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@ -9,7 +9,7 @@ Users can transfer bitcoin over the network to do just about anything that can b
Unlike traditional currencies, bitcoins are entirely virtual. There are no physical coins, or even digital coins per se. The coins are implied in transactions which transfer value from sender to recipient. Users of bitcoin own keys which allow them to prove ownership of transactions in the bitcoin network, unlocking the value to spend it and transfer it to a new recipient. Those keys are stored in a digital wallet on each user’s computer. Possession of the key that unlocks a transaction is the only prerequisite to spending bitcoins, putting the control entirely in the hands of each user. Unlike traditional currencies, bitcoins are entirely virtual. There are no physical coins, or even digital coins per se. The coins are implied in transactions which transfer value from sender to recipient. Users of bitcoin own keys which allow them to prove ownership of transactions in the bitcoin network, unlocking the value to spend it and transfer it to a new recipient. Those keys are stored in a digital wallet on each user’s computer. Possession of the key that unlocks a transaction is the only prerequisite to spending bitcoins, putting the control entirely in the hands of each user.
Bitcoin is a fully-distributed, peer-to-peer system, and as such there is no “central" server or point of control. Bitcoins are created through a process called "mining", which involves looking for a solution to a difficult problem. Any participant in the bitcoin network (i.e. any device running the full bitcoin protocol stack) may operate as a miner, using their computer's processing power to attempt to find solutions to this problem. Every 10 minutes on average, a new solution is found by someone who then is able to validate the transactions of the past 10 minutes and is rewarded with brand new bitcoins. Essentially, the currency-issuance function of a central bank and the clearing function are de-centralized and turned into a global competition. Bitcoin is a fully-distributed, peer-to-peer system, and as such there is no "central" server or point of control. Bitcoins are created through a process called "mining", which involves looking for a solution to a difficult problem. Any participant in the bitcoin network (i.e. any device running the full bitcoin protocol stack) may operate as a miner, using their computer's processing power to attempt to find solutions to this problem. Every 10 minutes on average, a new solution is found by someone who then is able to validate the transactions of the past 10 minutes and is rewarded with brand new bitcoins. Essentially, the currency-issuance function of a central bank and the clearing function are de-centralized and turned into a global competition.
The bitcoin protocol includes built-in algorithms that regulate the mining function across the network. The difficulty of the problem that miners must solve is adjusted dynamically so that, on average, someone finds a correct answer every 10 minutes regardless of how many miners (and CPUs) are working on the problem at any moment. The protocol also halves the rate at which new bitcoins are created every 4 years, and limits the total number of bitcoins that will be created to a fixed total of 21 million coins. The result is that the number of bitcoins in circulation closely follows an easily predictable curve that reaches 21 million by the year 2140. As a result, the bitcoin currency is deflationary and cannot be inflated by "printing" new money above and beyond the expected issuance rate. The bitcoin protocol includes built-in algorithms that regulate the mining function across the network. The difficulty of the problem that miners must solve is adjusted dynamically so that, on average, someone finds a correct answer every 10 minutes regardless of how many miners (and CPUs) are working on the problem at any moment. The protocol also halves the rate at which new bitcoins are created every 4 years, and limits the total number of bitcoins that will be created to a fixed total of 21 million coins. The result is that the number of bitcoins in circulation closely follows an easily predictable curve that reaches 21 million by the year 2140. As a result, the bitcoin currency is deflationary and cannot be inflated by "printing" new money above and beyond the expected issuance rate.
@ -19,7 +19,7 @@ In this chapter we'll get started by explaining some of the main concepts and te
=== History of Bitcoin === History of 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. Two fundamental questions for anyone accepting digital money, are: 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. Two fundamental questions for anyone accepting digital money are:
1. Can I trust the money is authentic and not counterfeit? 1. Can I trust the money is authentic and not counterfeit?
2. Can I be sure that no one else can claim that this money belongs to them and not me? (aka the “double-spend” problem) 2. Can I be sure that no one else can claim that this money belongs to them and not me? (aka the “double-spend” problem)
@ -28,7 +28,7 @@ Issuers of paper money are constantly battling the counterfeiting problem, by us
In the late 1980s, when cryptography started becoming more broadly available and understood, 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. In the late 1980s, when cryptography started becoming more broadly available and understood, 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.
While these earlier digital currencies worked, they were centralized and as a result they 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, be they legitimate governments or criminal elements, a digital currency needed to avoid the use of a central currency issuing or transaction clearing authority that could be a single point of attack. Bitcoin is such a system, completely de-centralized by design, lacking any central authority or point of control that can be attacked or corrupted. While these earlier digital currencies worked, they were centralized and as a result they 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, be they are legitimate governments or criminal elements, a digital currency is needed to avoid the use of a central currency issuer or transaction clearing authority that could be a single point of attack. Bitcoin is such a system, completely de-centralized by design, lacking any central authority or point of control that can be attacked or corrupted.
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: 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:
@ -59,7 +59,7 @@ North American Retail::
Alice lives in Northern California, in the 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 some of her bitcoin to buy a cup of coffee at Bob's Cafe in Palo Alto. This story will introduce us to the software, the exchanges and basic transactions from the perspective of a retail consumer. Alice lives in Northern California, in the 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 some of her bitcoin to buy a cup of coffee at Bob's Cafe in Palo Alto. This story will introduce us to the software, the exchanges and basic transactions from the perspective of a retail consumer.
Offshore Contract Services:: 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. 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.
Charitable Donations:: 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. 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.
@ -68,7 +68,7 @@ Remittances and Reverse Remittances::
Gopesh, the Indian web developer, is supporting his daughter Radhika who is a student in Essex, England. Gopesh is now considering sending Radhika bitcoin, eliminating the fees he used to pay for remittances. This story will demonstrate the use of local exchange and peer-to-peer exchanges for international remittances with bitcoin. Gopesh, the Indian web developer, is supporting his daughter Radhika who is a student in Essex, England. Gopesh is now considering sending Radhika bitcoin, eliminating the fees he used to pay for remittances. This story will demonstrate the use of local exchange and peer-to-peer exchanges for international remittances with bitcoin.
Import/Export:: Import/Export::
Mohammed is an electronics importer in Dubai. He's trying to use bitcoin to buy electronics from the USA and China for import into the U.A.E., 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. Mohammed is an electronics importer in Dubai. He's trying to use bitcoin to buy electronics from the USA and China for import into the U.A.E. 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.
Mining for Bitcoin:: Mining for Bitcoin::
Jing is a computer engineering student in Shanghai. He has built a "mining" rig to mine for bitcoins, 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. Jing is a computer engineering student in Shanghai. He has built a "mining" rig to mine for bitcoins, 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.
