Bitcoin is collection of concepts and technologies that form the basis of a digital money ecosystem. It includes a currency, called bitcoin (abbreviated BTC), that is used to store and transmit value among participants in the bitcoin network. Bitcoin users communicate with each other using the bitcoin protocol, primarily via the Internet, although other transport networks can also be used. The bitcoin protocol stack, available as open source software, can be run on a wide range of computing devices, including laptops and smartphones, making the technology easily accessible to many people. By transmitting bitcoins between the digital wallets in which they’re stored, people and organizations can use them to do just about anything that can be done with conventional currencies, such as buy and sell goods, send money to people or organizations, extend credit, and exchange them for other currencies. Because bitcoin technology represents and transmits money, it includes significant features to ensure the security of the bitcoin network. Bitcoins can be purchased and sold, exchanged for other currencies at a floating exchange rate, at specialized currency exchanges. Bitcoin in a sense is the perfect form of money for the Internet: fast, secure, borderless.
Bitcoin is collection of concepts and technologies that form the basis of a digital money ecosystem. It includes a currency, with units called bitcoins, that are used to store and transmit value among participants in the bitcoin network. Bitcoin users communicate with each other using the bitcoin protocol, primarily via the Internet, although other transport networks can also be used. The bitcoin protocol stack, available as open source software, can be run on a wide range of computing devices, including laptops and smartphones, making the technology easily accessible to many people. By transmitting bitcoins between the digital wallets in which they’re stored, people and organizations can use them to do just about anything that can be done with conventional currencies, such as buy and sell goods, send money to people or organizations, extend credit, and exchange them for other currencies. Because bitcoin technology represents and transmits money, it includes significant features to ensure the security of the bitcoin network. Bitcoins can be purchased and sold, exchanged for other currencies at a floating exchange rate, at specialized currency exchanges. Bitcoin in a sense is the perfect form of money for the Internet: fast, secure, borderless.
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.
@ -39,17 +39,19 @@ Bitcoin represents the culmination of decades of research in cryptography and di
As with many inventions, bitcoin was not novel in its entirety, but combined several prior inventions. A key bitcoin innovation was to use a Proof-Of-Work algorithm to conduct a global "election" every 10 minutes, allowing the de-centralized network to arrive at consensus about the state of transactions. This elegantly solves the double-spend problem while maintaining a fully de-centralized system.
.A solution to a distributed computing problem
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Satoshi Nakamoto's invention is also a practical solution to a previously unsolved problem in distributed computing, known as the Byzantine Generals problem. Briefly, the problem consists of trying to agree on a course of action by exchanging information over an unreliable and potentially compromised network. Satoshi Nakamoto's solution, which uses the concept of proof-of-work to achieve consensus without a central trusted authority represents a breakthrough in distributed computing science and has wide applicability beyond currency. It can be used to achieve consensus on decentralized networks for provably-fair elections, lotteries, asset registries, digital notarization and more.
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Bitcoin was invented in 2008 by Satoshi Nakamoto with the publication of a paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System". Satoshi Nakamoto combined several prior inventions such as b-money and HashCash to create a completely de-centralized electronic cash system that does not rely on a central authority for settlement and validation of transactions. The key innovation was to use a Proof-Of-Work algorithm to conduct a global "election" every 10 minutes, allowing the de-centralized network to arrive at _consensus_ about the state of transactions. This elegantly solves the issue of double-spend, a weakness of digital money, where a single currency unit can be spent twice. Previously, the double-spend problem was solved by clearing all transactions through a central clearinghouse.
The bitcoin network started in 2009, based on a reference implementation published by Nakamoto and since revised by many other programmers. During the first four years of operation, the network has grown to include an enormous amount of Proof-Of-Work computation, thereby increasing its security and resillience. In 2013, the total market value of bitcoin's primary monetary supply measure (M0) is estimated at more than 10 billion US dollars. The largest transaction processed by the network was $150 million US dollars, transmitted instantly and processed without any fees.
