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@ -5,7 +5,7 @@
((("pycoin library")))The Python library http://github.com/richardkiss/pycoin[+pycoin+], originally written and maintained by Richard Kiss, is a Python-based library that supports manipulation of bitcoin keys and transactions, even supporting the scripting language enough to properly deal with nonstandard transactions. ((("pycoin library")))The Python library http://github.com/richardkiss/pycoin[+pycoin+], originally written and maintained by Richard Kiss, is a Python-based library that supports manipulation of bitcoin keys and transactions, even supporting the scripting language enough to properly deal with nonstandard transactions.
The pycoin library supports both Python 2 (2.7.x) and Python 3 (after 3.3) and comes with some handy command-line utilities, +ku+ and +tx+. The pycoin library supports both Python 2 (2.7.x) and Python 3 (3.3 and later) and comes with some handy command-line utilities, +ku+ and +tx+.
=== Key Utility (KU) === Key Utility (KU)

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@ -150,7 +150,7 @@ Bitcoin transactions are irreversible. Most electronic payment networks such as
[role="pagebreak-before"] [role="pagebreak-before"]
Here are some methods for getting bitcoin as a new user: Here are some methods for getting bitcoin as a new user:
* Find a friend who has bitcoin and buy some from him or her directly. Many bitcoin users start this way. This method is the least complicated. One way to meet people with bitcoin is to attend a local bitcoin meetup listed at https://meetup.com[Meetup.com]. * Find a friend who has bitcoin and buy some from him or her directly. Many bitcoin users start this way. This method is the least complicated. One way to meet people with bitcoin is to attend a local bitcoin meetup listed at https://bitcoin.meetup.com[Meetup.com].
* Use a classified service such as pass:[<a class="orm:hideurl" href="https://localbitcoins.com/">localbitcoins.com</a>] to find a seller in your area to buy bitcoin for cash in an in-person transaction. * Use a classified service such as pass:[<a class="orm:hideurl" href="https://localbitcoins.com/">localbitcoins.com</a>] to find a seller in your area to buy bitcoin for cash in an in-person transaction.
* Earn bitcoin by selling a product or service for bitcoin. If you are a programmer, sell your programming skills. If you're a hairdresser, cut hair for bitcoin. * Earn bitcoin by selling a product or service for bitcoin. If you are a programmer, sell your programming skills. If you're a hairdresser, cut hair for bitcoin.
* ((("Coin ATM Radar")))((("ATMs, locating")))Use a bitcoin ATM in your city. A bitcoin ATM is a machine that accepts cash and sends bitcoin to your smartphone bitcoin wallet. Find a bitcoin ATM close to you using an online map from http://coinatmradar.com[Coin ATM Radar]. * ((("Coin ATM Radar")))((("ATMs, locating")))Use a bitcoin ATM in your city. A bitcoin ATM is a machine that accepts cash and sends bitcoin to your smartphone bitcoin wallet. Find a bitcoin ATM close to you using an online map from http://coinatmradar.com[Coin ATM Radar].

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@ -18,7 +18,6 @@ image::images/mbc2_0201.png["Bitcoin Overview"]
((("Bitcoin Block Explorer")))((("BlockCypher Explorer")))((("blockchain.info")))((("BitPay Insight")))Popular blockchain explorers include: ((("Bitcoin Block Explorer")))((("BlockCypher Explorer")))((("blockchain.info")))((("BitPay Insight")))Popular blockchain explorers include:
* https://blockexplorer.com[Bitcoin Block Explorer]
* https://live.blockcypher.com[BlockCypher Explorer] * https://live.blockcypher.com[BlockCypher Explorer]
* https://blockchain.info[blockchain.info] * https://blockchain.info[blockchain.info]
* https://insight.bitpay.com[BitPay Insight] * https://insight.bitpay.com[BitPay Insight]
@ -83,10 +82,10 @@ In the following sections, we will examine this transaction in more detail. We'l
You can examine Alice's transaction to Bob's Cafe on the blockchain using a block explorer site (<<view_alice_transaction>>): You can examine Alice's transaction to Bob's Cafe on the blockchain using a block explorer site (<<view_alice_transaction>>):
[[view_alice_transaction]] [[view_alice_transaction]]
.View Alice's transaction on https://blockexplorer.com/tx/0627052b6f28912f2703066a912ea577f2ce4da4caa5a5fbd8a57286c345c2f2[blockexplorer.com] .View Alice's transaction on https://blockchain.info/tx/0627052b6f28912f2703066a912ea577f2ce4da4caa5a5fbd8a57286c345c2f2[blockchain.info]
==== ====
---- ----
https://blockexplorer.com/tx/0627052b6f28912f2703066a912ea577f2ce4da4caa5a5fbd8a57286c345c2f2 https://blockchain.info/tx/0627052b6f28912f2703066a912ea577f2ce4da4caa5a5fbd8a57286c345c2f2
---- ----
==== ====
@ -148,7 +147,7 @@ image::images/mbc2_0207.png["Distributing Transaction"]
((("outputs and inputs", "locating and tracking inputs")))Alice's wallet application will first have to find inputs that can pay the amount she wants to send to Bob. Most wallets keep track of all the available outputs belonging to addresses in the wallet. Therefore, Alice's wallet would contain a copy of the transaction output from Joe's transaction, which was created in exchange for cash (see <<getting_first_bitcoin>>). A bitcoin wallet application that runs as a full-node client actually contains a copy of every unspent output from every transaction in the blockchain. This allows a wallet to construct transaction inputs as well as quickly verify incoming transactions as having correct inputs. However, because a full-node client takes up a lot of disk space, most user wallets run "lightweight" clients that track only the user's own unspent outputs. ((("outputs and inputs", "locating and tracking inputs")))Alice's wallet application will first have to find inputs that can pay the amount she wants to send to Bob. Most wallets keep track of all the available outputs belonging to addresses in the wallet. Therefore, Alice's wallet would contain a copy of the transaction output from Joe's transaction, which was created in exchange for cash (see <<getting_first_bitcoin>>). A bitcoin wallet application that runs as a full-node client actually contains a copy of every unspent output from every transaction in the blockchain. This allows a wallet to construct transaction inputs as well as quickly verify incoming transactions as having correct inputs. However, because a full-node client takes up a lot of disk space, most user wallets run "lightweight" clients that track only the user's own unspent outputs.
If the wallet application does not maintain a copy of unspent transaction outputs, it can query the bitcoin network to retrieve this information using a variety of APIs available by different providers or by asking a full-node using an application programming interface (API) call. <<example_2-2>> shows a API request, constructed as an HTTP GET command to a specific URL. This URL will return all the unspent transaction outputs for an address, giving any application the information it needs to construct transaction inputs for spending. We use the simple command-line HTTP client _cURL_ to retrieve the response. If the wallet application does not maintain a copy of unspent transaction outputs, it can query the bitcoin network to retrieve this information using a variety of APIs available by different providers or by asking a full-node using an application programming interface (API) call. <<example_2-2>> shows an API request, constructed as an HTTP GET command to a specific URL. This URL will return all the unspent transaction outputs for an address, giving any application the information it needs to construct transaction inputs for spending. We use the simple command-line HTTP client _cURL_ to retrieve the response.
[[example_2-2]] [[example_2-2]]
.Look up all the unspent outputs for Alice's bitcoin address .Look up all the unspent outputs for Alice's bitcoin address
@ -258,7 +257,7 @@ Transactions are added to the new block, prioritized by the highest-fee transact
((("candidate blocks")))((("blocks", "candidate blocks")))Alice's transaction was picked up by the network and included in the pool of unverified transactions. Once validated by the mining software it was included in a new block, called a _candidate block_, generated by Jing's mining pool. All the miners participating in that mining pool immediately start computing Proof-of-Work for the candidate block. Approximately five minutes after the transaction was first transmitted by Alice's wallet, one of Jing's ASIC miners found a solution for the candidate block and announced it to the network. Once other miners validated the winning block they started the race to generate the next block. ((("candidate blocks")))((("blocks", "candidate blocks")))Alice's transaction was picked up by the network and included in the pool of unverified transactions. Once validated by the mining software it was included in a new block, called a _candidate block_, generated by Jing's mining pool. All the miners participating in that mining pool immediately start computing Proof-of-Work for the candidate block. Approximately five minutes after the transaction was first transmitted by Alice's wallet, one of Jing's ASIC miners found a solution for the candidate block and announced it to the network. Once other miners validated the winning block they started the race to generate the next block.
Jing's winning block became part of the blockchain as block #277316, containing 420 transactions, including Alice's transaction. The block containing Alice's transaction is counted as one "confirmation" of that transaction. Jing's winning block became part of the blockchain as block #277316, containing 419 transactions, including Alice's transaction. The block containing Alice's transaction is counted as one "confirmation" of that transaction.
[TIP] [TIP]
==== ====

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@ -222,7 +222,7 @@ $ which bitcoin-cli
((("Bitcoin Core", "running core nodes", id="BCnode03")))((("bitcoin nodes", "running core nodes", id="BNcore03")))Bitcoin's peer-to-peer network is composed of network "nodes," run mostly by volunteers and some of the businesses that build bitcoin applications. Those running bitcoin nodes have a direct and authoritative view of the bitcoin blockchain, with a local copy of all the transactions, independently validated by their own system. By running a node, you don't have to rely on any third party to validate a transaction. Moreover, by running a bitcoin node you contribute to the bitcoin network by making it more robust. ((("Bitcoin Core", "running core nodes", id="BCnode03")))((("bitcoin nodes", "running core nodes", id="BNcore03")))Bitcoin's peer-to-peer network is composed of network "nodes," run mostly by volunteers and some of the businesses that build bitcoin applications. Those running bitcoin nodes have a direct and authoritative view of the bitcoin blockchain, with a local copy of all the transactions, independently validated by their own system. By running a node, you don't have to rely on any third party to validate a transaction. Moreover, by running a bitcoin node you contribute to the bitcoin network by making it more robust.
Running a node, however, requires a permanently connected system with enough resources to process all bitcoin transactions. Depending on whether you choose to index all transactions and keep a full copy of the blockchain, you may also need a lot of disk space and RAM. As of late 2016, a full-index node needs 2 GB of RAM and 125 GB of disk space so that it has room to grow. Bitcoin nodes also transmit and receive bitcoin transactions and blocks, consuming internet bandwidth. If your internet connection is limited, has a low data cap, or is metered (charged by the gigabit), you should probably not run a bitcoin node on it, or run it in a way that constrains its bandwidth (see <<constrained_resources>>). Running a node, however, requires a permanently connected system with enough resources to process all bitcoin transactions. Depending on whether you choose to index all transactions and keep a full copy of the blockchain, you may also need a lot of disk space and RAM. As of early 2018, a full-index node needs 2 GB of RAM and a minimum of 160 GB of disk space (see https://blockchain.info/charts/blocks-size). Bitcoin nodes also transmit and receive bitcoin transactions and blocks, consuming internet bandwidth. If your internet connection is limited, has a low data cap, or is metered (charged by the gigabit), you should probably not run a bitcoin node on it, or run it in a way that constrains its bandwidth (see <<constrained_resources>>).