@ -101,7 +101,7 @@ For the purposes of this book, we will be demonstrating the use of a variety of
==== Quick Start - Web Wallet ==== Quick Start - Web Wallet
A web-wallet is the easiest way to start using bitcoin, and is the choice of Alice who we introduced in <<user-stories>>. Alice is not a technical user and only recently heard about bitcoin from a friend. She starts her journey by visiting the official website bitcoin.org, where she finds a broad selection of bitcoin clients. Following the advice on the bitcoin.org site, she chooses a web-wallet by blockchain.info a popular hosted-wallet service. Following a link from bitcoin.org, she opens the blockchain.info wallet page at https://blockchain.info/wallet and selects "Start a New Wallet". To register her new wallet, she must enter an email address, a password and prove that she is a human by completing a CAPTCHA test. A web-wallet is the easiest way to start using bitcoin, and is the choice of Alice who we introduced in <<user-stories>>. Alice is not a technical user and only recently heard about bitcoin from a friend. She starts her journey by visiting the official website bitcoin.org, where she finds a broad selection of bitcoin clients. Following the advice on the bitcoin.org site, she chooses a web-wallet by blockchain.info, a popular hosted-wallet service. Following a link from bitcoin.org, she opens the blockchain.info wallet page at https://blockchain.info/wallet and selects "Start a New Wallet". To register her new wallet, she must enter an email address, a password and prove that she is a human by completing a CAPTCHA test.
[WARNING] [WARNING]
==== ====
@ -120,7 +120,7 @@ A few seconds later, Alice can start using her new bitcoin web-wallet by logging
.Blockchain.info - Wallet Home Screen .Blockchain.info - Wallet Home Screen
image::images/blockchain-home.png["wallet home screen"] image::images/blockchain-home.png["wallet home screen"]
The most important part of this screen is Alice's _bitcoin address_. Like an email address, Alice can share this address and anyone can use it to send money directly to her new web-wallet. On the screen it appears as a long string of letters and numbers: +1Cdid9KFAaatwczBwBttQcwXYCpvK8h7FK+. Next to the wallet's bitcoin address, there is a QR-code, a form of barcode that contains the same information in a format that can be easily scanned by a smartphone's camera. Alice can print the QR code as a way to easily give her address to others without them having to type the long string of letters and numbers. The most important part of this screen is Alice's _bitcoin address_. Like an email address, Alice can share this address and anyone can use it to send money directly to her new web-wallet. On the screen it appears as a long string of letters and numbers: +1Cdid9KFAaatwczBwBttQcwXYCpvK8h7FK+. Next to the wallet's bitcoin address, there is a QR code, a form of barcode that contains the same information in a format that can be easily scanned by a smartphone's camera. Alice can print the QR code as a way to easily give her address to others without them having to type the long string of letters and numbers.
[TIP] [TIP]
==== ====

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@ -26,7 +26,7 @@ image::images/Bitcoin_Overview.png["Bitcoin Overview"]
==== Buying a cup of coffee ==== Buying a cup of coffee
Alice, who we introduced in the previous chapter, is a new user who has just acquired her first bitcoin. In <<getting_first_bitcoin>>, Alice met with her frined Joe to exchange some cash for bitcoin. The transaction created by Joe, funded Alice's wallet with 0.10 BTC. Now Alice will make her first retail transaction, buying a cup of coffee at Bob's coffee shop in Palo Alto, California. Bob's coffee shop recently started accepting bitcoin payments, by adding a bitcoin option to his point-of-sale system (see <<bitcoin_for_merchants>> for information on using bitcoin for merchants/retail). The prices at Bob's Cafe are listed in the local currency (US dollars) but at the register, customers have the option of paying in either dollars or bitcoin. Alice places her order for a cup of coffee and Bob enters the transaction at the register. The point-of-sale system will convert the total price from US dollars to bitcoins at the prevailing market rate and displays the prices in both currencies, as well as showing a QR code containing a _payment request_ for this transaction: Alice, who we introduced in the previous chapter, is a new user who has just acquired her first bitcoin. In <<getting_first_bitcoin>>, Alice met with her friend Joe to exchange some cash for bitcoin. The transaction created by Joe, funded Alice's wallet with 0.10 BTC. Now Alice will make her first retail transaction, buying a cup of coffee at Bob's coffee shop in Palo Alto, California. Bob's coffee shop recently started accepting bitcoin payments, by adding a bitcoin option to his point-of-sale system (see <<bitcoin_for_merchants>> for information on using bitcoin for merchants/retail). The prices at Bob's Cafe are listed in the local currency (US dollars) but at the register, customers have the option of paying in either dollars or bitcoin. Alice places her order for a cup of coffee and Bob enters the transaction at the register. The point-of-sale system will convert the total price from US dollars to bitcoins at the prevailing market rate and displays the prices in both currencies, as well as showing a QR code containing a _payment request_ for this transaction:
.Displayed on Bob's cash register .Displayed on Bob's cash register
---- ----
@ -52,7 +52,7 @@ Components of the URL
A bitcoin address: "1GdK9UzpHBzqzX2A9JFP3Di4weBwqgmoQA" A bitcoin address: "1GdK9UzpHBzqzX2A9JFP3Di4weBwqgmoQA"
The payment amount: "0.015" The payment amount: "0.015"
A label for the recipient address: "Bob's Cafe" A label for the recipient address: "Bob's Cafe"
A description for the payement: "Purchase at Bob's Cafe" A description for the payment: "Purchase at Bob's Cafe"
---- ----
@ -65,7 +65,7 @@ Bob says "That's one-dollar-fifty, or fifteen milliBits".
Alice uses her smartphone to scan the barcode on display. Her smartphone shows a payment of +0.0150 BTC+ to +Bob's Cafe+ and she selects +Send+ to authorize the payment. Within a few seconds (about the same time as a credit card authorization), Bob would see the transaction on the register, completing the transaction. Alice uses her smartphone to scan the barcode on display. Her smartphone shows a payment of +0.0150 BTC+ to +Bob's Cafe+ and she selects +Send+ to authorize the payment. Within a few seconds (about the same time as a credit card authorization), Bob would see the transaction on the register, completing the transaction.
In the following sections we will examine this transaction in more detail, see how Alice's wallet constructed it, how it was propagated across the network, how it was verified and finally how Bob, the owner of the cafe, can spend that amount in subsequent transactions In the following sections we will examine this transaction in more detail, see how Alice's wallet constructed it, how it was propagated across the network, how it was verified and finally how Bob, the owner of the cafe, can spend that amount in subsequent transactions.
[NOTE] [NOTE]
==== ====
@ -83,7 +83,7 @@ Transactions are like lines in a double-entry bookkeeping ledger. In simple term
.Transaction As Double-Entry Bookkeeping .Transaction As Double-Entry Bookkeeping
image::images/Transaction_Double_Entry.png["Transaction Double-Entry"] image::images/Transaction_Double_Entry.png["Transaction Double-Entry"]
The transaction contains proof of ownership for each amount of bitcoin (inputs) whose value is transfered, in the form of a digital signature from the owner, that can be independently validated by anyone. In bitcoin terms, "spending" is signing the value of a previous transaction for which you have the keys, over to a new owner identified by a bitcoin address. The transaction contains proof of ownership for each amount of bitcoin (inputs) whose value is transferred, in the form of a digital signature from the owner, that can be independently validated by anyone. In bitcoin terms, "spending" is signing the value of a previous transaction for which you have the keys, over to a new owner identified by a bitcoin address.