Satoshi Nakamoto withdrew from the public in April of 2011, leaving the responsibility of developing the code and network to a thriving group of volunteers. The name Satoshi Nakamoto is an alias and the identity of the person or people behind this invention is currently unknown. However, neither Satoshi Nakamoto nor anyone else exerts control over the bitcoin system, which operates based on mathematical principles. The invention itself is groundbreaking and has already spawned new science in the fields of distributed computing, economics and econometrics.
.A solution to a distributed computing problem
****
Satoshi Nakamoto's invention is also a practical solution to a previously unsolved problem in distributed computing, known as the Byzantine Generals problem. Briefly, the problem consists of trying to agree on a course of action by exchanging information over an unreliable and potentially compromised network. Satoshi Nakamoto's solution, which uses the concept of proof-of-work to achieve consensus without a central trusted authority represents a breakthrough in distributed computing science and has wide applicability beyond currency. It can be used to achieve consensus on decentralized networks for provably-fair elections, lotteries, asset registries, digital notarization and more.
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[[user-stories]]
=== Bitcoin Uses, Users and Their Stories
@ -90,7 +92,10 @@ Light Client:: A lightweight client stores the user's wallet but relies on third
Web Client:: Web-clients are accessed through a web browser and store the user's wallet on a server owned by a third party. This is similar to webmail, in that it relies entirely on a third party server.
Mobile Client:: Mobile clients, for smartphones such as those based on the Android system can either operate as full clients, light clients or web clients.
.Mobile Bitcoin
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Mobile clients, for smartphones such as those based on the Android system can either operate as full clients, light clients or web clients. Some mobile clients are synchronized with a web or desktop client, providing a multi-platform wallet across multiple devices but with a common source of funds
****
The choice of bitcoin client depends on how much control the user wants over their funds. A full client will offer the highest level of control and independence for the user, but in turn put the burden of backups and security on the user. On the other end of the range of choices, a web client is the easiest to setup and use, but the security and control is shared by the user and the owner of the web service, which introduces counterparty risk. If a web wallet service is compromised, as many have been, the users can lose all their funds. Conversely, if a user has a full client without adequate backups, they may lose their funds through a computer mishap.
@ -98,11 +103,11 @@ For the purposes of this book, we will be demonstrating the use of a variety of
==== Quick Start - Web Wallet
A web wallet is the easiest way to start using bitcoin, and is the choice of our 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 the easiest-to-use client, 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 the easiest-to-use client, 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.
[TIP]
====
When creating a bitcoin wallet you will need to provide a password or passphrase to protect your wallet. There are many bad actors attempting to break weak passwords, so take care to select one that cannot be easily broken. Use a combination of upper and lower-case characters, numbers and symbols. Avoid personal information such as birthdates or names of sports teams. Avoid any words commonly found in dictionaries, in any language. If you can, use a random password generator to create a completely random password, at least 12 characters in length. Remember: bitcoin is money and can be instantly moved anywhere in the world - that makes it easy to steal and disappear.
When creating a bitcoin wallet you will need to provide a password or passphrase to protect your wallet. There are many bad actors attempting to break weak passwords, so take care to select one that cannot be easily broken. Use a combination of upper and lower-case characters, numbers and symbols. Avoid personal information such as birthdates or names of sports teams. Avoid any words commonly found in dictionaries, in any language. If you can, use a password generator to create a completely random password, at least 12 characters in length. Remember: bitcoin is money and can be instantly moved anywhere in the world - that makes it easy to steal and disappear.
====
Once Alice has completed the registration form, she is presented with a Wallet Recovery Mnemonic. This is a series of words that can be used to reconstruct her wallet in case she loses the password or account details. Following the instructions on screen, Alice copies the words onto paper, locking it away in a secure location.