[TIP] [TIP]
==== ====

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@ -60,7 +60,7 @@ The bitcoin private key is just a number. You can pick your private keys randoml
The first and most important step in generating keys is to find a secure source of entropy, or randomness. Creating a bitcoin key is essentially the same as "Pick a number between 1 and 2^256^." The exact method you use to pick that number does not matter as long as it is not predictable or repeatable. Bitcoin software uses the underlying operating system's random number generators to produce 256 bits of entropy (randomness). Usually, the OS random number generator is initialized by a human source of randomness, which is why you may be asked to wiggle your mouse around for a few seconds. The first and most important step in generating keys is to find a secure source of entropy, or randomness. Creating a bitcoin key is essentially the same as "Pick a number between 1 and 2^256^." The exact method you use to pick that number does not matter as long as it is not predictable or repeatable. Bitcoin software uses the underlying operating system's random number generators to produce 256 bits of entropy (randomness). Usually, the OS random number generator is initialized by a human source of randomness, which is why you may be asked to wiggle your mouse around for a few seconds.
More precisely, the private key can be any number between +0+ and +n - 1+ inclusive, where n is a constant (n = 1.158 * 10^77^, slightly less than 2^256^) defined as the order of the elliptic curve used in bitcoin (see <<elliptic_curve>>). To create such a key, we randomly pick a 256-bit number and check that it is less than +n+. In programming terms, this is usually achieved by feeding a larger string of random bits, collected from a cryptographically secure source of randomness, into the SHA256 hash algorithm, which will conveniently produce a 256-bit number. If the result is less than +n+, we have a suitable private key. Otherwise, we simply try again with another random number. More precisely, the private key can be any number between +0+ and +n - 1+ inclusive, where n is a constant (n = 1.1578 * 10^77^, slightly less than 2^256^) defined as the order of the elliptic curve used in bitcoin (see <<elliptic_curve>>). To create such a key, we randomly pick a 256-bit number and check that it is less than +n+. In programming terms, this is usually achieved by feeding a larger string of random bits, collected from a cryptographically secure source of randomness, into the SHA256 hash algorithm, which will conveniently produce a 256-bit number. If the result is less than +n+, we have a suitable private key. Otherwise, we simply try again with another random number.
[WARNING] [WARNING]
==== ====
@ -326,35 +326,6 @@ In bitcoin, most of the data presented to the user is Base58Check-encoded to mak
| BIP-32 Extended Public Key | 0x0488B21E | xpub | BIP-32 Extended Public Key | 0x0488B21E | xpub
|======= |=======
Let's look at the complete process of creating a bitcoin address, from a private key, to a public key (a point on the elliptic curve), to a double-hashed address, and finally, the Base58Check encoding. The C++ code in <<addr_example>> shows the complete step-by-step process, from private key to Base58Check-encoded bitcoin address. The code example uses the libbitcoin library introduced in <<alt_libraries>> for some helper functions.
[[addr_example]]
.Creating a Base58Check-encoded bitcoin address from a private key
====
[role="c_less_space"]
[source, cpp]
----
include::code/addr.cpp[]
----
====
The code uses a predefined private key to produce the same bitcoin address every time it is run, as shown in <<addr_example_run>>.((("", startref="base5804")))((("", startref="Abase5804")))
[[addr_example_run]]
.Compiling and running the addr code
====
[source,bash]
----
# Compile the addr.cpp code
$ g++ -o addr addr.cpp $(pkg-config --cflags --libs libbitcoin)
# Run the addr executable
$ ./addr
Public key: 0202a406624211f2abbdc68da3df929f938c3399dd79fac1b51b0e4ad1d26a47aa
Address: 1PRTTaJesdNovgne6Ehcdu1fpEdX7913CK
----
====
==== Key Formats ==== Key Formats
((("keys and addresses", "bitcoin addresses", "key formats")))Both private and public keys can be represented in a number of different formats. These representations all encode the same number, even though they look different. These formats are primarily used to make it easy for people to read and transcribe keys without introducing errors. ((("keys and addresses", "bitcoin addresses", "key formats")))Both private and public keys can be represented in a number of different formats. These representations all encode the same number, even though they look different. These formats are primarily used to make it easy for people to read and transcribe keys without introducing errors.
@ -528,6 +499,41 @@ If a bitcoin wallet is able to implement compressed public keys, it will use tho
"Compressed private keys" is a misnomer! They are not compressed; rather, WIF-compressed signifies that the keys should only be used to derive compressed public keys and their corresponding bitcoin addresses. Ironically, a "WIF-compressed" encoded private key is one byte longer because it has the added +01+ suffix to distinguish it from an "uncompressed" one.((("", startref="KAaddress04"))) "Compressed private keys" is a misnomer! They are not compressed; rather, WIF-compressed signifies that the keys should only be used to derive compressed public keys and their corresponding bitcoin addresses. Ironically, a "WIF-compressed" encoded private key is one byte longer because it has the added +01+ suffix to distinguish it from an "uncompressed" one.((("", startref="KAaddress04")))
==== ====
=== Implementing Keys and Addresses in Cpass:[++]
Let's look at the complete process of creating a bitcoin address, from a private key, to a public key (a point on the elliptic curve), to a double-hashed address, and finally, the Base58Check encoding. The C++ code in <<addr_example>> shows the complete step-by-step process, from private key to Base58Check-encoded bitcoin address. The code example uses the libbitcoin library introduced in <<alt_libraries>> for some helper functions.
[[addr_example]]
.Creating a Base58Check-encoded bitcoin address from a private key
====
[role="c_less_space"]
[source, cpp]
----
include::code/addr.cpp[]
----
====
The code uses a predefined private key to produce the same bitcoin address every time it is run, as shown in <<addr_example_run>>.((("", startref="base5804")))((("", startref="Abase5804")))
[[addr_example_run]]
.Compiling and running the addr code
====
[source,bash]
----
# Compile the addr.cpp code
$ g++ -o addr addr.cpp -std=c++11 $(pkg-config --cflags --libs libbitcoin)
# Run the addr executable
$ ./addr
Public key: 0202a406624211f2abbdc68da3df929f938c3399dd79fac1b51b0e4ad1d26a47aa
Address: 1PRTTaJesdNovgne6Ehcdu1fpEdX7913CK
----
====
[TIP]
====
The example in <<addr_example_run>>, produces a bitcoin address (+1PRTT...+) from a _compressed_ public key (see <<comp_pub>>). If you used the uncompressed public key instead, it would produce a different bitcoin address (+14K1y...+).
====
=== Implementing Keys and Addresses in Python === Implementing Keys and Addresses in Python
((("keys and addresses", "implementing in Python", id="KApython04")))((("pybitcointools")))The most comprehensive bitcoin library in Python is https://github.com/vbuterin/pybitcointools[pybitcointools] by Vitalik Buterin. In <<key-to-address_script>>, we use the pybitcointools library (imported as "bitcoin") to generate and display keys and addresses in various formats. ((("keys and addresses", "implementing in Python", id="KApython04")))((("pybitcointools")))The most comprehensive bitcoin library in Python is https://github.com/vbuterin/pybitcointools[pybitcointools] by Vitalik Buterin. In <<key-to-address_script>>, we use the pybitcointools library (imported as "bitcoin") to generate and display keys and addresses in various formats.
@ -591,7 +597,7 @@ include::code/ec-math.py[]
[NOTE] [NOTE]
==== ====
<<ec_math>> ((("random numbers", "os.urandom", see="entropy")))((("entropy", "os.urandom", see="random numbers")))((("random numbers", "random number generation")))((("entropy", "random number generation")))uses +os.urandom+, which reflects a cryptographically secure random number generator (CSRNG) provided by the underlying operating system. In the case of a Unix-like operating system such as Linux, it draws from +/dev/urandom+; and in the case of Windows, it calls +CryptGenRandom()+. If a suitable randomness source is not found, +NotImplementedError+ will be raised. While the random number generator used here is for demonstration purposes, it is _not_ appropriate for generating production-quality bitcoin keys as it is not implemented with sufficient security.((("", startref="KApython04"))) <<ec_math>> ((("random numbers", "os.urandom", see="entropy")))((("entropy", "os.urandom", see="random numbers")))((("random numbers", "random number generation")))((("entropy", "random number generation")))uses +os.urandom+, which reflects a cryptographically secure random number generator (CSRNG) provided by the underlying operating system. Caution: Depending on the OS, +os.urandom+ may _not_ be implemented with sufficient security or seeded properly and may _not_ be appropriate for generating production-quality bitcoin keys.((("", startref="KApython04")))
==== ====
[[ec_math_run]] [[ec_math_run]]
@ -651,8 +657,10 @@ script hash = RIPEMD160(SHA256(script))
The resulting "script hash" is encoded with Base58Check with a version prefix of 5, which results in an encoded address starting with a +3+. An example of a P2SH address is +3F6i6kwkevjR7AsAd4te2YB2zZyASEm1HM+, which can be derived using the Bitcoin Explorer commands +script-encode+, +sha256+, +ripemd160+, and +base58check-encode+ (see <<appdx_bx>>) as follows: The resulting "script hash" is encoded with Base58Check with a version prefix of 5, which results in an encoded address starting with a +3+. An example of a P2SH address is +3F6i6kwkevjR7AsAd4te2YB2zZyASEm1HM+, which can be derived using the Bitcoin Explorer commands +script-encode+, +sha256+, +ripemd160+, and +base58check-encode+ (see <<appdx_bx>>) as follows:
---- ----
$ echo dup hash160 [89abcdefabbaabbaabbaabbaabbaabbaabbaabba] equalverify checksig > script $ echo \
$ bx script-encode < script | bx sha256 | bx ripemd160 | bx base58check-encode --version 5 'DUP HASH160 [89abcdefabbaabbaabbaabbaabbaabbaabbaabba] EQUALVERIFY CHECKSIG' > script
$ bx script-encode < script | bx sha256 | bx ripemd160 \
| bx base58check-encode --version 5
3F6i6kwkevjR7AsAd4te2YB2zZyASEm1HM 3F6i6kwkevjR7AsAd4te2YB2zZyASEm1HM
---- ----
@ -827,7 +835,3 @@ Other designs feature additional copies of the key and address, in the form of d
[[paper_wallet_spw]] [[paper_wallet_spw]]
.An example of a paper wallet with additional copies of the keys on a backup "stub" .An example of a paper wallet with additional copies of the keys on a backup "stub"
image::images/mbc2_0412.png[] image::images/mbc2_0412.png[]

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@ -66,13 +66,13 @@ You may also notice a lot of strange and indecipherable fields and hexadecimal s
((("balances")))When we say that a user's wallet has "received" bitcoin, what we mean is that the wallet has detected a UTXO that can be spent with one of the keys controlled by that wallet. Thus, a user's bitcoin "balance" is the sum of all UTXO that user's wallet can spend and which may be scattered among hundreds of transactions and hundreds of blocks. The concept of a balance is created by the wallet application. The wallet calculates the user's balance by scanning the blockchain and aggregating the value of any UTXO the wallet can spend with the keys it controls. Most wallets maintain a database or use a database service to store a quick reference set of all the UTXO they can spend with the keys they control. ((("balances")))When we say that a user's wallet has "received" bitcoin, what we mean is that the wallet has detected a UTXO that can be spent with one of the keys controlled by that wallet. Thus, a user's bitcoin "balance" is the sum of all UTXO that user's wallet can spend and which may be scattered among hundreds of transactions and hundreds of blocks. The concept of a balance is created by the wallet application. The wallet calculates the user's balance by scanning the blockchain and aggregating the value of any UTXO the wallet can spend with the keys it controls. Most wallets maintain a database or use a database service to store a quick reference set of all the UTXO they can spend with the keys they control.