[TIP] [TIP]
@ -120,7 +120,7 @@ image::images/Bitcoin_Transaction_Structure_Distribution.png["Distributing Trans
=== Constructing A Transaction === Constructing A Transaction
Alice's wallet application contains all the logic for selecting appropriate inputs and outputs to build a transaction to Alice's specification. Alice only needs to specify a destination and an amount and the rest happens in the wallet application without her seeing the details. Importantly, a wallet application can construct transactions even if completely offline. Like writing a cheque at home and later sending it to the bank in an envelope, the transaction does not need to be constructed and signed while connected to the bitcoin network, it only has to be sent to the network eventually for it to be executed. Alice's wallet application contains all the logic for selecting appropriate inputs and outputs to build a transaction to Alice's specification. Alice only needs to specify a destination and an amount and the rest happens in the wallet application without her seeing the details. Importantly, a wallet application can construct transactions even if it is completely offline. Like writing a cheque at home and later sending it to the bank in an envelope, the transaction does not need to be constructed and signed while connected to the bitcoin network, it only has to be sent to the network eventually for it to be executed.
==== Getting the right inputs ==== Getting the right inputs
@ -166,7 +166,7 @@ As you can see, Alice's wallet contains enough bitcoins in a single unspent outp
A transaction output is created in the form of a script, that creates an encumberance on the value and can only be redeemed by the introduction of a solution to the script. In simpler terms, Alice's transaction output will contain a script that says something like "This output is payable to whoever can present a signature from the key corresponding to Bob's public address". Since only Bob has the wallet with the keys corresponding to that address, only Bob's wallet can present such a signature to redeem this output. Alice will therefore "encumber" the output value with a demand for a signature from Bob. A transaction output is created in the form of a script, that creates an encumberance on the value and can only be redeemed by the introduction of a solution to the script. In simpler terms, Alice's transaction output will contain a script that says something like "This output is payable to whoever can present a signature from the key corresponding to Bob's public address". Since only Bob has the wallet with the keys corresponding to that address, only Bob's wallet can present such a signature to redeem this output. Alice will therefore "encumber" the output value with a demand for a signature from Bob.
This transaction will also include a second output, because Alice's funds are in a the form of a 0.10 BTC output, too much money for the 0.015 BTC cup of coffee. Alice will need 0.085 BTC in change. Alice's change payment is created _by Alice's wallet_ in the very same transaction as the payment to Bob. Essentially, Alice's wallet breaks her funds into two payments, one to Bob, one back to herself. She can then use the change output in a subsequent transaction, thus spending it later. This transaction will also include a second output, because Alice's funds are in the form of a 0.10 BTC output, too much money for the 0.015 BTC cup of coffee. Alice will need 0.085 BTC in change. Alice's change payment is created _by Alice's wallet_ in the very same transaction as the payment to Bob. Essentially, Alice's wallet breaks her funds into two payments, one to Bob, one back to herself. She can then use the change output in a subsequent transaction, thus spending it later.
Finally, for the transaction to be processed by the network in a timely fashion, Alice's wallet application will add a small fee. This is not explicit in the transaction, it is implied by the difference between inputs and outputs. If instead of taking 0.085 in change, Alice creates only 0.0845 as the second output, there will be 0.0005 BTC (half a millibitcoin) left over. The input's 0.10 BTC is not fully spent with the two outputs, as they will add up to less than 0.10. The resulting difference is the _transaction fee_ which is collected by the miner as a fee for including the transaction in a block and putting it on the blockchain ledger. Finally, for the transaction to be processed by the network in a timely fashion, Alice's wallet application will add a small fee. This is not explicit in the transaction, it is implied by the difference between inputs and outputs. If instead of taking 0.085 in change, Alice creates only 0.0845 as the second output, there will be 0.0005 BTC (half a millibitcoin) left over. The input's 0.10 BTC is not fully spent with the two outputs, as they will add up to less than 0.10. The resulting difference is the _transaction fee_ which is collected by the miner as a fee for including the transaction in a block and putting it on the blockchain ledger.
@ -202,7 +202,7 @@ If Bob's bitcoin wallet application is directly connected to Alice's wallet appl
[TIP] [TIP]
==== ====
A common misconception about bitcoin transactions is that they must be "confirmed" by waiting 10 minutes for a new block, or up to sixty minutes for a full six confirmations. While confirmations ensure the transaction has been accepted by the whole network, for small value items like a cup of coffee, such a delay is unecessary. A merchant may accept a valid small-value transaction with no confirmations, with no more risk than a credit card payment made without ID or a signature, as many do today A common misconception about bitcoin transactions is that they must be "confirmed" by waiting 10 minutes for a new block, or up to sixty minutes for a full six confirmations. While confirmations ensure the transaction has been accepted by the whole network, for small value items like a cup of coffee, such a delay is unnecessary. A merchant may accept a valid small-value transaction with no confirmations, with no more risk than a credit card payment made without ID or a signature, as many do today.
==== ====
=== Bitcoin Mining === Bitcoin Mining
@ -214,17 +214,17 @@ The bitcoin system of trust is based on computation. Transactions are bundled in
* Mining creates new bitcoins in each block, almost like a central bank printing new money. The amount of bitcoin created is fixed and diminishes with time * Mining creates new bitcoins in each block, almost like a central bank printing new money. The amount of bitcoin created is fixed and diminishes with time
* Mining creates trust by ensuring that transactions are only confirmed if enough computational power was devoted to the block that contains them. More blocks mean more computation which means more trust. * Mining creates trust by ensuring that transactions are only confirmed if enough computational power was devoted to the block that contains them. More blocks mean more computation which means more trust.
A good way to describe mining is like a giant competitive game of sudoku that resets every time someone finds a solution and whose difficulty automatically adjusts so that it takes approximately 10 minutes to find a solution. Imagine a giant sudoku puzzle, several thousand rows and columns in size. If I show you a completed puzzle you can verify it quite quickly. If it is empty, however, it takes a lot of work to solve! The difficulty of the sudoku can be adjusted by changing its size (more or fewer rows and columns), but it can still be verified quite easily even if it is very large. The "puzzle" used in bitcoin is based on a cryptographic hash and exhibits similar characteristics: it is assymetrically hard to solve, but easy to verify and its difficulty can be adjusted. A good way to describe mining is like a giant competitive game of sudoku that resets every time someone finds a solution and whose difficulty automatically adjusts so that it takes approximately 10 minutes to find a solution. Imagine a giant sudoku puzzle, several thousand rows and columns in size. If I show you a completed puzzle you can verify it quite quickly. If it is empty, however, it takes a lot of work to solve! The difficulty of the sudoku can be adjusted by changing its size (more or fewer rows and columns), but it can still be verified quite easily even if it is very large. The "puzzle" used in bitcoin is based on a cryptographic hash and exhibits similar characteristics: it is asymmetrically hard to solve, but easy to verify and its difficulty can be adjusted.
