest to points on the curve with two integer coordinates!
In some cases (i.e., if P~1~ and P~2~ have the same x values but different y values), the tangent line will be exactly vertical, in which case P3 = "point at infinity".
If P~1~ is the "point at infinity", then the sum P~1~ + P~2~ = P~2~. Similary, if P~2~ is the point at infinity, then P~1~ + P~2~ = P~1~. This shows how the point at infinity plays the roll of 0.
It turns out that + is associative, which means that `(A+B)+C = A+(B+C)`. That means we can write A+B+C without parentheses without any ambiguity.
Now that we have defined addition, we can define multiplication in the standard way that extends addition. For a point P on the elliptic curve, if k is a whole number, then kP = P + P + P + ... + P (k times). Note that k is sometimes confusingly called an "exponent" in this case.
Starting with a private key in the form of a randomly generated number +k+, we multiply it by a predetermined point on the curve called the _generator point_ +G+ to produce another point somewhere else on the curve, which is the corresponding public key +K+. The generator point is specified as part of the +secp256k1+ standard and is always the same for all keys in bitcoin.
where +k+ is the private key, +G+ is the generator point, ((("generator point"))) and +K+ is the resulting public key, a point on the curve. Since the generator point is always the same for all bitcoin users, a private key k multiplied with G will always result in the same public key K. The relationship between k and K is fixed, but can only be calculated in one direction, from k to K. That's why a bitcoin address (derived from K) can be shared with anyone and does not reveal the user's private key (k).
[TIP]
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A private key can be converted into a public key, but a public key cannot be converted back into a private key because the math only works one way.
To visualize multiplication of a point with an integer, we will use the simpler elliptic curve over the real numbers -- remember, the math is the same. Our goal is to find the multiple kG of the generator point G. That is the same as adding G to itself, k times in a row. In elliptic curves, adding a point to itself is the equivalent of drawing a tangent line on the point and finding where it intersects the curve again, then reflecting that point on the x-axis.
Most bitcoin implementations use the OpenSSL cryptographic library to do the elliptic curve math. For example, to derive the public key, the function +EC_POINT_mul()+ is used. See http://wiki.openssl.org/index.php/Elliptic_Curve_Cryptography
A bitcoin address is a string of digits and characters that can be shared with anyone who wants to send you money. Addresses produced from public keys consist of a string of numbers and letters, beginning with the digit "1". Here's an example of a bitcoin address:
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1thMirt546nngXqyPEz532S8fLwbozud8
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The bitcoin address is what appears most commonly in a transaction as the "recipient" of the funds. If we were to compare a bitcoin transaction to a paper cheque, the bitcoin address is the beneficiary, which is what we write on the line after "Pay to the order of". On a paper cheque, that beneficiary can sometimes be the name of a bank account holder, but can also include corporations, institutions or even cash. Because paper cheques do not need to specify an account, but rather use an abstract name as the recipient of funds, that makes paper cheques very flexible as payment instruments. Bitcoin transactions use a similar abstraction, the bitcoin address, to make them very flexible. A bitcoin address can represent the owner of a private/public key pair, or it can represent something else, such as a payment script, as we will see in <<p2sh>>. For now, let's examine the simple case, a bitcoin address that represents, and is derived from, a public key.
The bitcoin address is derived from the public key through the use of one-way cryptographic hashing; a "hashing algorithm" or simply "hash algorithm" is a one-way function that produces a fingerprint or "hash" of an arbitrary sized input. Cryptographic hash functions are used extensively in bitcoin: in bitcoin addresses, in script addresses and in the mining "Proof-of-Work" algorithm. The algorithms used to make a bitcoin address from a public key are the Secure Hash Algorithm (SHA) and the RACE Integrity Primitives Evaluation Message Digest (RIPEMD), specifically SHA256 and RIPEMD160.
Bitcoin addresses are almost always presented to users in an encoding called "Base58Check" (see <<base58check>> below), which uses 58 characters (a base-58 number system) and a checksum to help human readability, avoid ambiguity and protect against errors in address transcription and entry. Base58Check is also used in many other ways in bitcoin, whenever there is a need for a user to read and correctly transcribe a number, such as a bitcoin address, a private key, an encrypted key, or a script hash. In the next section we will examine the mechanics of Base58Check encoding and decoding, and the resulting representations.
In order to represent long numbers in a compact way, using fewer symbols, many computer systems use mixed-alphanumeric representations with a base (or radix) higher than 10. For example, whereas the traditional decimal system uses the ten numerals 0 through 9, the hexadecimal system uses sixteen, with the letters A through F as the six additional symbols. A number represented in hexadecimal format is shorter than the equivalent decimal representation. Even more compact, Base-64 representation uses 26 lower case letters, 26 capital letters, 10 numerals and two more characters such as "\+" and "/" to transmit binary data over text-based media such as email. Base-64 is most commonly used to add binary attachments to email. Base-58 is a text-based binary-encoding format developed for use in bitcoin and used in many other crypto-currencies. It offers a balance between compact representation, readability and error detection and prevention. Base-58 is a subset of Base-64, using the upper and lower case letters and numbers but omitting some characters that are frequently mistaken for one another and can appear identical when displayed in certain fonts. Specifically, Base-58 is Base-64 without the 0 (number zero), O (capital o), l (lower L), I (capital i) and the symbols "\+" and "/". Or, more simply, it is a set of lower and capital letters and numbers without the four (0, O, l, I) mentioned above.