((("satoshis")))A transaction output can have an arbitrary (integer) value denominated as a multiple of satoshis. Just like dollars can be divided down to two decimal places as cents, bitcoin can be divided down to eight decimal places as satoshis. Although an output can have any arbitrary value, once created it is indivisible. This is an important characteristic of outputs that needs to be emphasized: outputs are _discrete_ and _indivisible_ units of value, denominated in integer satoshis. An unspent output can only be consumed in its entirety by a transaction. ((("satoshis")))A transaction output can have an arbitrary (integer) value denominated as a multiple of satoshis. Just as dollars can be divided down to two decimal places as cents, bitcoin can be divided down to eight decimal places as satoshis. Although an output can have any arbitrary value, once created it is indivisible. This is an important characteristic of outputs that needs to be emphasized: outputs are _discrete_ and _indivisible_ units of value, denominated in integer satoshis. An unspent output can only be consumed in its entirety by a transaction.
((("change, making")))If an UTXO is larger than the desired value of a transaction, it must still be consumed in its entirety and change must be generated in the transaction. In other words, if you have a UTXO worth 20 bitcoin and want to pay only 1 bitcoin, your transaction must consume the entire 20-bitcoin UTXO and produce two outputs: one paying 1 bitcoin to your desired recipient and another paying 19 bitcoin in change back to your wallet. As a result of the indivisible nature of transaction outputs, most bitcoin transactions will have to generate change. ((("change, making")))If a UTXO is larger than the desired value of a transaction, it must still be consumed in its entirety and change must be generated in the transaction. In other words, if you have a UTXO worth 20 bitcoin and want to pay only 1 bitcoin, your transaction must consume the entire 20-bitcoin UTXO and produce two outputs: one paying 1 bitcoin to your desired recipient and another paying 19 bitcoin in change back to your wallet. As a result of the indivisible nature of transaction outputs, most bitcoin transactions will have to generate change.
Imagine a shopper buying a $1.50 beverage, reaching into her wallet and trying to find a combination of coins and bank notes to cover the $1.50 cost. The shopper will choose exact change if available e.g. a dollar bill and two quarters (a quarter is $0.25), or a combination of smaller denominations (six quarters), or if necessary, a larger unit such as a $5 note. If she hands too much money, say $5, to the shop owner, she will expect $3.50 change, which she will return to her wallet and have available for future transactions. Imagine a shopper buying a $1.50 beverage, reaching into her wallet and trying to find a combination of coins and bank notes to cover the $1.50 cost. The shopper will choose exact change if available e.g. a dollar bill and two quarters (a quarter is $0.25), or a combination of smaller denominations (six quarters), or if necessary, a larger unit such as a $5 note. If she hands too much money, say $5, to the shop owner, she will expect $3.50 change, which she will return to her wallet and have available for future transactions.
Similarly, a bitcoin transaction must be created from a user's UTXO in whatever denominations that user has available. Users cannot cut an UTXO in half any more than they can cut a dollar bill in half and use it as currency. The user's wallet application will typically select from the user's available UTXO to compose an amount greater than or equal to the desired transaction amount. Similarly, a bitcoin transaction must be created from a user's UTXO in whatever denominations that user has available. Users cannot cut a UTXO in half any more than they can cut a dollar bill in half and use it as currency. The user's wallet application will typically select from the user's available UTXO to compose an amount greater than or equal to the desired transaction amount.
As with real life, the bitcoin application can use several strategies to satisfy the purchase amount: combining several smaller units, finding exact change, or using a single unit larger than the transaction value and making change. All of this complex assembly of spendable UTXO is done by the user's wallet automatically and is invisible to users. It is only relevant if you are programmatically constructing raw transactions from UTXO. As with real life, the bitcoin application can use several strategies to satisfy the purchase amount: combining several smaller units, finding exact change, or using a single unit larger than the transaction value and making change. All of this complex assembly of spendable UTXO is done by the user's wallet automatically and is invisible to users. It is only relevant if you are programmatically constructing raw transactions from UTXO.
@ -171,7 +171,7 @@ Here are some hints:
To build a transaction, a wallet selects from the UTXO it controls, UTXO with enough value to make the requested payment. Sometimes one UTXO is enough, other times more than one is needed. For each UTXO that will be consumed to make this payment, the wallet creates one input pointing to the UTXO and unlocks it with an unlocking script. To build a transaction, a wallet selects from the UTXO it controls, UTXO with enough value to make the requested payment. Sometimes one UTXO is enough, other times more than one is needed. For each UTXO that will be consumed to make this payment, the wallet creates one input pointing to the UTXO and unlocks it with an unlocking script.
Let's look at the components of an input in greater detail. The first part of an input is a pointer to an UTXO by reference to the transaction hash and an output index, which identifies the specific UTXO in that transaction. The second part is an unlocking script, which the wallet constructs in order to satisfy the spending conditions set in the UTXO. Most often, the unlocking script is a digital signature and public key proving ownership of the bitcoin. However, not all unlocking scripts contain signatures. The third part is a sequence number, which will be discussed later. Let's look at the components of an input in greater detail. The first part of an input is a pointer to a UTXO by reference to the transaction hash and an output index, which identifies the specific UTXO in that transaction. The second part is an unlocking script, which the wallet constructs in order to satisfy the spending conditions set in the UTXO. Most often, the unlocking script is a digital signature and public key proving ownership of the bitcoin. However, not all unlocking scripts contain signatures. The third part is a sequence number, which will be discussed later.
Consider our example in <<transactions_behind_the_scenes>>. The transaction inputs are an array (list) called +vin+: Consider our example in <<transactions_behind_the_scenes>>. The transaction inputs are an array (list) called +vin+:
@ -298,7 +298,7 @@ Transaction fees are calculated based on the size of the transaction in kilobyte
Over time, the way transaction fees are calculated and the effect they have on transaction prioritization has evolved. At first, transaction fees were fixed and constant across the network. Gradually, the fee structure relaxed and may be influenced by market forces, based on network capacity and transaction volume. Since at least the beginning of 2016, capacity limits in bitcoin have created competition between transactions, resulting in higher fees and effectively making free transactions a thing of the past. Zero fee or very low fee transactions rarely get mined and sometimes will not even be propagated across the network. Over time, the way transaction fees are calculated and the effect they have on transaction prioritization has evolved. At first, transaction fees were fixed and constant across the network. Gradually, the fee structure relaxed and may be influenced by market forces, based on network capacity and transaction volume. Since at least the beginning of 2016, capacity limits in bitcoin have created competition between transactions, resulting in higher fees and effectively making free transactions a thing of the past. Zero fee or very low fee transactions rarely get mined and sometimes will not even be propagated across the network.
((("fees", "fee relay policies")))((("minrelaytxfee option")))In Bitcoin Core, fee relay policies are set by the +minrelaytxfee+ option. The current default +minrelaytxfee+ is 0.00001 bitcoin or a hundredth of a millibitcoin per kilobyte. Therefore, by default, transactions with a fee less than 0.0001 bitcoin are treated as free and are only relayed if there is space in the mempool; otherwise, they are dropped. Bitcoin nodes can override the default fee relay policy by adjusting the value of +minrelaytxfee+. ((("fees", "fee relay policies")))((("minrelaytxfee option")))In Bitcoin Core, fee relay policies are set by the +minrelaytxfee+ option. The current default +minrelaytxfee+ is 0.00001 bitcoin or a hundredth of a millibitcoin per kilobyte. Therefore, by default, transactions with a fee less than 0.00001 bitcoin are treated as free and are only relayed if there is space in the mempool; otherwise, they are dropped. Bitcoin nodes can override the default fee relay policy by adjusting the value of +minrelaytxfee+.
((("dynamic fees")))((("fees", "dynamic fees")))Any bitcoin service that creates transactions, including wallets, exchanges, retail applications, etc., _must_ implement dynamic fees. Dynamic fees can be implemented through a third-party fee estimation service or with a built-in fee estimation algorithm. If you're unsure, begin with a third-party service and as you gain experience design and implement your own algorithm if you wish to remove the third-party dependency. ((("dynamic fees")))((("fees", "dynamic fees")))Any bitcoin service that creates transactions, including wallets, exchanges, retail applications, etc., _must_ implement dynamic fees. Dynamic fees can be implemented through a third-party fee estimation service or with a built-in fee estimation algorithm. If you're unsure, begin with a third-party service and as you gain experience design and implement your own algorithm if you wish to remove the third-party dependency.
@ -459,7 +459,7 @@ Try validating the preceding script yourself using pencil and paper. When the sc
((("security", "locking and unlocking scripts")))In the original bitcoin client, the unlocking and locking scripts were concatenated and executed in sequence. For security reasons, this was changed in 2010, because of a vulnerability that allowed a malformed unlocking script to push data onto the stack and corrupt the locking script. In the current implementation, the scripts are executed separately with the stack transferred between the two executions, as described next. ((("security", "locking and unlocking scripts")))In the original bitcoin client, the unlocking and locking scripts were concatenated and executed in sequence. For security reasons, this was changed in 2010, because of a vulnerability that allowed a malformed unlocking script to push data onto the stack and corrupt the locking script. In the current implementation, the scripts are executed separately with the stack transferred between the two executions, as described next.