In <<user-stories>> we introduced Jing, a computer engineering student in Shanghai. Jing is participating in the bitcoin network as a miner. Every 10 minutes or so, Jing joins thousands of other miners in a global race to find a solution to a block of transactions. Finding such a solution, the so-called "Proof-of-Work" requires quadrillions of hashing operations per second, across the entire bitcoin network. The algorithm for "Proof-of-Work" involves repeatedly hashing the header of the block and a random number with the SHA256 cryptographic algorithm, until a solution matching a pre-determined pattern emerges. The first miner to find such a solution wins the round of competition and publishes that block into the blockchain. In <<user-stories>> we introduced Jing, a computer engineering student in Shanghai. Jing is participating in the bitcoin network as a miner. Every 10 minutes or so, Jing joins thousands of other miners in a global race to find a solution to a block of transactions. Finding such a solution, the so-called "Proof-of-Work" requires quadrillions of hashing operations per second, across the entire bitcoin network. The algorithm for "Proof-of-Work" involves repeatedly hashing the header of the block and a random number with the SHA256 cryptographic algorithm, until a solution matching a pre-determined pattern emerges. The first miner to find such a solution wins the round of competition and publishes that block into the blockchain.
Jing started mining in 2010 using a very fast desktop computer to find a suitable Proof-of-Work for new blocks. As more miners started joining the bitcoin network, the difficulty of the problem increased rapidly. Soon, Jing and other miners upgraded to more specialized hardware, such as Graphical Processing Units (GPU), as used in gaming desktops or consoles. As this book is written, by 2014, the difficulty is so high that it is only profitable to mine with Application Specific Integrated Circuits, essentially hundreds of mining algorithms printed in hardware, running in parallel on a single silicone chip. Jing also joined a "mining pool", which much like a lottery-pool allows several participants to share their efforts and the rewards. Jing now runs two ASIC machines, which are USB connected devices, to mine for bitcoin 24 hours a day. He pays his electricity costs by selling the bitcoin he is able to generate from mining, creating some income from the profits. His computer runs a copy of bitcoind, the reference bitcoin client, as a back-end to his specialized mining software. Jing started mining in 2010 using a very fast desktop computer to find a suitable Proof-of-Work for new blocks. As more miners started joining the bitcoin network, the difficulty of the problem increased rapidly. Soon, Jing and other miners upgraded to more specialized hardware, such as Graphical Processing Units (GPU), as used in gaming desktops or consoles. As this book is written, by 2014, the difficulty is so high that it is only profitable to mine with Application Specific Integrated Circuits, essentially hundreds of mining algorithms printed in hardware, running in parallel on a single silicon chip. Jing also joined a "mining pool", which much like a lottery-pool allows several participants to share their efforts and the rewards. Jing now runs two ASIC machines, which are USB connected devices, to mine for bitcoin 24 hours a day. He pays his electricity costs by selling the bitcoin he is able to generate from mining, creating some income from the profits. His computer runs a copy of bitcoind, the reference bitcoin client, as a back-end to his specialized mining software.
=== Mining transactions in blocks === Mining transactions in blocks
A transaction transmitted across the network is not verified until it becomes part of the global distributed ledger, the blockchain. Every ten minutes, miners generate a new block, which contains all the transactions since the last block. New transactions are constantly flowing into the network from user wallets and other applications. As these are seen by the bitcoin network nodes, they get added to a temporary "pool" of unverified transactions maintained by each node. As miners build a new block, they add unverified transactions from this pool to a new block and then attempt to solve a very hard problem (aka Proof-of-Work) to prove the validity of that new block. The process of mining is explained in detail in <<mining>> A transaction transmitted across the network is not verified until it becomes part of the global distributed ledger, the blockchain. Every ten minutes, miners generate a new block, which contains all the transactions since the last block. New transactions are constantly flowing into the network from user wallets and other applications. As these are seen by the bitcoin network nodes, they get added to a temporary "pool" of unverified transactions maintained by each node. As miners build a new block, they add unverified transactions from this pool to a new block and then attempt to solve a very hard problem (aka Proof-of-Work) to prove the validity of that new block. The process of mining is explained in detail in <<mining>>
Transactions are added to the new block, prioritized by the highest-fee transactions first and a few other criteria. Each miner starts the process of mining a new block of transactions as soon as they receive the previous block from the network, knowing they have lost that previous round of competition. They immediately create a new block, fill it with transactions and the fingerprint of the previous block and start calculating a the Proof-of-Work for the new block. Each miner includes a special transaction in their block, one that pays their own bitcoin address a reward of newly created bitcoins (currently 25 BTC per block). If they find a solution that makes that block valid, they "win" this reward because their successful block is added to the global blockchain and the reward transaction they included becomes spendable. Jing, who participates in a mining pool, has set up his software to create new blocks that assign the reward to a pool address. From there, a share of the reward is distributed to Jing and other miners in proportion to the amount of work they contributed in the last round. Transactions are added to the new block, prioritized by the highest-fee transactions first and a few other criteria. Each miner starts the process of mining a new block of transactions as soon as they receive the previous block from the network, knowing they have lost that previous round of competition. They immediately create a new block, fill it with transactions and the fingerprint of the previous block and start calculating the Proof-of-Work for the new block. Each miner includes a special transaction in their block, one that pays their own bitcoin address a reward of newly created bitcoins (currently 25 BTC per block). If they find a solution that makes that block valid, they "win" this reward because their successful block is added to the global blockchain and the reward transaction they included becomes spendable. Jing, who participates in a mining pool, has set up his software to create new blocks that assign the reward to a pool address. From there, a share of the reward is distributed to Jing and other miners in proportion to the amount of work they contributed in the last round.
Alice's transaction was picked up by the network and included in the pool of unverified transactions. Since it had sufficient fees, it was included in a new block generated by Jing's mining pool. Approximately 5 minutes after the transaction was first transmitted by Alice's wallet, Jing's ASIC miner found a solution for the block and published it as block #277316, containing 419 other transactions. Jing's ASIC miner published the new block on the bitcoin network, where other miners validated it and started the race to generate the next block. Alice's transaction was picked up by the network and included in the pool of unverified transactions. Since it had sufficient fees, it was included in a new block generated by Jing's mining pool. Approximately 5 minutes after the transaction was first transmitted by Alice's wallet, Jing's ASIC miner found a solution for the block and published it as block #277316, containing 419 other transactions. Jing's ASIC miner published the new block on the bitcoin network, where other miners validated it and started the race to generate the next block.
@ -245,7 +245,7 @@ Now that Alice's transaction has been embedded in the blockchain as part of a bl
Bob can now spend the output from this and other transactions, by creating his own transactions that reference these outputs as their inputs and assign them new ownership. For example, Bob can pay a contractor or supplier by transferring value from Alice's coffee cup payment to these new owners. Most likely, Bob's bitcoin software will aggregate many small payments into a larger payment, perhaps concentrating all the day's bitcoin revenue into a single transaction. This would move the various payments into a single address, utilized as the store's general "checking" account. For a diagram of an aggregating transaction, see <<transaction-aggregating>>. Bob can now spend the output from this and other transactions, by creating his own transactions that reference these outputs as their inputs and assign them new ownership. For example, Bob can pay a contractor or supplier by transferring value from Alice's coffee cup payment to these new owners. Most likely, Bob's bitcoin software will aggregate many small payments into a larger payment, perhaps concentrating all the day's bitcoin revenue into a single transaction. This would move the various payments into a single address, utilized as the store's general "checking" account. For a diagram of an aggregating transaction, see <<transaction-aggregating>>.