To add extra security against typos or transcription errors, Base58Check is a Base-58 encoding format, frequently used in bitcoin, which has a built-in error-checking code. The checksum is an additional four bytes added to the end of the data that is being encoded. The checksum is derived from the hash of the encoded data and can therefore be used to detect and prevent transcription and typing errors. When presented with a Base58Check code, the decoding software will calculate the checksum of the data and compare it to the checksum included in the code. If the two do not match, that indicates that an error has been introduced and the Base58Check data is invalid. For example, this prevents a mistyped bitcoin address from being accepted by the wallet software as a valid destination, an error which would otherwise result in loss of funds.
To convert data (a number) into a Base58Check format, we first add a prefix to the data, called the "version byte", which serves to easily identify the type of data that is encoded. For example, in the case of a bitcoin address the prefix is zero (0x00 in hex), whereas the prefix used when encoding a private key is 128 (0x80 in hex). A list of common version prefixes is shown below in <<base58check_versions>>.
Next compute the "double-SHA" checksum, meaning we apply the SHA256 hash-algorithm twice on the previous result (prefix and data):
----
checksum = SHA256(SHA256(prefix+data))
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From the resulting 32-byte hash (hash-of-a-hash), we take only the first four bytes. These four bytes serve as the error-checking code, or checksum. The checksum is concatenated (appended) to the end.
In bitcoin, most of the data presented to the user is Base58Check encoded to make it compact, easy to read and easy to detect errors. The version prefix in Base58Check encoding is used to create easily distinguishable formats, which when encoded in Base-58 contain specific characters at the beginning of the Base58Check encoded payload, making it easy for humans to identify the type of data that is encoded and how to use it. This is what differentiates, for example, a Base58Check encoded bitcoin address that starts with a "1" from a Base58Check encoded private key WIF format that starts with a "5". Some example version prefixes and the resulting Base-58 characters are shown below:
===== Creating a bitcoin address from a private key
Let's look at the complete process of creating a bitcoin address, from a private key, to a public key (a point on the elliptic curve), to a double-hashed address and finally the Base58Check encoding. The C++ code in <<addr_example>> shows the complete process, from private key, to Base58Check encoded bitcoin address, step-by-step. The code example uses the libbitcoin library introduced in <<alt_libraries>> for some helper functions:
[[addr_example]]
.Creating a Base58Check encoded bitcoin address from a private key
====
[source, cpp]
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include::code/addr.cpp[]
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====
The code uses a pre-defined private key, so that it produces the same bitcoin address every time it is run:
All of the above representations are different ways of showing the same number, the same private key. They look different, but any one format can easily be converted to any other format.
The sx-tools package (See <<sx_tools>>) makes it easy to write shell-scripts and command-line "pipes" that manipulate bitcoin keys, addresses, and transactions. You can use sx-tools to decode the Base58Check format on the command line:
To encode into Base58Check (the opposite of the previous command), we provide the hex private key, followed by the Wallet Import Format (WIF) version prefix 128:
To encode into Base58Check as a "compressed" private key (see <<comp_priv>>), we add the suffix +01+ to the end of the hex key and then encode as above:
The resulting WIF-compressed format, starts with a "K". This denotes that the private key within has a suffix of "01" and will be used to produce compressed public keys only (See <<comp_pub>> below).
Public keys are also presented in different ways, most importantly as either _compressed_ or _uncompressed_ public keys.
As we saw previously, the public key is a point on the elliptic curve consisting of a pair of coordinates +(x,y)+. It is usually presented with the prefix +04+ followed by two 256-bit numbers, one for the x-coordinate of the point, the other for the y-coordinate. The prefix +04+ is used to distinguish uncompressed public keys from compressed public keys that begin with a +02+ or a +03+.
Compressed public keys were introduced to bitcoin to reduce the size of transactions and conserve disk space on nodes that store the bitcoin blockchain database. Most transactions include the public key, required to validate the owner's credentials and spend the bitcoin. Each public key requires 520 bits (prefix \+ x \+ y), which when multiplied by several hundred transactions per block, or tens of thousands of transactions per day, adds a significant amount of data to the blockchain.
As we saw in the section <<pubkey>> above, a public key is a point (x,y) on an elliptic curve. Since the curve expresses a mathematical function, a point on the curve represents a solution to the equation and therefore if we know the x-coordinate we can calculate the y-coordinate by solving the equation y^2^ mod p = (x^3^ + 7) mod p. That allows us to store only the x-coordinate of the public key point, omitting the y-coordinate and reducing the size of the key and the space required to store it by 256 bits. An almost 50% reduction in size in every transaction adds up to a lot of data saved over time!
Whereas uncompressed public keys have a prefix of +04+, compressed public keys start with either a +02+ or a +03+ prefix. Let's look at why there are two possible prefixes: since the left side of the equation is y^2^, that means the solution for y is a square root, which can have a positive or negative value. Visually, this means that the resulting y-coordinate can be above the x-axis or below the x-axis. As you can see from the graph of the elliptic curve, the curve is symmetric, meaning it is reflected like a mirror by the x-axis. So, while we can omit the y-coordinate we have to store the _sign_ of y (positive or negative), or in other words we have to remember if it was above or below the x-axis, as each of those options represents a different point and a different public key. When calculating the elliptic curve in binary arithmetic on the finite field of prime order p, the y coordinate is either even or odd, which corresponds to the positive/negative sign as explained above. Therefore, to distinguish between the two possible values of y, we store a +compressed public key+ with the prefix +02+ if the +y+ is even, and +03+ if it is odd, allowing the software to correctly deduce the y-coordinate from the x-coordinate and uncompress the public key to the full coordinates of the point.