First, the unlocking script is executed, using the stack execution engine. If the unlocking script is executed without errors (e.g., it has no "dangling" operators left over), the main stack (not the alternate stack) is copied and the locking script is executed. If the result of executing the locking script with the stack data copied from the unlocking script is "TRUE," the unlocking script has succeeded in resolving the conditions imposed by the locking script and, therefore, the input is a valid authorization to spend the UTXO. If any result other than "TRUE" remains after execution of the combined script, the input is invalid because it has failed to satisfy the spending conditions placed on the UTXO. First, the unlocking script is executed, using the stack execution engine. If the unlocking script is executed without errors (e.g., it has no "dangling" operators left over), the main stack is copied and the locking script is executed. If the result of executing the locking script with the stack data copied from the unlocking script is "TRUE," the unlocking script has succeeded in resolving the conditions imposed by the locking script and, therefore, the input is a valid authorization to spend the UTXO. If any result other than "TRUE" remains after execution of the combined script, the input is invalid because it has failed to satisfy the spending conditions placed on the UTXO.
[[p2pkh]] [[p2pkh]]
@ -677,7 +677,7 @@ Note that in verifying the signature, the private key is neither known nor revea
[TIP] [TIP]
==== ====
The math of ECDSA is complex and difficult to understand. There are a number of great guides online that might help. Search for "ECDSA explained" or try this one: http://bit.ly/2r0HhGB[]. ECDSA is necessarily a fairly complicated piece of math; a full explanation is beyond the scope of this book. A number of great guides online take you through it step by step: search for "ECDSA explained" or try this one: http://bit.ly/2r0HhGB[].
==== ====
==== The Importance of Randomness in Signatures ==== The Importance of Randomness in Signatures

10
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@ -211,11 +211,11 @@ P2SH addresses hide all of the complexity, so that the person making a payment d
==== Redeem Script and Validation ==== Redeem Script and Validation
((("scripting", "Pay-to-Script-Hash", "redeem scripts and validation")))((("Pay-to-Script-Hash (P2SH)", "redeem scripts and validation")))((("redeem scripts")))((("validation")))Prior to version 0.9.2 of the Bitcoin Core client, Pay-to-Script-Hash was limited to the standard types of bitcoin transaction scripts, by the +IsStandard()+ function. That means that the redeem script presented in the spending transaction could only be one of the standard types: P2PK, P2PKH, or multisig, excluding +RETURN+ and P2SH itself. ((("scripting", "Pay-to-Script-Hash", "redeem scripts and validation")))((("Pay-to-Script-Hash (P2SH)", "redeem scripts and validation")))((("redeem scripts")))((("validation")))Prior to version 0.9.2 of the Bitcoin Core client, Pay-to-Script-Hash was limited to the standard types of bitcoin transaction scripts, by the +IsStandard()+ function. That means that the redeem script presented in the spending transaction could only be one of the standard types: P2PK, P2PKH, or multisig.
As of version 0.9.2 of the Bitcoin Core client, P2SH transactions can contain any valid script, making the P2SH standard much more flexible and allowing for experimentation with many novel and complex types of transactions. As of version 0.9.2 of the Bitcoin Core client, P2SH transactions can contain any valid script, making the P2SH standard much more flexible and allowing for experimentation with many novel and complex types of transactions.
Note that you are not able to put a P2SH inside a P2SH redeem script, because the P2SH specification is not recursive. While it is technically possible to include +RETURN+ in a redeem script, as nothing in the rules prevents you from doing so, it is of no practical use because executing +RETURN+ during validation will cause the transaction to be marked invalid. You are not able to put a P2SH inside a P2SH redeem script, because the P2SH specification is not recursive. Also, while it is technically possible to include +RETURN+ (see <<op_return>>) in a redeem script, as nothing in the rules prevents you from doing so, it is of no practical use because executing +RETURN+ during validation will cause the transaction to be marked invalid.
Note that because the redeem script is not presented to the network until you attempt to spend a P2SH output, if you lock an output with the hash of an invalid redeem script it will be processed regardless. The UTXO will be successfully locked. However, you will not be able to spend it because the spending transaction, which includes the redeem script, will not be accepted because it is an invalid script. This creates a risk, because you can lock bitcoin in a P2SH that cannot be spent later. The network will accept the P2SH locking script even if it corresponds to an invalid redeem script, because the script hash gives no indication of the script it represents.((("", startref="Spay07"))) Note that because the redeem script is not presented to the network until you attempt to spend a P2SH output, if you lock an output with the hash of an invalid redeem script it will be processed regardless. The UTXO will be successfully locked. However, you will not be able to spend it because the spending transaction, which includes the redeem script, will not be accepted because it is an invalid script. This creates a risk, because you can lock bitcoin in a P2SH that cannot be spent later. The network will accept the P2SH locking script even if it corresponds to an invalid redeem script, because the script hash gives no indication of the script it represents.((("", startref="Spay07")))
@ -325,12 +325,12 @@ More precisely, +CHECKLOCKTIMEVERIFY+ fails and halts execution, marking the tra
[NOTE] [NOTE]
==== ====
+CLTV+ and +nLocktime+ use the same format to describe timelocks, either a block height or the time elapsed in seconds since Unix epoch. Critically, when used together, the format of +nLocktime+ must match that of +CLTV+ in the inputs&#x2014;they must both reference either block height or time in seconds. +CLTV+ and +nLocktime+ use the same format to describe timelocks, either a block height or the time elapsed in seconds since Unix epoch. Critically, when used together, the format of +nLocktime+ must match that of +CLTV+ in the outputs&#x2014;they must both reference either block height or time in seconds.
==== ====
After execution, if +CLTV+ is satisfied, the time parameter that preceded it remains as the top item on the stack and may need to be dropped, with +DROP+, for correct execution of subsequent script opcodes. You will often see +CHECKLOCKTIMEVERIFY+ followed by +DROP+ in scripts for this reason. After execution, if +CLTV+ is satisfied, the time parameter that preceded it remains as the top item on the stack and may need to be dropped, with +DROP+, for correct execution of subsequent script opcodes. You will often see +CHECKLOCKTIMEVERIFY+ followed by +DROP+ in scripts for this reason.
By using nLocktime in conjunction with +CLTV+, the scenario described in <<locktime_limitations>> changes. Because Alice locked the UTXO itself, it is now impossible for either Bob or Alice to spend it before the 3-month locktime has expired.((("", startref="alicesseven"))) By using nLocktime in conjunction with +CLTV+, the scenario described in <<locktime_limitations>> changes. Alice can no longer spend the money (because it's locked with Bob's key) and Bob cannot spend it before the 3-month locktime has expired.((("", startref="alicesseven")))
By introducing timelock functionality directly into the scripting language, +CLTV+ allows us to develop some very interesting complex scripts.((("", startref="cltv07"))) By introducing timelock functionality directly into the scripting language, +CLTV+ allows us to develop some very interesting complex scripts.((("", startref="cltv07")))
@ -498,7 +498,7 @@ Bob's unlocking script is identical:
<Bob's Sig> <hash pre-image> <Bob's Sig> <hash pre-image>
---- ----
The script with +IF+ does the same thing as using an opcode with a +VERIFY+ suffix; they both operate as guard clauses. However, the +VERIFY+ construction is more efficient, using one fewer opcode. The script with +IF+ does the same thing as using an opcode with a +VERIFY+ suffix; they both operate as guard clauses. However, the +VERIFY+ construction is more efficient, using two fewer opcodes.
So, when do we use +VERIFY+ and when do we use +IF+? If all we are trying to do is to attach a precondition (guard clause), then +VERIFY+ is better. If, however, we want to have more than one execution path (flow control), then we need an +IF...ELSE+ flow control clause. So, when do we use +VERIFY+ and when do we use +IF+? If all we are trying to do is to attach a precondition (guard clause), then +VERIFY+ is better. If, however, we want to have more than one execution path (flow control), then we need an +IF...ELSE+ flow control clause.

4
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@ -20,7 +20,7 @@ image::images/mbc2_0801.png["FullNodeReferenceClient_Small"]
All nodes include the routing function to participate in the network and might include other functionality. All nodes validate and propagate transactions and blocks, and discover and maintain connections to peers. In the full-node example in <<full_node_reference>>, the routing function is indicated by an orange circle named "Network Routing Node" or with the letter "N." All nodes include the routing function to participate in the network and might include other functionality. All nodes validate and propagate transactions and blocks, and discover and maintain connections to peers. In the full-node example in <<full_node_reference>>, the routing function is indicated by an orange circle named "Network Routing Node" or with the letter "N."
((("full-node clients")))Some nodes, called full nodes, also maintain a complete and up-to-date copy of the blockchain. Full nodes can autonomously and authoritatively verify any transaction without external reference. ((("simple-payment-verification (SPV)")))Some nodes maintain only a subset of the blockchain and verify transactions using a method called _simplified payment verification_, or SPV. ((("lightweight clients")))These nodes are known as SPV nodes or lightweight nodes. In the full-node example in the figure, the full-node blockchain database function is indicated by a blue circle called "Full Blockchain" or the letter "B." In <<bitcoin_network>>, SPV nodes are drawn without the blue circle, showing that they do not have a full copy of the blockchain. ((("full-node clients")))Some nodes, called full nodes, also maintain a complete and up-to-date copy of the blockchain. Full nodes can autonomously and authoritatively verify any transaction without external reference. ((("simple-payment-verification (SPV)")))Some nodes maintain only a subset of the blockchain and verify transactions using a method called _simplified payment verification_, or SPV. ((("lightweight clients")))These nodes are known as SPV nodes or lightweight nodes. In the full-node example in the figure, the full-node blockchain database function is indicated by a circle called "Full Blockchain" or the letter "B." In <<bitcoin_network>>, SPV nodes are drawn without the "B" circle, showing that they do not have a full copy of the blockchain.
((("bitcoin nodes", "mining nodes")))((("mining and consensus", "mining nodes")))((("Proof-of-Work algorithm")))((("mining and consensus", "Proof-of-Work algorithm")))Mining nodes compete to create new blocks by running specialized hardware to solve the Proof-of-Work algorithm. Some mining nodes are also full nodes, maintaining a full copy of the blockchain, while others are lightweight nodes participating in pool mining and depending on a pool server to maintain a full node. The mining function is shown in the full node as a black circle called "Miner" or the letter "M." ((("bitcoin nodes", "mining nodes")))((("mining and consensus", "mining nodes")))((("Proof-of-Work algorithm")))((("mining and consensus", "Proof-of-Work algorithm")))Mining nodes compete to create new blocks by running specialized hardware to solve the Proof-of-Work algorithm. Some mining nodes are also full nodes, maintaining a full copy of the blockchain, while others are lightweight nodes participating in pool mining and depending on a pool server to maintain a full node. The mining function is shown in the full node as a black circle called "Miner" or the letter "M."