As Bob spends the payments received from Alice and other customers, he exends the chain of transactions, which in turn are added to the global blochcain ledger for all to see and trust. Let's assume that Bob pays his web designer Gopesh in Bangalore for a new web site page. Now the chain of transactions will look like this: As Bob spends the payments received from Alice and other customers, he extends the chain of transactions, which in turn are added to the global blockchain ledger for all to see and trust. Let's assume that Bob pays his web designer Gopesh in Bangalore for a new web site page. Now the chain of transactions will look like this:
[[block-alice]] [[block-alice]]
.Alice's transaction as part of a transaction chain from Joe to Gopesh .Alice's transaction as part of a transaction chain from Joe to Gopesh

18
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@ -19,7 +19,7 @@ The first time you run Bitcoin Core it will start downloading the blockchain, a
[TIP] [TIP]
==== ====
Bitcoin Core keeps a full copy of the transaction ledger (blockchain), with every transaction that has ever occured on the bitcoin network since its inception in 2009. This data set is several gigabytes in size (approximately 16GB in late 2013) and is downloaded incrementally over several days. The client will not be able to process transactions or update account balances until the full blockchain dataset is downloaded. During that time, the client will display "Out of sync" next to the account balances and show "Synchronizing" in the footer. Make sure you have enough disk space, bandwidth and time to complete the initial synchronization. Bitcoin Core keeps a full copy of the transaction ledger (blockchain), with every transaction that has ever occurred on the bitcoin network since its inception in 2009. This dataset is several gigabytes in size (approximately 16GB in late 2013) and is downloaded incrementally over several days. The client will not be able to process transactions or update account balances until the full blockchain dataset is downloaded. During that time, the client will display "Out of sync" next to the account balances and show "Synchronizing" in the footer. Make sure you have enough disk space, bandwidth and time to complete the initial synchronization.
==== ====
[[bitcoin-qt-firstload]] [[bitcoin-qt-firstload]]
@ -47,7 +47,7 @@ $
The instructions and resulting output may vary from version to version. Follow the documentation that comes with the code even if it differs from the instructions you see here and don't be surprised if the output displayed on your screen is slightly different from the examples here. The instructions and resulting output may vary from version to version. Follow the documentation that comes with the code even if it differs from the instructions you see here and don't be surprised if the output displayed on your screen is slightly different from the examples here.
==== ====
When the git cloning operation has complete, you will have a complete local copy of the source code repository in the directory _bitcoin_. Change to this directory by typing +cd bitcoin+ at the prompt: When the git cloning operation has completed, you will have a complete local copy of the source code repository in the directory _bitcoin_. Change to this directory by typing +cd bitcoin+ at the prompt:
---- ----
$ cd bitcoin $ cd bitcoin
@ -86,7 +86,7 @@ $
The source code includes documentation, which can be found in a number of files. Review the main documentation located in README.md in the bitcoin directory, by typing +more README.md+ at the prompt, using the space bar to progress to the next page. In this chapter we will build the command-line bitcoin client, also known as +bitcoind+ on Linux. Review the instructions for compiling the bitcoind command-line client on your platform by typing +more doc/build-unix.md+. Alternative instructions for Mac OSX and Windows can be found in the doc directory, as +build-os.md+ or +build-msw.md+ respectively. The source code includes documentation, which can be found in a number of files. Review the main documentation located in README.md in the bitcoin directory, by typing +more README.md+ at the prompt, using the space bar to progress to the next page. In this chapter we will build the command-line bitcoin client, also known as +bitcoind+ on Linux. Review the instructions for compiling the bitcoind command-line client on your platform by typing +more doc/build-unix.md+. Alternative instructions for Mac OSX and Windows can be found in the doc directory, as +build-os.md+ or +build-msw.md+ respectively.
Carefully review the build pre-requisited which are in the first part of the build documentation. These are libraries that must be present on your system before you can begin to compile bitcoin. If these pre-requisites are missing the build process will fail with an error. If this happens because you missed a pre-requisite, you can install it and then resume the build process from where you left off. Assuming the pre-requisites are installed, we start the build process by generating a set of build scripts using the +autogen.sh+ script. Carefully review the build pre-requisites which are in the first part of the build documentation. These are libraries that must be present on your system before you can begin to compile bitcoin. If these pre-requisites are missing the build process will fail with an error. If this happens because you missed a pre-requisite, you can install it and then resume the build process from where you left off. Assuming the pre-requisites are installed, we start the build process by generating a set of build scripts using the +autogen.sh+ script.
[TIP] [TIP]
==== ====
@ -103,7 +103,7 @@ src/Makefile.am: installing `src/build-aux/depcomp'
$ $
---- ----
The +autogen.sh+ script creates a set of automatic configuation scripts that will interrogate your system to discover the correct settings and ensure you have all the necessary libraries to compile the code. The most important of these is the +configure+ script that offers a number of different options to customize the build process. Type +./configure --help+ to see the various options: The +autogen.sh+ script creates a set of automatic configuration scripts that will interrogate your system to discover the correct settings and ensure you have all the necessary libraries to compile the code. The most important of these is the +configure+ script that offers a number of different options to customize the build process. Type +./configure --help+ to see the various options:
---- ----
$ ./configure --help $ ./configure --help
@ -378,7 +378,7 @@ $ bitcoind getinfo
} }
---- ----
The data is returned as a JavaScript Object Notation (JSON), a format which can easily be "consumed" by all programming languages but is also quite human-readable. Among this data we see the version of the bitcoin software client (9000), protocol (70002) and wallet file (60000). We see the current balance contained in the wallet, which is zero. We see the current block height, showing us how many blocks are known to this client, 286216. We also see various statistics about the bitcoin network and the settings related to this client. We will explore these settings in more detail in the rest of this chapter. The data is returned in JavaScript Object Notation (JSON), a format which can easily be "consumed" by all programming languages but is also quite human-readable. Among this data we see the version of the bitcoin software client (9000), protocol (70002) and wallet file (60000). We see the current balance contained in the wallet, which is zero. We see the current block height, showing us how many blocks are known to this client, 286216. We also see various statistics about the bitcoin network and the settings related to this client. We will explore these settings in more detail in the rest of this chapter.
[TIP] [TIP]
==== ====
@ -544,7 +544,7 @@ $ bitcoind getbalance
[TIP] [TIP]
==== ====
If the transaction has not yet confirmed, the balance returned by getbalance will be zero. The configuration option "minconf" determines the minimum number of confirmations that are required before a transaction shows in the balance If the transaction has not yet confirmed, the balance returned by getbalance will be zero. The configuration option "minconf" determines the minimum number of confirmations that are required before a transaction shows in the balance.