Here's the same public key generated previously, shown as a +compressed public key+ stored in 264-bits (66 hex digits) with the prefix +03+ indicating the +y+ coordinate is odd:
The compressed public key, above, corresponds to the same private key, meaning that it is generated from the same private key. However it looks different from the uncompressed public key. More importantly, if we convert this compressed public key to a bitcoin address using the double-hash function (RIPEMD160(SHA256(K))) it will produce a _different_ bitcoin address. This can be confusing, because it means that a single private key can produce a public key expressed in two different formats (compressed and uncompressed) which produce two different bitcoin addresses. However, the private key is identical for both bitcoin addresses.
Compressed public keys are gradually becoming the default across bitcoin clients, which is having a significant impact on reducing the size of transactions and therefore the blockchain. However, not all clients support compressed public keys yet. Newer clients that support compressed public keys have to account for transactions from older clients which do not support compressed public keys. This is especially important when a wallet application is importing private keys from another bitcoin wallet application, because the new wallet needs to scan the blockchain to find transactions corresponding to these imported keys. Which bitcoin addresses should the bitcoin wallet scan for? The bitcoin addresses produced by uncompressed public keys, or the bitcoin addresses produced by compressed public keys? Both are valid bitcoin addresses, and can be signed for by the private key, but they are different addresses!
To resolve this issue, when private keys are exported from a wallet, the Wallet Import Format that is used to represent them is implemented differently in newer bitcoin wallets, to indicate that these private keys have been used to produce _compressed_ public keys and therefore _compressed_ bitcoin addresses. This allows the importing wallet to distinguish between private keys originating from older or newer wallets and search the blockchain for transactions with bitcoin addresses corresponding to the uncompressed, or the compressed public keys respectively. Let's look at how this works in more detail, in the next section.
Ironically, the name "compressed private key" is misleading, because when a private key is exported as WIF-compressed it is actually one byte _longer_ than an "uncompressed" private key. That is because it has the added 01 suffix which signifies it comes from a newer wallet and should only be used to produce compressed public keys. Private keys are not compressed and cannot be compressed. The term "compressed private key" really means "private key from which compressed public keys should be derived", whereas "uncompressed private key" really means "private key from which uncompressed public keys should be derived". You should only refer to the export format as "WIF-compressed" or "WIF" and not refer to the private key as "compressed" to avoid further confusion.
Remember, these formats are _not_ used interchangeably. In a newer wallet that implements compressed public keys, the private keys will only ever be exported as WIF-compressed (with a K or L prefix). If the wallet is an older implementation and does not use compressed public keys, the private keys will only ever be exported as WIF (5 prefix). The goal here is to signal to the wallet importing these private keys whether it must search the blockchain for compressed or uncompressed public keys and addresses.
If a bitcoin wallet is able to implement compressed public keys, then it will use those in all transactions. The private keys in the wallet will be used to derive the public key points on the curve, which will be compressed. The compressed public keys will be used to produce bitcoin addresses and those will be used in transactions. When exporting private keys from a new wallet that implements compressed public keys, the Wallet Import Format is modified, with the addition of a one-byte suffix +01+to the private key. The resulting base58check encoded private key is called a "Compressed WIF" and starts with the letter K or L, instead of starting with "5" as is the case with WIF encoded (non-compressed) keys from older wallets.
"Compressed private keys" is a misnomer! They are not compressed, rather the WIF-compressed format signifies that they should only be used to derive compressed public keys and their corresponding bitcoin addresses. Ironically, a "WIF-compressed" encoded private key is one byte longer because it has the added 01 suffix to distinguish it from an "uncompressed" one.
The most comprehensive bitcoin library in Python is "pybitcointools"by Vitalik Buterin (https://github.com/vbuterin/pybitcointools). In the following code example, we use the pybitcointools library (imported as "bitcoin") to generate and display keys and addresses in various formats:
Another method for making keys is _deterministic key generation_. Here you derive each new private key, using a one-way hash function from a previous private key, linking them in a sequence. As long as you can re-create that sequence, you only need the first key (known as a _seed_ or _master_ key) to generate them all. In this section we will examine the different methods of key generation and the wallet structures that are built around them.
Wallets contain keys, not coins. The coins are stored on the blockchain in the form of transaction-outputs (often noted as _vout_ or _txout_). Each user has a wallet containing keys. Wallets are really keychains containing pairs of private/public keys (See <<public_key>>). Users sign transactions with the keys, thereby proving they own the transaction outputs (their coins).
In the first implementations of bitcoin clients, wallets were simply collections of randomly generated private keys. This type of wallet is called a _Type-0 Non-Deterministic Wallets_. For example, the Bitcoin Core Client pre-generates 100 random private keys when first started and generates more keys as needed, using each key only once. This type of wallet is nicknamed "Just a Bunch Of Keys", or JBOK, and such wallets are being replaced with deterministic wallets because they are cumbersome to manage, backup and import. The disadvantage of random keys is that if you generate many of them you must keep copies of all of them, meaning that the wallet must be backed-up frequently. Each key must be backed-up, or the funds it controls are irrevocably lost if the wallet becomes inaccessible. This conflicts directly with the principle of avoiding address re-use, by using each bitcoin address for only one transaction. Address re-use reduces privacy by associating multiple transactions and addresses with each other. A Type-0 non-deterministic wallet is a poor choice of wallet, especially if you want to avoid address re-use as that means managing many keys, which creates the need for frequent backups. While the Bitcoin Core Client includes a wallet that is implemented as a Type-0 wallet, the use of this wallet is actively discouraged by developers of the Bitcoin Core.