@ -175,7 +175,7 @@ image::images/mbc2_0806.png["InventorySynchronization"]
((("bitcoin network", "SPV nodes", id="BNspvnodes08")))((("bitcoin nodes", "SPV nodes", id="BNospv08")))((("simple-payment-verification (SPV)", id="simple08")))Not all nodes have the ability to store the full blockchain. Many bitcoin clients are designed to run on space- and power-constrained devices, such as smartphones, tablets, or embedded systems. For such devices, a _simplified payment verification_ (SPV) method is used to allow them to operate without storing the full blockchain. These types of clients are called SPV clients or lightweight clients. As bitcoin adoption surges, the SPV node is becoming the most common form of bitcoin node, especially for bitcoin wallets. ((("bitcoin network", "SPV nodes", id="BNspvnodes08")))((("bitcoin nodes", "SPV nodes", id="BNospv08")))((("simple-payment-verification (SPV)", id="simple08")))Not all nodes have the ability to store the full blockchain. Many bitcoin clients are designed to run on space- and power-constrained devices, such as smartphones, tablets, or embedded systems. For such devices, a _simplified payment verification_ (SPV) method is used to allow them to operate without storing the full blockchain. These types of clients are called SPV clients or lightweight clients. As bitcoin adoption surges, the SPV node is becoming the most common form of bitcoin node, especially for bitcoin wallets.
SPV nodes download only the block headers and do not download the transactions included in each block. The resulting chain of blocks, without transactions, is 1,000 times smaller than the full blockchain. SPV nodes cannot construct a full picture of all the UTXOs that are available for spending because they do not know about all the transactions on the network. SPV nodes verify transactions using a slightly different methodology that relies on peers to provide partial views of relevant parts of the blockchain on demand. SPV nodes download only the block headers and do not download the transactions included in each block. The resulting chain of blocks, without transactions, is 1,000 times smaller than the full blockchain. SPV nodes cannot construct a full picture of all the UTXOs that are available for spending because they do not know about all the transactions on the network. SPV nodes verify transactions using a slightly different method that relies on peers to provide partial views of relevant parts of the blockchain on demand.
As an analogy, a full node is like a tourist in a strange city, equipped with a detailed map of every street and every address. By comparison, an SPV node is like a tourist in a strange city asking random strangers for turn-by-turn directions while knowing only one main avenue. Although both tourists can verify the existence of a street by visiting it, the tourist without a map doesn't know what lies down any of the side streets and doesn't know what other streets exist. Positioned in front of 23 Church Street, the tourist without a map cannot know if there are a dozen other "23 Church Street" addresses in the city and whether this is the right one. The mapless tourist's best chance is to ask enough people and hope some of them are not trying to mug him. As an analogy, a full node is like a tourist in a strange city, equipped with a detailed map of every street and every address. By comparison, an SPV node is like a tourist in a strange city asking random strangers for turn-by-turn directions while knowing only one main avenue. Although both tourists can verify the existence of a street by visiting it, the tourist without a map doesn't know what lies down any of the side streets and doesn't know what other streets exist. Positioned in front of 23 Church Street, the tourist without a map cannot know if there are a dozen other "23 Church Street" addresses in the city and whether this is the right one. The mapless tourist's best chance is to ask enough people and hope some of them are not trying to mug him.

5
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@ -84,11 +84,8 @@ You can search for that block hash in any block explorer website, such as _block
https://blockchain.info/block/000000000019d6689c085ae165831e934ff763ae46a2a6c172b3f1b60a8ce26f https://blockchain.info/block/000000000019d6689c085ae165831e934ff763ae46a2a6c172b3f1b60a8ce26f
https://blockexplorer.com/block/000000000019d6689c085ae165831e934ff763ae46a2a6c172b3f1b60a8ce26f
Using the Bitcoin Core reference client on the command line: Using the Bitcoin Core reference client on the command line:
---- ----
$ bitcoin-cli getblock 000000000019d6689c085ae165831e934ff763ae46a2a6c172b3f1b60a8ce26f $ bitcoin-cli getblock 000000000019d6689c085ae165831e934ff763ae46a2a6c172b3f1b60a8ce26f
---- ----
@ -285,7 +282,7 @@ Keep in mind that testnet3 is a large blockchain, in excess of 20 GB in early 20
===== Using testnet ===== Using testnet
Bitcoin Core, like almost all other bitcoin software, has full support for operation on testnet instead of mainnet, but also allows you to mine testnet coins and operate a full testnet node. Bitcoin Core, like almost all other bitcoin software, has full support for operation on testnet instead of mainnet. All of Bitcoin Core's functions work on testnet, including the wallet, mining testnet coins, and syncing a full testnet node.
To start Bitcoin Core on testnet instead of mainnet you use the +testnet+ switch: To start Bitcoin Core on testnet instead of mainnet you use the +testnet+ switch:

28
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@ -596,7 +596,7 @@ At the time of writing, the network is attempting to find a block whose header h
0000000000000000029AB9000000000000000000000000000000000000000000 0000000000000000029AB9000000000000000000000000000000000000000000
---- ----
As you can see, there are a lot of zeros at the beginning of that target, meaning that the acceptable range of hashes is much smaller, hence it's more difficult to find a valid hash. It will take on average more than 1.8 septa-hashes (thousand billion billion hashes) per second for the network to discover the next block. That seems like an impossible task, but fortunately the network is bringing 3 exa-hashes per second (EH/sec) of processing power to bear, which will be able to find a block in about 10 minutes on average.((("", startref="Cproof10")))((("", startref="proof10"))) As you can see, there are a lot of zeros at the beginning of that target, meaning that the acceptable range of hashes is much smaller, hence it's more difficult to find a valid hash. It will take on average more than 1.8 zeta-hashes (thousand billion billion hashes) per second for the network to discover the next block. That seems like an impossible task, but fortunately the network is bringing 3 exa-hashes per second (EH/sec) of processing power to bear, which will be able to find a block in about 10 minutes on average.((("", startref="Cproof10")))((("", startref="proof10")))
[[target_bits]] [[target_bits]]
==== Target Representation ==== Target Representation
@ -702,9 +702,11 @@ The difficulty of mining is closely related to the cost of electricity and the e
=== Successfully Mining the Block === Successfully Mining the Block
((("mining and consensus", "mining the block", "successful completion")))((("use cases", "mining for bitcoin", id="jingtentwo")))As we saw earlier, Jing's node has constructed a candidate block and prepared it for mining. Jing has several hardware mining rigs with application-specific integrated circuits, where hundreds of thousands of integrated circuits run the SHA256 algorithm in parallel at incredible speeds. Many of these specialized machines are connected to his mining node over USB or a local area network. Next, the mining node running on Jing's desktop transmits the block header to his mining hardware, which starts testing trillions of nonces per second. ((("mining and consensus", "mining the block", "successful completion")))((("use cases", "mining for bitcoin", id="jingtentwo")))As we saw earlier, Jing's node has constructed a candidate block and prepared it for mining. Jing has several hardware mining rigs with application-specific integrated circuits, where hundreds of thousands of integrated circuits run the SHA256 algorithm in parallel at incredible speeds. Many of these specialized machines are connected to his mining node over USB or a local area network. Next, the mining node running on Jing's desktop transmits the block header to his mining hardware, which starts testing trillions of nonces per second. Because the nonce is only 32 bits, after exhausting all the nonce possibilities (about 4 billion), the mining hardware changes the block header (adjusting the coinbase extra nonce space or timestamp) and resets the nonce counter, testing new combinations.
Almost 11 minutes after starting to mine block 277,316, one of the hardware mining machines finds a solution and sends it back to the mining node. When inserted into the block header, the nonce 924,591,752 produces a block hash of: Almost 11 minutes after starting to mine block 277,316, one of the hardware mining machines finds a solution and sends it back to the mining node.
When inserted into the block header, the nonce 924,591,752 produces a block hash of:
---- ----
0000000000000001b6b9a13b095e96db41c4a928b97ef2d944a9b31b2cc7bdc4 0000000000000001b6b9a13b095e96db41c4a928b97ef2d944a9b31b2cc7bdc4
@ -805,7 +807,7 @@ Any mining node whose perspective resembles Node Y will start building a candida
Forks are almost always resolved within one block. While part of the network's hashing power is dedicated to building on top of "triangle" as the parent, another part of the hashing power is focused on building on top of "upside-down triangle." Even if the hashing power is almost evenly split, it is likely that one set of miners will find a solution and propagate it before the other set of miners have found any solutions. Let's say, for example, that the miners building on top of "triangle" find a new block "rhombus" that extends the chain (e.g., star-triangle-rhombus). They immediately propagate this new block and the entire network sees it as a valid solution as shown in <<fork4>>. Forks are almost always resolved within one block. While part of the network's hashing power is dedicated to building on top of "triangle" as the parent, another part of the hashing power is focused on building on top of "upside-down triangle." Even if the hashing power is almost evenly split, it is likely that one set of miners will find a solution and propagate it before the other set of miners have found any solutions. Let's say, for example, that the miners building on top of "triangle" find a new block "rhombus" that extends the chain (e.g., star-triangle-rhombus). They immediately propagate this new block and the entire network sees it as a valid solution as shown in <<fork4>>.