==== ====
@ -634,7 +634,7 @@ $ bitcoind decoderawtransaction 0100000001d717...388ac00000000
} }
---- ----
The transaction decode shows all the compoenents of this transaction, including the transaction inputs, and outputs. In this case we see that the transaction that credited our new address with 50 milibits used one input and generated two outputs. The input to this transaction was the output from a previously confirmed transaction (shown as the vin txid starting with +d3c7+ above). The two outputs correspond to the 50 milibit credit and an output with change back to the sender. The transaction decode shows all the components of this transaction, including the transaction inputs, and outputs. In this case we see that the transaction that credited our new address with 50 millibits used one input and generated two outputs. The input to this transaction was the output from a previously confirmed transaction (shown as the vin txid starting with +d3c7+ above). The two outputs correspond to the 50 millibit credit and an output with change back to the sender.
We can further explore the blockchain by examining the previous transaction referenced by its txid in this transaction, using the same commands (eg. +gettransaction+). Jumping from transaction to transaction we can follow a chain of transactions back as the coins are transmitted from owner address to owner address. We can further explore the blockchain by examining the previous transaction referenced by its txid in this transaction, using the same commands (eg. +gettransaction+). Jumping from transaction to transaction we can follow a chain of transactions back as the coins are transmitted from owner address to owner address.
@ -867,7 +867,7 @@ $ bitcoind decoderawtransaction 0100000001e34ac1e2baac09c366fce1c2245536bda8f7db
That looks correct! Our new transaction "consumes" the unspent output from our confirmed transaction and then spends it in two outputs, one for 25 millibits to our new address and one for 24.5 millibits as change back to the original address. The difference of 0.5 millibits represents the transaction fee and will be credited to the miner who finds the block that includes our transaction. That looks correct! Our new transaction "consumes" the unspent output from our confirmed transaction and then spends it in two outputs, one for 25 millibits to our new address and one for 24.5 millibits as change back to the original address. The difference of 0.5 millibits represents the transaction fee and will be credited to the miner who finds the block that includes our transaction.
As you may notice, the transaction contains an empty +scriptSig+, because we haven't signed it yet. Without a signature, this transaction is meaningless, we haven't yet proven that we *own* the address from which the unpsent output is sourced. By signing, we remove the encumberance on the output and prove that we own this output and can spend it. We use the +signrawtransaction+ command to sign the transaction. It takes the raw transaction hex string as the parameter. As you may notice, the transaction contains an empty +scriptSig+, because we haven't signed it yet. Without a signature, this transaction is meaningless, we haven't yet proven that we *own* the address from which the unspent output is sourced. By signing, we remove the encumberance on the output and prove that we own this output and can spend it. We use the +signrawtransaction+ command to sign the transaction. It takes the raw transaction hex string as the parameter.
[TIP] [TIP]
==== ====
@ -1004,7 +1004,7 @@ Many more libraries exist in a variety of other programming languages and more a
==== Libbitcoin and sx tools ==== Libbitcoin and sx tools
The libbitcoin library is a C++ scalable multi-threaded and modular implemntation that supports a full-node client and a command-line toolset named "sx", which offers many of the same capabilities as the bitcoind client commands we illustrated in this chapter. The sx tools also offer some key management and manipulation tools that are not offered by bitcoind, including type-2 deterministic keys and key mnemonics. The libbitcoin library is a C++ scalable multi-threaded and modular implementation that supports a full-node client and a command-line toolset named "sx", which offers many of the same capabilities as the bitcoind client commands we illustrated in this chapter. The sx tools also offer some key management and manipulation tools that are not offered by bitcoind, including type-2 deterministic keys and key mnemonics.
===== Installing sx ===== Installing sx

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@ -3,11 +3,11 @@
Ownership of bitcoin is established through _digital keys_ and _digital signatures_. These keys are not actually stored in the network, but are instead created and stored by end-users, in a file called a _wallet_, or in a database. The keys within each user's wallet allow the user to sign transactions, thereby providing cryptographic proof of the ownership of the bitcoins sourced by the transaction. The keys themselves are completely independent of the bitcoin protocol and can be generated and managed by the end users. Keys can be generated without reference to the blockchain or access to the network. Keys enable many of the interesting properties of bitcoin, including de-centralized trust and control, ownership attestation and the cryptographic-proof security model. Keys can also be converted into unique and public addresses (eg. bitcoin addresses, those that start with a "1"), allowing anyone to create transactions that transfer ownership of bitcoin to our keys. Ownership of bitcoin is established through _digital keys_ and _digital signatures_. These keys are not actually stored in the network, but are instead created and stored by end-users, in a file called a _wallet_, or in a database. The keys within each user's wallet allow the user to sign transactions, thereby providing cryptographic proof of the ownership of the bitcoins sourced by the transaction. The keys themselves are completely independent of the bitcoin protocol and can be generated and managed by the end users. Keys can be generated without reference to the blockchain or access to the network. Keys enable many of the interesting properties of bitcoin, including de-centralized trust and control, ownership attestation and the cryptographic-proof security model. Keys can also be converted into unique and public addresses (eg. bitcoin addresses, those that start with a "1"), allowing anyone to create transactions that transfer ownership of bitcoin to our keys.
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, prove ownerhsip and special addresses uses such as vanity addresses and paper wallets. 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, prove ownership and special addresses uses such as vanity addresses and paper wallets.
[TIP] [TIP]
==== ====
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/publice keys (See <<public key>>). Users sign transactions with the keys, thereby proving they own the transaction outputs (their coins). 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).
==== ====
[[wallets]] [[wallets]]
@ -20,7 +20,7 @@ Your bitcoin wallet contains a collection of key pairs, each consisting of a pri
==== Private Keys ==== Private Keys
In the most simple form, the +private key+ is a number. The private key be used to create a corresponding +public key+. The public key can then be converted into a +bitcoin address+, which is shared with anyone who we want to send us bitcoin. Ownerhsip and control over the private key is the root of user control over all funds associated with the corresponding bitcoin address. In the most simple form, the +private key+ is a number. The private key can be used to create a corresponding +public key+. The public key can then be converted into a +bitcoin address+, which is shared with anyone who we want to send us bitcoin. Ownership and control over the private key is the root of user control over all funds associated with the corresponding bitcoin address.
===== Generating a private key from a random number ===== Generating a private key from a random number
@ -29,7 +29,7 @@ A private key is a number, between +1+ and +n - 1+ where latexmath:[\(n = 1.158
[TIP] [TIP]
==== ====
Do not try and design your own pseudo random number generator (PRNG). Use a cryptographically-secure (CSPRNG) with a seed from a source of sufficient entropy, the choice of which which depends on you operating-system. Correct implementation of the CSPRNG is critical to the security of the keys. DIY is highly discouraged unless you are a professional cryptographer. Do not try and design your own pseudo random number generator (PRNG). Use a cryptographically-secure pseudo-random number generator (CSPRNG) with a seed from a source of sufficient entropy, the choice of which depends on your operating-system. Correct implementation of the CSPRNG is critical to the security of the keys. DIY is highly discouraged unless you are a professional cryptographer.