Deterministic, or "seeded" wallets are wallets that contain private keys which are all derived from a common seed, through the use of a one-way hash function. The seed is a randomly generated number which is combined with other data, such as an index number or "chain code" (see <<hd_wallets>>) to derive the private keys. In a deterministic wallet, the seed is sufficient to recover all the derived keys and therefore a single backup at creation time is sufficient. The seed is also sufficient for a wallet export or import, allowing for easy migration of all the user's keys between different wallet implementations.
Mnemonic codes are English word sequences that represent (encode) a random number used as a seed to derive a deterministic wallet. The sequence of words is sufficient to re-create the seed and from there re-create the wallet and all the derived keys. A wallet application that implements deterministic wallets with mnemonic code will show the user a sequence of 12-24 words when first creating a wallet. That sequence of words is the wallet backup and can be used to recover and re-create all the keys in the same or any compatible wallet application. Mnemonic code words make it easier for users to back up wallets, as they are easy to read and correctly transcribe, as compared to a random sequence of numbers.
Mnemonic codes are defined in Bitcoin Improvement Proposal 39 (see <<bip0039>>), currently in Draft status. Note that BIP0039 is a draft proposal and not a standard. Specifically, there is a different standard, with a different set of words used by the Electrum wallet and _predating_ BIP0039. BIP0039 is used by the Trezor wallet and a few other wallets but is incompatible with Electrum's implementation.
The mnemonic code represents 128 to 256 bits which are used to derive a longer (512 bit) seed through the use of the key-stretching function PBKDF2. The resulting seed is used to create a deterministic wallet and all of its derived keys.
Deterministic wallets were developed to make it easy to derive many keys from a single "seed". The most advanced form of deterministic wallets is the _Hierarchical Deterministic Wallet_ or _HD Wallet_ defined by the BIP0032 standard. Hierarchical deterministic wallets contain keys derived in a tree structure, such that a parent key can derive a sequence of children keys, each of which can derive a sequence of grandchildren keys and so on to an infinite depth. This tree structure is illustrated below:
If you are implementing a bitcoin wallet, it should be built as an HD wallet following the BIP0032 and BIP0044 standards.
====
HD wallets offer two major advantages over random (non-deterministic) keys. First, the tree structure can be used to express additional organizational meaning, such as when a specific branch of sub-keys is used to receive incoming payments and a different branch is used to receive change from outgoing payments. Branches of keys can also be used in a corporate setting, allocating different branches to departments, subsidiaries, specific functions or accounting categories.
The second advantage of HD wallets is that users can create a sequence of public keys without having access to the corresponding private keys. This allows HD wallets to be used on an insecure server or in a receive-only capacity, issuing a different public key for each transaction. The public keys do not need to be pre-loaded or derived in advance, yet the server doesn't have the private keys that can spend the funds.
HD wallets are created from a single _root seed_, which is a 128, 256 or 512 bit random number. Everything else in the HD wallet is deterministically derived from this root seed, which makes it possible to re-create the entire HD wallet from that seed in any compatible HD wallet. This makes it easy to backup, restore, export and import HD wallets containing thousands or even millions of keys by simply transferring only the root seed. The root seed is most often represented by a _mnemonic word sequence_, as described in the previous section <<mnemonic_code_words>>, to make it easier for people to transcribe and store it.
The process of creating the master keys and master chain code for an HD wallet is shown below:
The root seed is input into the HMAC-SHA512 algorithm and the resulting hash is used to create a _master private key_ (m) and a _master chain code_. The master private key (m) then generates a corresponding master public key (M), using the normal elliptic curve multiplication process +m * G+ that we saw previously in this chapter. The chain code is used to introduce entropy in the function that creates child keys from parent keys, as we will see in the next section.
Hierarchical Deterministic wallets use a _child key derivation_ (CKD) function to derive children keys from parent keys.
The child key derivation functions are based on one-way hash functions that combines:
* A parent private or public key (ECDSA uncompressed key)
* A seed called a chain code (256 bits)
* An index number (32 bits)
The chain code is used to introduce seemingly random data to the process, so that the index is not sufficient to derive other child keys. Thus, having a child key does not make it possible to find its siblings, unless you also have the chain code. The initial chain code seed (at the root of the tree) is made from random data, while subsequent chain codes are derived from each parent chain code.
These three items are combined and hashed to generate children keys, as follows:
The parent public key, chain code and the index number are combined and hashed with the HMAC-SHA512 algorithm to produce a 512 bit hash. The resulting hash is split into two halfs. The right-half 256 bits of the hash output become the chain code for the child. The left-half 256 bits of the hash and the index number are added to the parent private key to produce the child private key. In the diagram below, we see this illustrated with the index set to 0 to produce the 0'th (first by index) child of the parent.
Changing the index allows us to extend the parent and create the other children in the sequence, e.g. Child 0, Child 1, Child 2 etc. Each parent key can have 2 billion children keys.
Repeating the process one level down the tree, each child can in turn become a parent and create its own children, in an infinite number of generations.
Child private keys are indistinguishable from non-deterministic (random) keys. Because the derivation function is a one way function, the child key cannot be used to find the parent key. The child key can also not be used to find any siblings. If you have the n~th~ child, you cannot find its siblings, such as the n-1 child or the n+1 child, or any other children that are part of the sequence. Only the parent key and chain code can derive all the children. Without the child chain code, the child key cannot be used to derive any grandchildren either. You need both the child private key and the child chain code to start a new branch and derive grandchildren.
So what can the child private key be used for on its own? It can be used to make a public key and a bitcoin address. Then, it can be used to sign transactions to spend anything paid to that address.
A child private key, the corresponding public key and the bitcoin address are all indistinguishable from keys and addresses created randomly. The fact that they are part of a sequence is not visible, outside of the HD wallet function that created them. Once created, they operate exactly as "normal" keys.