@ -134,22 +139,58 @@ It is not possible to buy bitcoins at a bank, or foreign exchange kioks, at this
* Coinbase (coinbase.com), a US-based currency market, based in California, that supports US dollar exchange to and from bitcoin. Coinbase can connect to US checking accounts via the ACH system
* Mt. Gox (mtgox.com), one of the oldest bitcoin currency exchanges, based in Japan, that supports many different national currencies via wire transfer.
It takes several days or weeks to setup the necessary accounts with the above services, as they require various forms of identification to comply with KYC (Know Your Customer) and AML (Anti-Money Laundering) banking regulations, essentially like opening a new bank account. Once you have an account on a bitcoin exchange, you can then buy or sell bitcoins quickly, just like buying a foreign currency with a brokerage account.
Crypto-currency exchanges such as these operate at the intersection of national currencies and crypto-currencies. As such, they are subject to national and international regulations and are often specific to a single country or economic area and specialize in the national currencies of that area. Your choice of currency exchange will be specific to the national currency you use and limited to the exchanges that operate within the legal jurisdiction of your country. It takes several days or weeks to setup the necessary accounts with the above services, as they require various forms of identification to comply with KYC (Know Your Customer) and AML (Anti-Money Laundering) banking regulations, essentially like opening a new bank account. Once you have an account on a bitcoin exchange, you can then buy or sell bitcoins quickly, just like buying a foreign currency with a brokerage account.
A more complete list can be found at http://bitcoincharts.com/markets/, a site that offers price quotes and other market data across many dozens of currency exchanges.
There are three other methods for getting bitcoins as a new user:
* Find a friend who has bitcoins and buy some from them directly. Many bitcoin users started this way.
* Use a classified service like localbitcoins.com to find a seller in your area to buy bitcoins for cash
* Use a classified service like localbitcoins.com to find a seller in your area to buy bitcoins for cash in an in-person transaction.
* Sell a product or service for bitcoin. If you're a programmer, sell your programming skills. If you have an online store, see <<bitcoin-commerce>> to sell in bitcoin.
Alice was introduced to bitcoin by a friend and so she has an easy way of getting her first bitcoin while she waits for her account on Coinbase, the California currency market, to be verified and activated.
Alice was introduced to bitcoin by a friend and so she has an easy way of getting her first bitcoin while she waits for her account on a California currency market to be verified and activated.
===== Sending and receiving bitcoins
Once Alice created her bitcoin web wallet, she is ready to receive funds. Her web wallet application generated a bitcoin address and the corresponding key (an elliptic curve private key, describe in more detail in <<private keys>>). At this point, her bitcoin address is not known to the bitcoin network or "registered" with any part of the bitcoin system. Her bitcoin address is simply a number that corresponds to a key that she can use to control access to the funds. There is no account or association between that address and an account. Until the moment this address is referenced as the recipient of value in a transaction posted on the bitcoin ledger (the blockchain), it is simply part of the vast number of possible addresses that are "valid" in bitcoin. Once it has been associated with a transaction, it becomes part of the known addresses in the network and anyone can check its balance on the public ledger.
Alice meets her friend Joe who introduced her to bitcoin at a local restuarant so they can exchange some US dollars and put some bitcoins into her account. She has brought a print out of her address and the QR code as shown on the home page of her web wallet. There is nothing sensitive, from a security perspective, about the bitcoin address, it can be posted anywhere without risking the security of her account and it can be changed by creating a new address at any time. The print out of the address and QR code is just for convenience. Alice wants to convert just $10 US dollars into bitcoin, so as not to risk too much money on this new technology. She gives Joe a $10 bill and the printout of her address so that Joe can send her the equivalent amount of bitcoin.
===== Receiving bitcoins
First, Joe has to figure out the exchange rate so that he can give the correct amount of bitcoin to Alice. There are hundreds of applications and web sites that can provide the current market rate, here are some of the most popular:
* bitcoincharts.com, a market data listing service that shows the market rate of bitcoin across many exchanges around the globe, denominated in different local currencies
* bitcoinaverage.com, a site that provides a simple view of the volume-weighted-average for each currency. An easy way to see the global bitcoin price in dollars summarized from the most popular exchanges
* Bitcoin Prices, a free Android application that can display a bitcoin price from most exchanges or from the bitcoinaverage.com site mentioned above.