==== ====
@ -72,7 +72,7 @@ $ bitcoind dumpprivkey 1J7mdg5rbQyUHENYdx39WVWK7fsLpEoXZy
KxFC1jmwwCoACiCAWZ3eXa96mBM6tb3TYzGmf6YwgdGWZgawvrtJ KxFC1jmwwCoACiCAWZ3eXa96mBM6tb3TYzGmf6YwgdGWZgawvrtJ
---- ----
The +dumpprivkey+ command is opening the wallet and extracting 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. In the example above, we see that the private key has a "K" prefix, indicating it is encoded as a WIF-compressed format. This means it that the key-pair is stored in the wallet with both keys compressed, saving 31 bytes of space. If the prefix had been "5", indicating the WIF format, we would know that the key-pair is uncompressed. The +dumpprivkey+ command is opening the wallet and extracting 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. In the example above, we see that the private key has a "K" prefix, indicating it is encoded as a WIF-compressed format. This means that the key-pair is stored in the wallet with both keys compressed, saving 31 bytes of space. If the prefix had been "5", indicating the WIF format, we would know that the key-pair is uncompressed.
You can also use +sx tools+ to generate keys and convert them between formats: You can also use +sx tools+ to generate keys and convert them between formats:
@ -102,7 +102,7 @@ KxFC1jmwwCoACiCAWZ3eXa96mBM6tb3TYzGmf6YwgdGWZgawvrtJ
==== From Private Key to Public Key ==== From Private Key to Public Key
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 (division), or calculating +k+ if you know +K+ is as difficult as trying all possible values of +k+, ie a brute-force search. 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 (division), or calculating +k+ if you know +K+ is as difficult as trying all possible values of +k+, i.e. a brute-force search.
The public key is a point on the elliptic curve, and consists of a pair of coordinates +(x,y)+, normally represented by a 512-bit number with the added prefix +04+. The public key is a point on the elliptic curve, and consists of a pair of coordinates +(x,y)+, normally represented by a 512-bit number with the added prefix +04+.
@ -121,7 +121,7 @@ Here's the same public key shown as a 512-bit number (130 hex digits) with the p
K = 04 32 5D 52 E3 B7 ... CD 90 C2 K = 04 32 5D 52 E3 B7 ... CD 90 C2
---- ----
The +y+ coordinate can be deduced from the +x+ coordinate, since they both lie on the same curved line defined by the elliptic curve equation. This makes it possible to store the public key _compressed_, with the +y+ ommitted. A +compressed public key+ has the prefix +02+ if the +y+ is above the x-axis, and +03+ if it is below the x-axis, allowing the software to calculate it from +x+. The +y+ coordinate can be deduced from the +x+ coordinate, since they both lie on the same curved line defined by the elliptic curve equation. This makes it possible to store the public key _compressed_, with the +y+ omitted. A +compressed public key+ has the prefix +02+ if the +y+ is above the x-axis, and +03+ if it is below the x-axis, allowing the software to calculate it from +x+.
Here's the same public key above, shown as a +compressed public key+ stored in 264-bits (66 hex digits) with the prefix +02+ indicating the +y+ coordinate has a positive sign: Here's the same public key above, shown as a +compressed public key+ stored in 264-bits (66 hex digits) with the prefix +02+ indicating the +y+ coordinate has a positive sign:
@ -141,7 +141,7 @@ An address is a string of digits and characters that can be shared with anyone w
==== Generating keys ==== Generating keys
There are many ways to generate keys for use in bitcoin. The simplest is to pick a large random number and turn it into a key pair (See <<key_derivation>>). A random key can generated with very simple hardware or even manually with pen, paper and dice. The disadvantage of random keys is that if you generate many of them you must keep copies of all of them. Another method for making keys is _deterministic key generation_. Here you generate each new key as a function of the previous key, linking them in a sequence. As long as you can re-create that sequence, you only need the first key to generate them all. In this section we will examine the different methods for key generation. There are many ways to generate keys for use in bitcoin. The simplest is to pick a large random number and turn it into a key pair (See <<key_derivation>>). A random key can be generated with very simple hardware or even manually with pen, paper and dice. The disadvantage of random keys is that if you generate many of them you must keep copies of all of them. Another method for making keys is _deterministic key generation_. Here you generate each new key as a function of the previous key, linking them in a sequence. As long as you can re-create that sequence, you only need the first key to generate them all. In this section we will examine the different methods for key generation.
[TIP] [TIP]
==== ====
@ -150,7 +150,7 @@ The private key is just a number. A public key can be generated from any private
===== Type-0 or non-deterministic (random) keys ===== Type-0 or non-deterministic (random) keys
The first and most important step in generating keys is to find a secure source of entropy, or randomness. The private key is a 256-bit number, which must be selected at random. 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 will use the underlying operating system's random number generators to produce 256-bits of entropy. 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 trully paranoid, nothing beats dice, pencil and paper. The first and most important step in generating keys is to find a secure source of entropy, or randomness. The private key is a 256-bit number, which must be selected at random. 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 will use the underlying operating system's random number generators to produce 256-bits of entropy. 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.
[[Type0_keygen]] [[Type0_keygen]]
@ -205,7 +205,7 @@ image::images/BIP32-derivation.png["Key generation"]
[[public_key]] [[public_key]]
==== Public key cryptography and crypto-currency ==== Public key cryptography and crypto-currency
((("public key"))) ((("public key")))
Public-key cryptography, is like a digital padlock, which can only be opened by the owner of a secret, also known as a private key. The owner of that key can hand out as many copies of the padlock, as they want, and others can use it to "lock" bitcoins inside transactions recorded on the blockchain. Only the owner of the private key can then create a signature to unlock and "redeem" these transactions, as only they can open the digital padlock. Public-key cryptography is like a digital padlock which can only be opened by the owner of a secret, also known as a private key. The owner of that key can hand out as many copies of the padlock, as they want, and others can use it to "lock" bitcoins inside transactions recorded on the blockchain. Only the owner of the private key can then create a signature to unlock and "redeem" these transactions, as only they can open the digital padlock.
When Alice pays Bob 15 millibits (0.015 BTC), she is unlocking a set of unspent outputs with _digital signatures_ made with her _private keys_. Like signing a check, she signs a transaction to authorize spending her coins. Then she "locks" a certain amount of bitcoin with Bob's address (made from his _public key_ and freely shared), thereby making a transaction output encumbered by Bob's address and spendable only with Bob's signature. When Alice pays Bob 15 millibits (0.015 BTC), she is unlocking a set of unspent outputs with _digital signatures_ made with her _private keys_. Like signing a check, she signs a transaction to authorize spending her coins. Then she "locks" a certain amount of bitcoin with Bob's address (made from his _public key_ and freely shared), thereby making a transaction output encumbered by Bob's address and spendable only with Bob's signature.
@ -213,13 +213,13 @@ Spending can be visualized as unlocking my coins and then locking some of them w
==== Public Key Cryptography ==== Public Key Cryptography
((("public key", "private key"))) ((("public key", "private key")))
Public key, or assymetric cryptography, is a type of cryptography that uses a pair of digital keys. A user has a private and a public key. The public key is derived from the private key with a mathematical function that is difficult to reverse. Public key, or asymmetric cryptography, is a type of cryptography that uses a pair of digital keys. A user has a private and a public key. The public key is derived from the private key with a mathematical function that is difficult to reverse.