====
===== Extended keys
As we saw above, the key derivation function can be used to create children at any level of the tree, based on the three inputs: a key, a chain code and the index of the desired child. The two essential ingredients are the key and chain code and combined these are called an _extended key_. The term "extended key" could also be thought of as "extensible key" because such a key can be used to derive children.
Extended keys are stored and represented simply as the concatenation of the 256 bit key and 256 bit chain code into a 512 bit sequence. There are two types of extended keys: An extended private key is the combination of a private key and chain code and can be used to derive child private keys (and from them, child public keys). An extended public key is a public key and chain code, which can be used to create child public keys, as described in <<public_key_derivation>>.
Think of an extended key as the root of a branch in the tree structure of the HD wallet. With the root of the branch, you can derive the rest of the branch. The extended private key can create a complete branch, whereas the extended public key can only create a branch of public keys.
An extended key consists of a private or public key and chain code. An extended key can create children generating its own branch in the tree structure. Sharing an extended key gives access to the entire branch.
Extended keys are encoded using Base58Check, to easily export and import between different BIP0032 compatible wallets. The Base58Check coding for extended keys uses a special version number that results in the prefix "xprv" and "xpub" when encoded in base 58 characters, to make them easily recognizable. Since the extended key is 512 or 513 bits, it is also much longer than other Base58Check encoded strings we have seen previously.
Here's an example of an extended private key, encoded in Base58Check:
As mentioned above, a very useful characteristic of hierarchical deterministic wallets is the ability to derive public child keys from public parent keys, _without_ having the private keys. This gives us two ways to derive a child public key: either from the child private key, or directly from the parent public key.
An extended public key can be used, therefore, to derive all of the _public_ keys (and only the public keys) in that branch of the HD wallet structure.
This shortcut can be used to create very secure public-key-only deployments where a server or application has a copy of an extended public key and no private keys whatsoever. That kind of deployment can produce an infinite number of public keys and bitcoin addresses but cannot spend any of the money sent to those addresses. Meanwhile, on another more secure server, the extended private key can derive all the corresponding private keys to sign transactions and spend the money.
One common application of this solution is to install an extended public key on a web server that serves an e-commerce application. The web server can use the public key derivation function to create a new bitcoin address for every transaction (e.g. for a customer shopping cart). The web server will not have any private keys that would be vulnerable to theft. Without HD wallets, the only way to do this is to generate thousands of bitcoin addresses on a separate secure server and then pre-load them on the e-commerce server. That approach is cumbersome and requires constant maintenance to ensure that the e-commerce server doesn't "run out" of keys.
Another common application of this solution is for cold-storage or hardware wallets. In that scenario, the extended private key can be stored on a paper wallet or hardware device (such as a Trezor hardware wallet), while the extended public key can be kept online. The user can create "receive" addresses at will, while the private keys are safely stored offline. To spend the funds, they can use the extended private key on an offline signing bitcoin client or sign transactions on the hardware wallet device (e.g. Trezor).
The ability to derive a branch of public keys from an extended public key is very useful, but it comes with a potential risk. Access to an extended public key does not give access to child private keys. However, because the extended public key contains the chain code, if a child private key is known, or somehow leaked, it can be used with the chain code to derive all the other child private keys. A single leaked child private key, together with a parent chain code, reveals all the private keys of all the children. Worse, the child private key together with a parent chain code can be used to deduce the parent private key.
To counter this risk, HD wallets use an alternative derivation function called _hardened derivation_, which "breaks" the relationship between parent public key and child chain code. The hardened derivation function uses the parent private key to derive the child chain code, instead of the parent public key. This creates a "firewall" in the parent/child sequence, with a chain code that cannot be used to compromise a parent or sibling private key. The hardened derivation function looks almost identical to the normal child private key derivation, except that the parent private key is used as input to the hash function, instead of the parent public key, as shown in the diagram below:
When the hardened private derivation function is used, the resulting child private key and chain code are completely different from what would result from the normal derivation function. The resulting "branch" of keys can be used to produce extended public keys which are not vulnerable, since the chain code they contain cannot be exploited to reveal any private keys. Hardened derivation is therefore used to create a "gap" in the tree above the level where extended public keys are used.
In simple terms, if you want to use the convenience of an extended public key to derive branches of public keys, without exposing yourself to the risk of a leaked chain code, you should derive it from a hardened parent, rather than a normal parent. As a best practice, the level-1 children of the master keys are always derived through the hardened derivation, to prevent compromise of the master keys.
The index number used in the derivation function is a 32-bit integer. To easily distinguish between keys derived through the normal derivation function versus keys derived through hardened derivation, this index number is split into two ranges. Index numbers between 0 and 2^31^-1 (0x0 to 0x7FFFFFFF) are used _only_ for normal derivation. Index numbers between 2^31^ and 2^32^-1 (0x80000000 to 0xFFFFFFFF) are used _only_ for hardened derivation. Therefore, if the index number is less than 2^31^, that means the child is normal, whereas if the index number is equal or above 2^31^, the child is hardened.
To make the index number easier to read and display, the index number for hardened children is displayed starting from zero, but with a prime symbol. The first normal child key is therefore displayed as 0, whereas the first hardened child (index 0x80000000) is displayed as 0'. In sequence then, the second hardened key would have index 0x80000001 and would be displayed as 1', and so on. When you see an HD wallet index i', that means 2^31^+i.
Keys in an HD wallet are identified using a "path" naming convention, with each level of the tree separated by a slash (/) character. Private keys derived from the master private key start with "m". Public keys derived from the master public key start with "M". Therefore, the first child private key of the master private key is m/0. The first child public key is M/0. The second grandchild of the first child is m/0/1 and so on.