All nodes that had chosen "triangle" as the winner in the previous round will simply extend the chain one more block. The nodes that chose "upside-down triangle" as the winner, however, will now see two chains: star-triangle-rhombus and star-upside-down-triangle. The chain star-triangle-rhombus is now longer (more cumulative work) than the other chain. As a result, those nodes will set the chain star-triangle-rhombus as the main chain and change the star-upside-down-triangle chain to a secondary chain, as shown in <<fork5>>. This is a chain reconvergence, because those nodes are forced to revise their view of the blockchain to incorporate the new evidence of a longer chain. Any miners working on extending the chain star-upside-down-triangle will now stop that work because their candidate block is an "orphan," as its parent "upside-down-triangle" is no longer on the longest chain. The transactions within "upside-down-triangle" are re-inserted in the mempool for inclusion in the next block, because the block they were in is no longer in the main chain. The entire network reconverges on a single blockchain star-triangle-rhombus, with "rhombus" as the last block in the chain. All miners immediately start working on candidate blocks that reference "rhombus" as their parent to extend the star-triangle-rhombus chain. All nodes that had chosen "triangle" as the winner in the previous round will simply extend the chain one more block. The nodes that chose "upside-down triangle" as the winner, however, will now see two chains: star-triangle-rhombus and star-upside-down-triangle. The chain star-triangle-rhombus is now longer (more cumulative work) than the other chain. As a result, those nodes will set the chain star-triangle-rhombus as the main chain and change the star-upside-down-triangle chain to a secondary chain, as shown in <<fork5>>. This is a chain reconvergence, because those nodes are forced to revise their view of the blockchain to incorporate the new evidence of a longer chain. Any miners working on extending the chain star-upside-down-triangle will now stop that work because their candidate block is an "orphan," as its parent "upside-down-triangle" is no longer on the longest chain. The transactions within "upside-down-triangle" that are not within "triangle" are re-inserted in the mempool for inclusion in the next block to become a part of the main chain. The entire network reconverges on a single blockchain star-triangle-rhombus, with "rhombus" as the last block in the chain. All miners immediately start working on candidate blocks that reference "rhombus" as their parent to extend the star-triangle-rhombus chain.
[[fork4]] [[fork4]]
[role="smallereighty"] [role="smallereighty"]
@ -829,12 +831,12 @@ The following list shows the total hashing power of the bitcoin network, over th
2009:: 0.5 MH/sec–8 MH/sec (16&#x00D7; growth) 2009:: 0.5 MH/sec–8 MH/sec (16&#x00D7; growth)
2010:: 8 MH/sec–116 GH/sec (14,500&#x00D7; growth) 2010:: 8 MH/sec–116 GH/sec (14,500&#x00D7; growth)
2011:: 16 GH/sec–9 TH/sec (562&#x00D7; growth) 2011:: 116 GH/sec–9 TH/sec (78&#x00D7; growth)
2012:: 9 TH/sec–23 TH/sec (2.5&#x00D7; growth) 2012:: 9 TH/sec–23 TH/sec (2.5&#x00D7; growth)
2013:: 23 TH/sec–10 PH/sec (450&#x00D7; growth) 2013:: 23 TH/sec–10 PH/sec (450&#x00D7; growth)
2014:: 10 PH/sec–300 PH/sec (3000&#x00D7; growth) 2014:: 10 PH/sec–300 PH/sec (30&#x00D7; growth)
2015:: 300 PH/sec-800 PH/sec (266&#x00D7; growth) 2015:: 300 PH/sec-800 PH/sec (2.66&#x00D7; growth)
2016:: 800 PH/sec-2.5 EH/sec (312&#x00D7; growth)) 2016:: 800 PH/sec-2.5 EH/sec (3.12&#x00D7; growth)
In the chart in <<network_hashing_power>>, we can see that bitcoin network's hashing power increased over the past two years. As you can see, the competition between miners and the growth of bitcoin has resulted in an exponential increase in the hashing power (total hashes per second across the network). In the chart in <<network_hashing_power>>, we can see that bitcoin network's hashing power increased over the past two years. As you can see, the competition between miners and the growth of bitcoin has resulted in an exponential increase in the hashing power (total hashes per second across the network).
@ -916,7 +918,7 @@ The massive increase of total hashing power has arguably made bitcoin impervious
Not all attackers will be motivated by profit, however. One potential attack scenario is where an attacker intends to disrupt the bitcoin network without the possibility of profiting from such disruption. A malicious attack aimed at crippling bitcoin would require enormous investment and covert planning, but could conceivably be launched by a well-funded, most likely state-sponsored, attacker. Alternatively, a well-funded attacker could attack bitcoin's consensus by simultaneously amassing mining hardware, compromising pool operators, and attacking other pools with denial-of-service. All of these scenarios are theoretically possible, but increasingly impractical as the bitcoin network's overall hashing power continues to grow exponentially. Not all attackers will be motivated by profit, however. One potential attack scenario is where an attacker intends to disrupt the bitcoin network without the possibility of profiting from such disruption. A malicious attack aimed at crippling bitcoin would require enormous investment and covert planning, but could conceivably be launched by a well-funded, most likely state-sponsored, attacker. Alternatively, a well-funded attacker could attack bitcoin's consensus by simultaneously amassing mining hardware, compromising pool operators, and attacking other pools with denial-of-service. All of these scenarios are theoretically possible, but increasingly impractical as the bitcoin network's overall hashing power continues to grow exponentially.
Undoubtedly, a serious consensus attack would erode confidence in bitcoin in the short term, possibly causing a significant price decline. However, the bitcoin network and software are constantly evolving, so consensus attacks would be met with immediate countermeasures by the bitcoin community, making bitcoin hardier, stealthier, and more robust than ever.((("", startref="Cattack10")))((("", startref="MACattack10")))((("", startref="Sconsens10"))) Undoubtedly, a serious consensus attack would erode confidence in bitcoin in the short term, possibly causing a significant price decline. However, the bitcoin network and software are constantly evolving, so consensus attacks would be met with immediate countermeasures by the bitcoin community, making bitcoin more robust.((("", startref="Cattack10")))((("", startref="MACattack10")))((("", startref="Sconsens10")))
[[consensus_changes]] [[consensus_changes]]
=== Changing the Consensus Rules === Changing the Consensus Rules
@ -994,7 +996,7 @@ The term _soft fork_ was introduced to distinguish this upgrade method from a "h
One aspect of soft forks that is not immediately obvious is that soft fork upgrades can only be used to constrain the consensus rules, not to expand them. In order to be forward compatible, transactions and blocks created under the new rules must be valid under the old rules too, but not vice versa. The new rules can only limit what is valid; otherwise, they will trigger a hard fork when rejected under the old rules. One aspect of soft forks that is not immediately obvious is that soft fork upgrades can only be used to constrain the consensus rules, not to expand them. In order to be forward compatible, transactions and blocks created under the new rules must be valid under the old rules too, but not vice versa. The new rules can only limit what is valid; otherwise, they will trigger a hard fork when rejected under the old rules.
Soft forks can be implemented in a number of ways&#x2014;the term does not define a single method, rather a set of methods that all have one thing in common: they don't require all nodes to upgrade or force nonupgraded nodes out of consensus. Soft forks can be implemented in a number of ways&#x2014;the term does not specify a particular method, rather a set of methods that all have one thing in common: they don't require all nodes to upgrade or force nonupgraded nodes out of consensus.
===== Soft forks redefining NOP opcodes ===== Soft forks redefining NOP opcodes
@ -1018,7 +1020,7 @@ Technical debt:: Because soft forks are more technically complex than a hard for
Validation relaxation:: Unmodified clients see transactions as valid, without evaluating the modified consensus rules. In effect, the unmodified clients are not validating using the full range of consensus rules, as they are blind to the new rules. This applies to NOP-based upgrades, as well as other soft fork upgrades. Validation relaxation:: Unmodified clients see transactions as valid, without evaluating the modified consensus rules. In effect, the unmodified clients are not validating using the full range of consensus rules, as they are blind to the new rules. This applies to NOP-based upgrades, as well as other soft fork upgrades.
Irreversible upgrades:: Because soft forks create transactions with additional consensus constraints, they become irreversible upgrades in practice. If a soft fork upgrade were to be reversed after being activated, any transactions created under the new rules could result in a loss of funds under the old rules. For example, if a CLTV transaction is evaluated under the old rules, there is no timelock constraint and it can be spent whenever. Therefore, critics contend that a failed soft fork that had to be reversed because of a bug would almost certainly lead to loss of funds.((("", startref="Crule10"))) Irreversible upgrades:: Because soft forks create transactions with additional consensus constraints, they become irreversible upgrades in practice. If a soft fork upgrade were to be reversed after beings activated, any transactions created under the new rules could result in a loss of funds under the old rules. For example, if a CLTV transaction is evaluated under the old rules, there is no timelock constraint and it can be spent at any time. Therefore, critics contend that a failed soft fork that had to be reversed because of a bug would almost certainly lead to loss of funds.((("", startref="Crule10")))
[[softforksignaling]] [[softforksignaling]]
=== Soft Fork Signaling with Block Version === Soft Fork Signaling with Block Version
@ -1086,7 +1088,7 @@ Unlike BIP-34, BIP-9 counts activation signaling in whole intervals based on the
BIP-9 offers a proposal state diagram to illustrate the various stages and transitions for a proposal, as shown in <<bip9states>>. BIP-9 offers a proposal state diagram to illustrate the various stages and transitions for a proposal, as shown in <<bip9states>>.
Proposals start in the +DEFINED+ state, once their parameters are known (defined) in the bitcoin software. For blocks with MTP after the start time, the proposal state transitions to +STARTED+. If the voting threshold is exceeded within a retarget period and the timeout has not been exceeded, the proposal state transitions to +LOCKED_IN+. One retarget period later, the proposal becomes +ACTIVE+. Proposals remain in the +ACTIVE+ state perpetually once they reach that state. If the timeout is elapsed before the voting threshold has been reached, the proposal state changes to +FAILED+, indicating a rejected proposal. +REJECTED+ proposals remain in that state perpetually. Proposals start in the +DEFINED+ state, once their parameters are known (defined) in the bitcoin software. For blocks with MTP after the start time, the proposal state transitions to +STARTED+. If the voting threshold is exceeded within a retarget period and the timeout has not been exceeded, the proposal state transitions to +LOCKED_IN+. One retarget period later, the proposal becomes +ACTIVE+. Proposals remain in the +ACTIVE+ state perpetually once they reach that state. If the timeout elapses before the voting threshold has been reached, the proposal state changes to +FAILED+, indicating a rejected proposal. +FAILED+ proposals remain in that state perpetually.
[[bip9states]] [[bip9states]]
.BIP-9 state transition diagram .BIP-9 state transition diagram
@ -1098,7 +1100,7 @@ The standard is defined in https://github.com/bitcoin/bips/blob/master/bip-0009.