* Bitcoin Price, an iOS application for iPhone and iPad that shows the bitcoin price in difference exchanges.
[[bitcoin-price-android]]
.Bitcoin Prices - A bitcoin market rate application for Android OS
Using one of the applications or websites above, Joe determines the price of bitcoin to be approximately $100 US dollars per bitcoin. At that rate, he should give Alice 0.10 bitcoin, also known as 100 milli-bits, in return for the $10 US dollars she gave him.
Once establishing a fare exchange price, Joe opens his mobile wallet application and selects to "send" bitcoin. He is presented with a screen requesting two inputs:
* The destination bitcoin address for the transaction
* The amount of bitcoin to send
===== Spending bitcoins - Creating the first transaction
[[blockchain-mobile-send]]
.Bitcoin mobile wallet - Send bitcoin screen
image::images/blockchain-mobile-send.png["blockchain mobile send screen"]
In the input field for the bitcoin address, there is a small icon that looks like a QR code. This allows Joe to scan the barcode with his smartphone camera so that he doesn't have to type in Alice's bitcoin address (+1Cdid9KFAaatwczBwBttQcwXYCpvK8h7FK+), which is quite long and difficult to type. Joe taps on the QR code icon and acivates the smartphone camera, scanning the QR code from Alice's wallet, from the printed page she brought with her. The mobile wallet application fills in the bitcoin address and Joe can check that it scanned correctly by comparing a few digits from the address with the address printed by Alice.
Joe then enters the bitcoin value for the transaction, 0.10 bitcoin. He carefully checks to make sure he has entered the correct amount, as he is about to transmit money and any mistake could be costly. Finally, he presses "Send" to transmit the transaction. Joe's mobile bitcoin wallet constructs a transaction that assigns 0.10 bitcoin to the address provided by Alice, sourcing the funds from Joe's wallet and signing the transaction with Joe's private keys. This tells the bitcoin network that Joe has authorized a transfer of value from one of his addresses to Alice's new address. As the transaction is transmitted via the peer-to-peer protocol, it quickly propagates across the bitcoin network. In less than a second, most of the well-connected nodes in the network receive the transaction and see Alice's address for the first time.
If Alice has a smartphone or laptop with her, she will also be able to see the transaction. The bitcoin ledger is public, meaning that all she has to do is look up her own address and see if any funds have been sent to it. She can do this quite easily at the blockchain.info website by entering her address in the search box. The website will show her a page (https://blockchain.info/address/1Cdid9KFAaatwczBwBttQcwXYCpvK8h7FK) listing all the transactions to and from that address. If Alice is watching that page, soon after Joe hits "Send", it will update to show a new transaction transferring 0.10 bitcoin to her balance.
.Confirmations
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At first, Alice's address will show the transaction from Joe as "Unconfirmed". This means that the transaction has been propagated to the network but has not yet been included in the bitcoin transaction ledger, known as the blockchain. To be included, the transaction must be "picked up" by a miner and included in a block of transactions. Once a miner has discovered a solution to the Proof-of-Work algorithm for this block, in approximately 10 minutes, the transactions within the block will be accepted as "confirmed" by the network and can be spent. The transaction is seen by all instantly, but is only "trusted" by all when it is included in a newly mined block. The more blocks mined after that block, the more trusted it is, as more and more computation is "piled" on top of it.
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Alice is now the proud owner of 0.10 bitcoin which she can spend. In the next chapter we will look at her first purchase with bitcoin and examine the underlying transaction and propagation technologies in more detail.
==== Bitcoin-Qt - The Reference Implementation, aka Satoshi Client
Andreas M. Antonopoulos
11 years ago