The "ancestry" of a key is read from right to left, until you reach the master key from which it was derived. For example, identifier m/x/y/z describes the key which is the z-th child of key m/x/y, which is the y-th child of key m/x, which is the x-th child of m.
The HD wallet tree structure offers tremendous flexibility. Each parent extended key can have 4 billion children: 2 billion normal children and 2 billion hardened children. Each of those children can have another 4 billion children and so on. The tree can be as deep as you want, with an infinite number of generations. With all that flexibility, however, it becomes quite difficult to navigate this infinite tree. It is especially difficult to transfer HD wallets between implementations, because the possibilities for internal organization into branches and sub-branches are endless.
Two Bitcoin Improvement Proposals (BIPs) offer a solution to this complexity, by creating some proposed standards for the structure of HD wallet trees. BIP0043 proposes the use of the first hardened child index as a special identifier that signifies the "purpose" of the tree structure. Based on BIP0043, an HD wallet should use only one level-1 branch of the tree, with the index number identifying the structure and namespace of the rest of the tree by defining its purpose. For example, an HD wallet using only branch m/i'/, is intended to signify a specific purpose and that purpose is identified by index number "i".
Extending that specification, BIP0044 proposes a multi-account structure as "purpose" number +44'+ under BIP0043. All HD wallets following the BIP0044 structure are identified by the fact that they only used one branch of the tree: m/44'/.
BIP0044 specifies the structure as consisting of five pre-defined tree levels:
The first level "purpose" is always set to +44'+. The second level "coin_type" specifies the type of crypto-currency coin, allowing for multi-currency HD wallets where each currency has its own subtree under the second level. There are three currencies defined for now: Bitcoin is m/44'/0', Bitcoin Testnet is m/44'/1' and Litecoin is m/44'/2'.
The third level of the tree is "account", which allows users to subdivide their wallets into separate logical sub-accounts, for accounting or organizational purposes. For example, an HD wallet might contain two bitcoin "accounts": m/44'/0'/0' and m/44'/0'/1'. Each account is the root of its own sub-tree.
On the fourth level "change", an HD wallet has two sub-trees, one for creating receiving addresses and one for creating change addresses. Note that whereas the previous levels used hardened derivation, this level uses normal derivation. This is to allow this level of the tree to export extended public keys for use in an non-secured environment. Usable addresses are derived by the HD wallet as children of the fourth level, making the fifth level of the tree the "address_index". For example, the third receiving address for bitcoin payments in the primary account would be M/44'/0'/0'/0/2. Here are a few more examples:
.BIP0044 HD wallet structure examples
|=======
| M/44'/0'/0'/0/2 | The third receiving public key for the primary bitcoin account
| M/44'/0'/3'/1/14 | The fifteenth change-address public key for the fourth bitcoin account
Using the command line tool +sx+, introduced in <<ch03_bitcoin_client>>, you can experiment with generating and extending BIP0032 deterministic keys, as well as displaying them in different formats:
Private keys must remain secret. The need for _confidentiality_ of the private keys is a truism which is quite difficult to achieve in practice, as it conflicts with the equally important security objective of _availability_. Keeping the private key private is much harder when you need to store backups of the private key to avoid losing it. A private key stored in a wallet that is encrypted by a password may be secure, but that wallet needs to be backed up. At times, users need to move keys from one wallet to another -- to upgrade or replace the wallet software, for example. Private key backups might also be stored on paper (see <<paper_wallets>>) or on external storage media, such as a USB flash drive. But what if the backup itself is stolen or lost? These conflicting security goals led to the introduction of a portable and convenient standard for encrypting private keys in a way that can be understood by many different wallets and bitcoin clients, standardized by Bitcoin Improvement Proposal 38 or BIP0038 (see <<bip0038>>).
BIP0038 proposes a common standard for encrypting private keys with a passphrase and encoding them with Base58Check so that they can be stored securely on backup media, transported securely between wallets or in any other conditions where the key might be exposed. The standard for encryption uses the Advanced Encryption Standard (AES), a standard established by the National Institute of Standards and Technology (NIST) and used broadly in data encryption implementations for commercial and military applications.
A BIP0038 encryption scheme takes as input a bitcoin private key, usually encoded in the Wallet Import Format (WIF), as a Base58Check string with a prefix of "5". Additionally, the BIP0038 encryption scheme takes a passphrase -- a long password -- usually composed of several words or a complex string of alphanumeric characters. The result of the BIP0038 encryption scheme is a Base58Check encoded encrypted private key that begins with the prefix +6P+. If you see a key that starts with +6P+ that means it is encrypted and requires a passphrase in order to convert (decrypt) it back into a WIF-formatted private key (prefix +5+) that can be used in any wallet. Many wallet applications now recognize BIP0038 encrypted private keys and will prompt the user for a passphrase to decrypt and import the key. Third party applications, such as the incredibly useful browser-based bitaddress.org (Wallet Details tab), can be used to decrypt BIP0038 keys.
The most common use case for BIP0038 encrypted keys is for paper wallets that can be used to backup private keys on a piece of paper. As long as the user selects a strong passphrase, a paper wallet with BIP0038 encrypted private keys is incredibly secure and a great way to create offline bitcoin storage (also known as "cold storage").
As we know, traditional bitcoin addresses begin with the number “1” and are derived from the public key, which is derived from the private key. While anyone can send bitcoin to a “1” address, that bitcoin can only be spent by presenting the corresponding private key signature and public key hash.