=== Consensus Software Development === Consensus Software Development
((("mining and consensus", "consensus software development")))((("development environment", "consensus software development")))Consensus software development continues to evolve and there is much discussion on the various mechanisms for changing the consensus rules. By its very nature, bitcoin sets a very high bar on coordination and consensus for changes. As a decentralized system, it has no "authority" that can impose its will on the participants of the network. Power is diffused between multiple constituencies such as miners, core developers, wallet developers, exchanges, merchants, and end users. Decisions cannot be made unilaterally by any of these constituencies. For example, while miners can theoretically change the rules by simple majority (51%), they are constrained by the consent of the other constituencies. If they act unilaterally, the rest of the participants may simply refuse to follow them, keeping the economic activity on a minority chain. Without economic activity (transactions, merchants, wallets, exchanges), the miners will be mining a worthless coin with empty blocks. This diffusion of power means that all the participants must coordinate, or no changes can be made. Status quo is the stable state of this system with only a few changes possible if there is strong consensus by a very large majority. The 95% threshold for soft forks is reflective of this reality. ((("mining and consensus", "consensus software development")))((("development environment", "consensus software development")))Consensus software continues to evolve and there is much discussion on the various mechanisms for changing the consensus rules. By its very nature, bitcoin sets a very high bar on coordination and consensus for changes. As a decentralized system, it has no "authority" that can impose its will on the participants of the network. Power is diffused between multiple constituencies such as miners, core developers, wallet developers, exchanges, merchants, and end users. Decisions cannot be made unilaterally by any of these constituencies. For example, while miners can theoretically change the rules by simple majority (51%), they are constrained by the consent of the other constituencies. If they act unilaterally, the rest of the participants may simply refuse to follow them, keeping the economic activity on a minority chain. Without economic activity (transactions, merchants, wallets, exchanges), the miners will be mining a worthless coin with empty blocks. This diffusion of power means that all the participants must coordinate, or no changes can be made. Status quo is the stable state of this system with only a few changes possible if there is strong consensus by a very large majority. The 95% threshold for soft forks is reflective of this reality.
((("hard forks")))It is important to recognize that there is no perfect solution for consensus development. Both hard forks and soft forks involve tradeoffs. For some types of changes, soft forks may be a better choice; for others, hard forks may be a better choice. There is no perfect choice; both carry risks. The one constant characteristic of consensus software development is that change is difficult and consensus forces compromise. ((("hard forks")))It is important to recognize that there is no perfect solution for consensus development. Both hard forks and soft forks involve tradeoffs. For some types of changes, soft forks may be a better choice; for others, hard forks may be a better choice. There is no perfect choice; both carry risks. The one constant characteristic of consensus software development is that change is difficult and consensus forces compromise.

28
ch12.asciidoc
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@ -7,7 +7,7 @@ In this chapter we will look at the features offered by the bitcoin blockchain,
=== Introduction === Introduction
((("blockchain applications", "benefits of bitcoin system")))The bitcoin system was designed as a decentralized currency and payment system. However, most of its functionality is derived from much lower-level constructs that can be used for much broader applications. Bitcoin wasn't built with components such as accounts, users, balances, and payments. Instead, it uses a transactional scripting language with low-level cryptographic functions, as we saw in <<transactions>>. Just like the higher-level concepts of accounts, balances, and payments can be derived from these basic primitives, so can many other complex applications. Thus, the bitcoin blockchain can become an application platform offering trust services to applications, such as smart contracts, far surpassing the original purpose of digital currency and payments. ((("blockchain applications", "benefits of bitcoin system")))The bitcoin system was designed as a decentralized currency and payment system. However, most of its functionality is derived from much lower-level constructs that can be used for much broader applications. Bitcoin wasn't built with components such as accounts, users, balances, and payments. Instead, it uses a transactional scripting language with low-level cryptographic functions, as we saw in <<transactions>>. Just as the higher-level concepts of accounts, balances, and payments can be derived from these basic primitives, so can many other complex applications. Thus, the bitcoin blockchain can become an application platform offering trust services to applications, such as smart contracts, far surpassing the original purpose of digital currency and payments.
=== Building Blocks (Primitives) === Building Blocks (Primitives)
@ -17,7 +17,7 @@ No Double-Spend:: The most fundamental guarantee of bitcoin's decentralized cons
Immutability:: Once a transaction is recorded in the blockchain and sufficient work has been added with subsequent blocks, the transaction's data becomes immutable. Immutability is underwritten by energy, as rewriting the blockchain requires the expenditure of energy to produce Proof-of-Work. The energy required and therefore the degree of immutability increases with the amount of work committed on top of the block containing a transaction. Immutability:: Once a transaction is recorded in the blockchain and sufficient work has been added with subsequent blocks, the transaction's data becomes immutable. Immutability is underwritten by energy, as rewriting the blockchain requires the expenditure of energy to produce Proof-of-Work. The energy required and therefore the degree of immutability increases with the amount of work committed on top of the block containing a transaction.
Neutrality:: The decentralized bitcoin network propagates valid transactions regardless of the origin or content of those transactions. This means that anyone can create a valid transaction with sufficient fees and trust they will be able to transmit that transaction and have it included in the blockchain at anytime. Neutrality:: The decentralized bitcoin network propagates valid transactions regardless of the origin or content of those transactions. This means that anyone can create a valid transaction with sufficient fees and trust they will be able to transmit that transaction and have it included in the blockchain at any time.
Secure Timestamping:: The consensus rules reject any block whose timestamp is too far in the past or future. This ensures that timestamps on blocks can be trusted. The timestamp on a block implies an unspent-before guarantee for the inputs of all included transactions. Secure Timestamping:: The consensus rules reject any block whose timestamp is too far in the past or future. This ensures that timestamps on blocks can be trusted. The timestamp on a block implies an unspent-before guarantee for the inputs of all included transactions.
@ -59,7 +59,7 @@ Proof-of-Existence (Digital Notary):: ((("digital notary services")))((("Proof o
Kickstarter (Lighthouse):: Consistency + Atomicity + Integrity. If you sign one input and the output (Integrity) of a fundraiser transaction, others can contribute to the fundraiser but it cannot be spent (Atomicity) until the goal (output value) is funded (Consistency). Kickstarter (Lighthouse):: Consistency + Atomicity + Integrity. If you sign one input and the output (Integrity) of a fundraiser transaction, others can contribute to the fundraiser but it cannot be spent (Atomicity) until the goal (output value) is funded (Consistency).
Payment Channels:: ((("payment (state) channels", "building blocks (primitives) used in")))Quorum of Control + Timelock + No Double Spend + Nonexpiration + Censorship Resistance + Authorization. A multisig 2-of-2 (Quorum) with a timelock (Timelock) used as the "settlement" transaction of a payment channel can be held (Nonexpiration) and spent whenever (Censorship Resistance) by either party (Authorization). The two parties can then create commitment transactions that double-spend (No Double-Spend) the settlement on a shorter timelock (Timelock). Payment Channels:: ((("payment (state) channels", "building blocks (primitives) used in")))Quorum of Control + Timelock + No Double Spend + Nonexpiration + Censorship Resistance + Authorization. A multisig 2-of-2 (Quorum) with a timelock (Timelock) used as the "settlement" transaction of a payment channel can be held (Nonexpiration) and spent at any time (Censorship Resistance) by either party (Authorization). The two parties can then create commitment transactions that double-spend (No Double-Spend) the settlement on a shorter timelock (Timelock).
=== Colored Coins === Colored Coins
@ -245,7 +245,7 @@ image::images/mbc2_1204.png["A payment channel between Bob and Alice, showing th
==== Simple Payment Channel Example ==== Simple Payment Channel Example
((("payment (state) channels", "example of", id="PSCexample12")))To explain state channels, we have to start with a very simple example. We demonstrate a one-way channel, meaning that value is flowing in one direction only. We will also start with the naive assumption that no one is trying to cheat, to keep things simple. Once we have the basic channel idea explained, we will then look at what it takes to make it trustless so that neither party _can_ cheat, even if they are trying to. ((("payment (state) channels", "example of", id="PSCexample12")))To explain state channels, we start with a very simple example. We demonstrate a one-way channel, meaning that value is flowing in one direction only. We will also start with the naive assumption that no one is trying to cheat, to keep things simple. Once we have the basic channel idea explained, we will then look at what it takes to make it trustless so that neither party _can_ cheat, even if they are trying to.
For this example we will assume two participants: Emma and Fabian. Fabian offers a video streaming service that is billed by the second using a micropayment channel. Fabian charges 0.01 millibit (0.00001 BTC) per second of video, equivalent to 36 millibits (0.036 BTC) per hour of video. Emma is a user who purchases this streaming video service from Fabian. <<emma_fabian_streaming_video>> shows Emma buying the video streaming service from Fabian using a payment channel. For this example we will assume two participants: Emma and Fabian. Fabian offers a video streaming service that is billed by the second using a micropayment channel. Fabian charges 0.01 millibit (0.00001 BTC) per second of video, equivalent to 36 millibits (0.036 BTC) per hour of video. Emma is a user who purchases this streaming video service from Fabian. <<emma_fabian_streaming_video>> shows Emma buying the video streaming service from Fabian using a payment channel.
@ -311,7 +311,7 @@ The first form of unidirectional payment channel was demonstrated as a prototype
Timelocks are not the only way to invalidate prior commitment transactions. In the next sections we will see how a revocation key can be used to achieve the same result. Timelocks are effective but they have two distinct disadvantages. By establishing a maximum timelock when the channel is first opened, they limit the lifetime of the channel. Worse, they force channel implementations to strike a balance between allowing long-lived channels and forcing one of the participants to wait a very long time for a refund in case of premature closure. For example, if you allow the channel to remain open for 30 days, by setting the refund timelock to 30 days, if one of the parties disappears immediately the other party must wait 30 days for a refund. The more distant the endpoint, the more distant the refund. Timelocks are not the only way to invalidate prior commitment transactions. In the next sections we will see how a revocation key can be used to achieve the same result. Timelocks are effective but they have two distinct disadvantages. By establishing a maximum timelock when the channel is first opened, they limit the lifetime of the channel. Worse, they force channel implementations to strike a balance between allowing long-lived channels and forcing one of the participants to wait a very long time for a refund in case of premature closure. For example, if you allow the channel to remain open for 30 days, by setting the refund timelock to 30 days, if one of the parties disappears immediately the other party must wait 30 days for a refund. The more distant the endpoint, the more distant the refund.
The second problem is that since each subsequent commitment transaction must decrement the timelock, there is an explicit limit on the number of commitment transactions that can be exchanged between the parties. For example, a 30-day channel, setting a timelock of 4320 blocks into the future, can only accommodate 4320 intermediate commitment transactions before it must be closed. There is a danger in setting the timelock commitment transaction interval at 1 block. By setting the timelock interval between commitment transactions to 1 block, a developer is creating a very high burden for the channel participants who have to be vigilant, remain online and watching, and be ready to transmit the right commitment transaction at anytime. The second problem is that since each subsequent commitment transaction must decrement the timelock, there is an explicit limit on the number of commitment transactions that can be exchanged between the parties. For example, a 30-day channel, setting a timelock of 4320 blocks into the future, can only accommodate 4320 intermediate commitment transactions before it must be closed. There is a danger in setting the timelock commitment transaction interval at 1 block. By setting the timelock interval between commitment transactions to 1 block, a developer is creating a very high burden for the channel participants who have to be vigilant, remain online and watching, and be ready to transmit the right commitment transaction at any time.