[[pubcrypto_colors]] [[pubcrypto_colors]]
.Public Key Cryptography: Irreversible Function as Color Mixing .Public Key Cryptography: Irreversible Function as Color Mixing
image::images/pubcrypto-colors.png["Public Key Cryptography: Irreversible Function as Color Mixing"] image::images/pubcrypto-colors.png["Public Key Cryptography: Irreversible Function as Color Mixing"]
As an example, think of mixing a shade of yellow with a shade of blue. Mixing the two colors is simple. However, figuring out exactly which two shades went into the final mix is not so easy, unless you have one of the two shades. If you have one of the colors you can easily filter it out and get the other. Whereas mixing colors is easy, "un-mixing" them is hard. The mathematical equivalent most often used in cryptography is the Discrete Logarith Problem link$$https://en.wikipedia.org/wiki/Discrete_logarithm_problem#Cryptography$$[Discrete Logarithm Problem in Cryptography] As an example, think of mixing a shade of yellow with a shade of blue. Mixing the two colors is simple. However, figuring out exactly which two shades went into the final mix is not so easy, unless you have one of the two shades. If you have one of the colors you can easily filter it out and get the other. Whereas mixing colors is easy, "un-mixing" them is hard. The mathematical equivalent most often used in cryptography is the Discrete Logarithm Problem link$$https://en.wikipedia.org/wiki/Discrete_logarithm_problem#Cryptography$$[Discrete Logarithm Problem in Cryptography]
To use public key cryptography, Alice will ask Bob for his public key. Then, Alice can encrypt messages with Bob's public key, knowing that only Bob can read those messages, since only Bob has the equivalent private key. To use public key cryptography, Alice will ask Bob for his public key. Then, Alice can encrypt messages with Bob's public key, knowing that only Bob can read those messages, since only Bob has the equivalent private key.
@ -230,7 +230,7 @@ In most implementations, the private and public keys are stored together as a _k
==== Elliptic Curve Cryptography ==== Elliptic Curve Cryptography
((("elliptic curve cryptography", "ECC"))) ((("elliptic curve cryptography", "ECC")))
Elliptic Curve Cryptography is a type of assymetric or public-key cryptography based on the discrete logarithm problem as expressed by addition and multiplication on the points of an elliptic curve. 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.
Starting with a private key in the form of a randomly generator number +k+, we multiply it with 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+. Starting with a private key in the form of a randomly generator number +k+, we multiply it with 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+.
@ -290,7 +290,7 @@ Here's an example from the reference implementation, generating a public key fro
int EC_KEY_regenerate_key(EC_KEY *eckey, BIGNUM *priv_key) int EC_KEY_regenerate_key(EC_KEY *eckey, BIGNUM *priv_key)
{ {
[...initializtion code ommitted ...] [...initialization code omitted ...]
if (!EC_POINT_mul(group, pub_key, priv_key, NULL, NULL, ctx)) <1> if (!EC_POINT_mul(group, pub_key, priv_key, NULL, NULL, ctx)) <1>
goto err; goto err;

4
preface.asciidoc
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@ -5,7 +5,7 @@
I first stumbled upon bitcoin in mid-2011. My immediate reaction was more or less "Pfft! Nerd money!" and I ignored it for another 6 months, failing to grasp its importance. This is a reaction which I have seen repeated among many of the smartest people I know, which gives me some consolation. The second time I came across bitcoin in a mailing list discussion, I decided to read the white paper written by Satoshi Nakamoto, to study the authoritative source and see what it was all about. I still remember the moment I finished reading those 9 pages, when I realized that bitcoin was not simply a digital currency, but a network of trust that could also provide the basis for so much more than just currencies. That realization: "This isn't money, it's a de-centralized trust network," started me on a four month journey to devour every scrap of information about bitcoin I could find. I became obsessed and enthralled, spending twelve or more hours each day glued to a screen, reading, writing, coding and learning as much as I could. I emerged from this state of fugue, more than 20 lbs lighter from lack of consistent meals, determined to dedicate myself to working on bitcoin. I first stumbled upon bitcoin in mid-2011. My immediate reaction was more or less "Pfft! Nerd money!" and I ignored it for another 6 months, failing to grasp its importance. This is a reaction which I have seen repeated among many of the smartest people I know, which gives me some consolation. The second time I came across bitcoin in a mailing list discussion, I decided to read the white paper written by Satoshi Nakamoto, to study the authoritative source and see what it was all about. I still remember the moment I finished reading those 9 pages, when I realized that bitcoin was not simply a digital currency, but a network of trust that could also provide the basis for so much more than just currencies. That realization: "This isn't money, it's a de-centralized trust network," started me on a four month journey to devour every scrap of information about bitcoin I could find. I became obsessed and enthralled, spending twelve or more hours each day glued to a screen, reading, writing, coding and learning as much as I could. I emerged from this state of fugue, more than 20 lbs lighter from lack of consistent meals, determined to dedicate myself to working on bitcoin.
Two years later, after creating a number of small startups to explore various bitcoin-related services and products, I decided that it was time to write my first book. Bitcoin was the topic that had driven me into a frenzy of creativity, consumed my thoughts and is the most exciting technology I have encountered since the Internet. It was now time to share my discovery of this amazing technolgy and my passion with a broader audience. This is the bitcoin book. Two years later, after creating a number of small startups to explore various bitcoin-related services and products, I decided that it was time to write my first book. Bitcoin was the topic that had driven me into a frenzy of creativity, consumed my thoughts and is the most exciting technology I have encountered since the Internet. It was now time to share my discovery of this amazing technology and my passion with a broader audience. This is the bitcoin book.
=== Intended Audience === Intended Audience
@ -23,7 +23,7 @@ I hope you can help me find and publish the "right answer" by the time this book
The Leafcutter Ant is a species that exhibits highly complex behavior in a colony super-organism, but each individual ant operates on a set of simple rules driven by social interaction and the exchange of chemical scents (pheromones). Per Wikipedia: "Next to humans, leafcutter ants form the largest and most complex animal societies on Earth." Leafcutter ants don't actually eat leaves, but rather use them to farm a fungus, which is the central food source for the colony. Get that? These ants are farming! The Leafcutter Ant is a species that exhibits highly complex behavior in a colony super-organism, but each individual ant operates on a set of simple rules driven by social interaction and the exchange of chemical scents (pheromones). Per Wikipedia: "Next to humans, leafcutter ants form the largest and most complex animal societies on Earth." Leafcutter ants don't actually eat leaves, but rather use them to farm a fungus, which is the central food source for the colony. Get that? These ants are farming!
While ants form a caste-based society and have a queen for producing offspring, there is no central authority or leader in an ant colony. The highly intelligent and sohpisticated behavior exhibited by a multi-million member colony is an emergent property from the interaction of the individuals in a social network. While ants form a caste-based society and have a queen for producing offspring, there is no central authority or leader in an ant colony. The highly intelligent and sophisticated behavior exhibited by a multi-million member colony is an emergent property from the interaction of the individuals in a social network.
Nature demonstrates that de-centralized systems can be resilient and can produce emergent complexity and sophistication without the need for a central authority, hierarchy or complex parts. Nature demonstrates that de-centralized systems can be resilient and can produce emergent complexity and sophistication without the need for a central authority, hierarchy or complex parts.