Bitcoin addresses that begin with the number “3” are pay-to-script-hash (P2SH) addresses, sometimes erroneously called multi-signature or multi-sig addresses. They designate the beneficiary of a bitcoin transaction as the hash of a script, instead of the owner of a public key. The feature was introduced in January 2012 with Bitcoin Improvement Proposal 16 or BIP0016 (see <<bip0016>>) and is being widely adopted because it provides the opportunity to add functionality to the address itself. Unlike transactions that "send" funds to traditional “1” bitcoin addresses, also known as pay-to-public-key-hash (P2PKH), funds sent to “3” addresses require something more than the presentation of one public key hash and one private key signature as proof of ownership. The requirements are designated at the time the address is created, within the script, and all inputs to this address will be encumbered with the same requirements.
A pay-to-script-hash address is created from a transaction script, which defines who can spend a transaction output (for more detail, see <<p2sh>>). Encoding a pay-to-script hash address involves using the same double-hash function as used during creation of a bitcoin address, only applied on the script instead of the public key.
The resulting "script hash" is encoded with Base58Check with a version prefix of 5, which results in an encoded address starting with a +3+. An example of a P2SH address is +32M8ednmuyZ2zVbes4puqe44NZumgG92sM+
[TIP]
====
P2SH is not necessarily the same as a multi-signature standard transaction. A P2SH address _most often_ represents a multi-signature script, but it might also represent a script encoding other types of transactions.
Currently, the most common implementation of the P2SH function is the multi-signature address script. As the name implies, the underlying script requires more than one signature to prove ownership and therefore spend funds. The bitcoin multi-signature feature is designed to require M signatures (also known as the “threshold”) from a total of N keys, known as an M-of-N multi-sig, where M is equal to or less than N. For example, Bob the coffee shop owner from <<ch01_intro_what_is_bitcoin>> could use a multi-signature address requiring 1-of-2 signatures from a key belonging to him and a key belonging to his spouse, ensuring either of them could sign to spend a transaction output locked to this address. This would be similar to a “joint account” as implemented in traditional banking where either spouse can spend with a single signature. Or Gopesh, the web designer paid by Bob to create a website might have a 2-of-3 multi-signature address for his business that ensures that no funds can be spent unless at least two of the business partners sign a transaction.
Vanity addresses are valid bitcoin addresses that contain human-readable messages, for example 1LoveBPzzD72PUXLzCkYAtGFYmK5vYNR33 is a valid address that contains the letters forming the word "Love" as the first four Base-58 letters. Vanity addresses require generating and testing billions of candidate private keys, until one derives a bitcoin address with the desired pattern. While there are some optimizations in the vanity generation algorithm, the process essentially involves picking a private key at random, deriving the public key, deriving the bitcoin address and checking to see if it matches the desired vanity pattern, repeating billions of times until a match is found.
Once a vanity address matching the desired pattern is found, the private key from which it was derived can be used by the owner to spend bitcoins in exactly the same way as any other address. Vanity addresses are no less or more secure than any other address. They depend on the same Elliptic Curve Cryptography (ECC) and Secure Hash Algorithm (SHA) as any other address. You can no easier find the private key of an address starting with a vanity pattern than you can any other address.
In our first chapter, we introduced Eugenia, a children's charity director operating in the Philippines. Let's say that Eugenia is organizing a bitcoin fundraising drive and wants to use a vanity bitcoin address to publicize the fundraising. Eugenia will create a vanity address that starts with "1Kids", to promote the children's charity fundraiser. Let's see how this vanity address will be created and what it means for the security of Eugenia's charity.
It's important to realize that a bitcoin address is simply a number represented by symbols in the Base-58 alphabet. The search for a pattern like "1Kids" can be seen as searching for an address in the range from "1Kids11111111111111111111111111111" to "1Kidszzzzzzzzzzzzzzzzzzzzzzzzzzzzz". There are approximately 58^29^ (approximately 1.4 * 10^51^) addresses in that range, all starting with "1Kids".
.The range of vanity addresses starting with "1Kids"
|=======
| From | 1Kids11111111111111111111111111111
| To | 1Kidszzzzzzzzzzzzzzzzzzzzzzzzzzzzz
|=======
Let's look at the pattern "1Kids" as a number and see how frequently we might find this pattern in a bitcoin address. An average desktop computer PC, without any specialized hardware, can search approximately 100,000 keys per second.
.The frequency of a vanity pattern (1KidsCharity) and average time-to-find on a desktop PC
[options="header"]
|=======
| Length | Pattern | Frequency | Average Search Time
As you can see, Eugenia won't be creating the vanity address "1KidsCharity" any time soon, even if she had access to several thousand computers. Each additional character increases the difficulty by a factor of 58. Patterns with more than seven characters are usually found by specialized hardware, such as custom-built desktops with multiple Graphical Processing Units (GPUs). These are often re-purposed bitcoin mining "rigs" that are no longer profitable for bitcoin mining but can be used effectively to find vanity addresses. Vanity searches on GPU systems are many orders of magnitude faster than on a general-purpose CPU.
Another way to find a vanity address is to outsource the work to a pool of vanity-miners, such as the pool at vanitypool.appspot.com. A pool is a service that allows those with GPU hardware to earn bitcoin searching for vanity addresses for others. For a small payment (0.01 bitcoin or approximately $5 when this was written), Eugenia can outsource the search for a 7-character pattern vanity address and get results in a few hours instead of having to run a CPU search for months.
Generating a vanity address is a brute-force exercise: try a random key, check the resulting address to see if it matches the desired pattern, repeat until successful. Here's an example of a "vanity miner", a program designed to find vanity addresses, written in C++. The example uses the libbitcoin library, which we introduced in <<alt_libraries>>.
[[vanity_miner_code]]
.Vanity Address Miner
====
[source,cpp]
----
include::code/vanity-miner.cpp[]
----
====
The example code must be compiled using a C++ compiler and linked against the libbitcoin library (which must be first installed on that system). To run the example, run the +vanity-minder+ executable with no parameters and it will attempt to find a vanity address starting with "1kid":
The example code will take a few seconds to find a match for the three-character pattern "kid", as we can see when we use the +time+ Unix command to measure the execution time. Change the +search+ pattern in the source code and see how much longer it takes for four- or five-character patterns!
Vanity addresses can be used to enhance _and_ to defeat security measures, they are truly a double-edged sword. Used to improve security, a distinctive address makes it harder for adversaries to substitute their own address and fool your customers into paying them instead of you. Unfortunately, vanity addresses also make it possible for anyone to create an address that _resembles_ any random address, or even another vanity address, thereby fooling your customers.
Eugenia could advertise a randomly generated address (e.g. 1J7mdg5rbQyUHENYdx39WVWK7fsLpEoXZy) to which people can send their donations. Or, she could generate a vanity address that starts with 1Kids, to make it more distinctive.
In both cases, one of the risks of using a single fixed address (rather than a separate dynamic address per donor) is that a thief might be able to infiltrate your website and replace it with their own address, thereby diverting donations to themselves. If you have advertised your donation address in a number of different places, your users may visually inspect the address before making a payment to ensure it is the same one they saw on your website, on your email, and on your flyer. In the case of a random address like "1J7mdg5rbQyUHENYdx39WVWK7fsLpEoXZy", the average user will inspect the first few characters "1J7mdg" perhaps and be satisfied that the address matches. Using a vanity address generator, someone with the intent to steal by substituting a similar-looking address can quickly generate addresses that match the first few characters:
So does a vanity address increase security? If Eugenia generates the vanity address "1Kids33q44erFfpeXrmDSz7zEqG2FesZEN",
users are likely to look at the vanity pattern word _and a few characters beyond_, for example noticing the "1Kids33" part of the address. That would force an attacker to generate a vanity address matching at least 6 characters (2 more), expending an effort that is 3,364 times (58 x 58) higher than the effort Eugenia expended for her 4 character vanity. Essentially, the effort Eugenia expends (or pays a vanity pool for) "pushes" the attacker into having to produce a longer pattern vanity. If Eugenia pays a pool to generate an 8 character vanity address, the attacker would be pushed into the realm of 10 characters which is infeasible on a personal computer and expensive even with a custom vanity-mining rig or vanity pool. What is affordable for Eugenia becomes unaffordable for the attacker, especially if the potential reward of fraud is not high enough to cover the cost of the vanity address generation.
Paper wallets are bitcoin private keys printed on paper. Often the paper wallet also includes the corresponding bitcoin address, for convenience, but this is not necessary since it can be derived from the private key. Paper wallets are a very effective way to create backups or offline bitcoin storage, also known as "cold storage". As a backup mechanism, a paper wallet can provide security against the loss of key due to a computer mishap such as a hard drive failure, theft, or accidental deletion. As a "cold storage" mechanism, if the paper wallet keys are generated offline and never stored on a computer system, they are much more secure against hackers, key-loggers and other online computer threats.
Paper wallets come in many shapes, sizes and designs, but at a very basic level are just a key and an address printed on paper. Here's the simplest form of a paper wallet:
.A very simple paper wallet - a printout of the bitcoin address and private key
|=======
| Public Address | 1424C2F4bC9JidNjjTUZCbUxv6Sa1Mt62x
Paper wallets can be generated easily using a tool such as the client-side Javascript generator at bitaddress.org. This page contains all the code necessary to generate keys and paper wallets, even while completely disconnected from the Internet. To use it, save the HTML page on your local drive or on an external USB flash drive. Disconnect from the Internet and open the file in a browser. Even better, boot your computer using a pristine operating system, such as a CDROM bootable Linux OS. Any keys generated with this tool while offline can be printed on a local printer over a USB cable (not wirelessly), thereby creating paper wallets whose keys exist only on the paper and have never been stored on any online system. Put these paper wallets in a fire-proof safe and "send" bitcoin to their bitcoin address, to implement a simple yet highly effective "cold storage" solution.
The disadvantage of the simple paper wallet system is that the printed keys are vulnerable to theft. A thief who is able to gain access to the paper can either steal it or photograph the keys and take control of the bitcoins locked with those keys. A more sophisticated paper wallet storage system uses BIP0038 encrypted private keys. The keys printed on the paper wallet are protected by a passphrase that the owner has memorized. Without the passphrase, the encrypted keys are useless. Yet, they still are superior to a passphrase protected wallet because the keys have never been online and must be physically retrieved from a safe or other physically secured storage.
While you can deposit funds into a paper wallet several times, you should withdraw all funds only once, spending everything. This is because in the process of unlocking and spending funds you expose the private key and because some wallets may generate a change address if you spend less than the whole amount. One way to do this is to withdraw the entire balance stored in the paper wallet and send any remaining funds to a new paper wallet.
====
Paper wallets come in many designs and sizes, with many different features. Some are intended to be given as gifts and have seasonal themes, such as Christmas and New Year's themes. Others are designed for storage in a bank vault or safe with the private key hidden in some way, either with opaque scratch-off stickers, or folded and sealed with tamper-proof adhesive foil.
Other designs feature additional copies of the key and address, in the form of detachable stubs similar to ticket stubs, allowing you to store multiple copies to protect against fire, flood or other natural disasters.
.An example of a paper wallet with additional copies of the keys on a backup "stub"