Now that we understand how timelocks can be used to invalidate prior commitments, we can see the difference between closing the channel cooperatively and closing it unilaterally by broadcasting a commitment transaction. All commitment transactions are timelocked, therefore broadcasting a commitment transaction will always involve waiting until the timelock has expired. But if the two parties agree on what the final balance is and know they both hold commitment transactions that will eventually make that balance a reality, they can construct a settlement transaction without a timelock representing that same balance. In a cooperative close, either party takes the most recent commitment transaction and builds a settlement transaction that is identical in every way except that it omits the timelock. Both parties can sign this settlement transaction knowing there is no way to cheat and get a more favorable balance. By cooperatively signing and transmitting the settlement transaction they can close the channel and redeem their balance immediately. Worst case, one of the parties can be petty, refuse to cooperate, and force the other party to do a unilateral close with the most recent commitment transaction. But if they do that, they have to wait for their funds too.((("", startref="PSCtrust12"))) Now that we understand how timelocks can be used to invalidate prior commitments, we can see the difference between closing the channel cooperatively and closing it unilaterally by broadcasting a commitment transaction. All commitment transactions are timelocked, therefore broadcasting a commitment transaction will always involve waiting until the timelock has expired. But if the two parties agree on what the final balance is and know they both hold commitment transactions that will eventually make that balance a reality, they can construct a settlement transaction without a timelock representing that same balance. In a cooperative close, either party takes the most recent commitment transaction and builds a settlement transaction that is identical in every way except that it omits the timelock. Both parties can sign this settlement transaction knowing there is no way to cheat and get a more favorable balance. By cooperatively signing and transmitting the settlement transaction they can close the channel and redeem their balance immediately. Worst case, one of the parties can be petty, refuse to cooperate, and force the other party to do a unilateral close with the most recent commitment transaction. But if they do that, they have to wait for their funds too.((("", startref="PSCtrust12")))
@ -368,9 +368,17 @@ This way, each party has a commitment transaction, spending the 2-of-2 funding o
.Two asymmetric commitment transactions with delayed payment for the party holding the transaction .Two asymmetric commitment transactions with delayed payment for the party holding the transaction
image::images/mbc2_1208.png["Two asymmetric commitment transactions with delayed payment for the party holding the transaction"] image::images/mbc2_1208.png["Two asymmetric commitment transactions with delayed payment for the party holding the transaction"]
Now we introduce the final element of this scheme: a revocation key that allows a wronged party to punish a cheater by taking the entire balance of the channel. Now we introduce the final element of this scheme: a revocation key that prevents a cheater from broadcasting an expired commitment. The revocation key allows the wronged party to punish the cheater by taking the entire balance of the channel.
Each of the commitment transactions has a "delayed" output. The redemption script for that output allows one party to redeem it after 1000 blocks _or_ the other party to redeem it if they have a revocation key. So when Hitesh creates a commitment transaction for Irene to sign, he makes the second output payable to himself after 1000 blocks, or to whoever can present a revocation key. Hitesh constructs this transaction and creates a revocation key that he keeps secret. He will only reveal it to Irene when he is ready to move to a new channel state and wants to revoke this commitment. The second output's script looks like this: The revocation key is composed of two secrets, each half generated independently by each channel participant. It is similar to a 2-of-2 multisig, but constructed using elliptic curve arithmetic, so that both parties know the revocation public key but each party knows only half the revocation secret key.
In each round, both parties reveal their half of the revocation secret to the other party, thereby giving the other party (who now has both halves) the means to claim the penalty output if this revoked transaction is ever broadcast.
Each of the commitment transactions has a "delayed" output. The redemption script for that output allows one party to redeem it after 1000 blocks, _or_ the other party to redeem it if they have a revocation key, penalizing transmission of a revoked commitment.
So when Hitesh creates a commitment transaction for Irene to sign, he makes the second output payable to himself after 1000 blocks, or to the revocation public key (of which he only knows half the secret). Hitesh constructs this transaction. He will only reveal his half of the revocation secret to Irene when he is ready to move to a new channel state and wants to revoke this commitment.
The second output's script looks like this:
---- ----
Output 0 <5 bitcoin>: Output 0 <5 bitcoin>:
@ -391,9 +399,9 @@ CHECKSIG
Irene can confidently sign this transaction, since if transmitted it will immediately pay her what she is owed. Hitesh holds the transaction, but knows that if he transmits it in a unilateral channel closing, he will have to wait 1000 blocks to get paid. Irene can confidently sign this transaction, since if transmitted it will immediately pay her what she is owed. Hitesh holds the transaction, but knows that if he transmits it in a unilateral channel closing, he will have to wait 1000 blocks to get paid.
When the channel is advanced to the next state, Hitesh has to _revoke_ this commitment transaction before Irene agrees to sign the next commitment transaction. To do that, all he has to do is send the _revocation key_ to Irene. Once Irene has the revocation key for this commitment, she can sign the next commitment with confidence. She knows that if Hitesh tries to cheat by publishing the prior commitment, she can use the revocation key to redeem Hitesh's delayed output. _If Hitesh cheats, Irene gets BOTH outputs_. When the channel is advanced to the next state, Hitesh has to _revoke_ this commitment transaction before Irene agrees to sign the next commitment transaction. To do that, all he has to do is send his half of the _revocation key_ to Irene. Once Irene has both halves of the revocation secret key for this commitment, she can sign the next commitment with confidence. She knows that if Hitesh tries to cheat by publishing the prior commitment, she can use the revocation key to redeem Hitesh's delayed output. _If Hitesh cheats, Irene gets BOTH outputs_. Meanwhile, Hitesh only has half the revocation secret for that revocation public key and can't redeem the output until 1000 blocks. Irene will be able to redeem the output and punish Hitesh before the 1000 blocks have elapsed.
The revocation protocol is bilateral, meaning that in each round, as the channel state is advanced, the two parties exchange new commitments, exchange revocation keys for the previous commitment, and sign each other's commitment transactions. As they accept a new state, they make the prior state impossible to use, by giving each other the necessary revocation keys to punish any cheating. The revocation protocol is bilateral, meaning that in each round, as the channel state is advanced, the two parties exchange new commitments, exchange revocation secrets for the previous commitments, and sign each other's new commitment transactions. As they accept a new state, they make the prior state impossible to use, by giving each other the necessary revocation secrets to punish any cheating.
Let's look at an example of how it works. One of Irene's customers wants to send 2 bitcoin to one of Hitesh's customers. To transmit 2 bitcoin across the channel, Hitesh and Irene must advance the channel state to reflect the new balance. They will commit to a new state (state number 2) where the channel's 10 bitcoin are split, 7 bitcoin to Hitesh and 3 bitcoin to Irene. To advance the state of the channel, they will each create new commitment transactions reflecting the new channel balance. Let's look at an example of how it works. One of Irene's customers wants to send 2 bitcoin to one of Hitesh's customers. To transmit 2 bitcoin across the channel, Hitesh and Irene must advance the channel state to reflect the new balance. They will commit to a new state (state number 2) where the channel's 10 bitcoin are split, 7 bitcoin to Hitesh and 3 bitcoin to Irene. To advance the state of the channel, they will each create new commitment transactions reflecting the new channel balance.
@ -426,7 +434,7 @@ IF
ELSE ELSE
# Refund after timeout. # Refund after timeout.
<locktime> CHECKLOCKTIMEVERIFY DROP <locktime> CHECKLOCKTIMEVERIFY DROP
<Payee Public Key> CHECKSIG <Payer Public Key> CHECKSIG
ENDIF ENDIF
---- ----

2
code/key-to-address-ecc-example.py
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@ -21,7 +21,7 @@ print("Private Key Compressed (hex) is: ", compressed_private_key)
# Generate a WIF format from the compressed private key (WIF-compressed) # Generate a WIF format from the compressed private key (WIF-compressed)
wif_compressed_private_key = bitcoin.encode_privkey( wif_compressed_private_key = bitcoin.encode_privkey(
bitcoin.decode_privkey(compressed_private_key, 'hex'), 'wif') bitcoin.decode_privkey(compressed_private_key, 'hex'), 'wif_compressed')
print("Private Key (WIF-Compressed) is: ", wif_compressed_private_key) print("Private Key (WIF-Compressed) is: ", wif_compressed_private_key)
# Multiply the EC generator point G with the private key to get a public key point # Multiply the EC generator point G with the private key to get a public key point

15
glossary.asciidoc
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@ -4,7 +4,7 @@
This quick glossary contains many of the terms used in relation to bitcoin. These terms are used throughout the book, so bookmark this for a quick reference. This quick glossary contains many of the terms used in relation to bitcoin. These terms are used throughout the book, so bookmark this for a quick reference.
address:: address::
A bitcoin address looks like +1DSrfJdB2AnWaFNgSbv3MZC2m74996JafV+. It consists of a string of letters and numbers. It's really an encoded base58check version of a public key 160-bit hash. Just like you ask others to send an email to your email address, you would ask others to send you bitcoin to one of your bitcoin addresses. A bitcoin address looks like +1DSrfJdB2AnWaFNgSbv3MZC2m74996JafV+. It consists of a string of letters and numbers. It's really an encoded base58check version of a public key 160-bit hash. Just as you ask others to send an email to your email address, you would ask others to send you bitcoin to one of your bitcoin addresses.
bip:: bip::
Bitcoin Improvement Proposals. A set of proposals that members of the bitcoin community have submitted to improve bitcoin. For example, BIP-21 is a proposal to improve the bitcoin uniform resource identifier (URI) scheme. Bitcoin Improvement Proposals. A set of proposals that members of the bitcoin community have submitted to improve bitcoin. For example, BIP-21 is a proposal to improve the bitcoin uniform resource identifier (URI) scheme.
@ -55,8 +55,8 @@ difficulty retargeting::
difficulty target:: difficulty target::
A difficulty at which all the computation in the network will find blocks approximately every 10 minutes. A difficulty at which all the computation in the network will find blocks approximately every 10 minutes.
double spending:: double-spending::
Double spending is the result of successfully spending some money more than once. Bitcoin protects against double spending by verifying each transaction added to the block chain to ensure that the inputs for the transaction had not previously already been spent. Double spending is the result of successfully spending some money more than once. Bitcoin protects against double-spending by verifying each transaction added to the block chain to ensure that the inputs for the transaction had not previously already been spent.
ECDSA:: ECDSA::
Elliptic Curve Digital Signature Algorithm or ECDSA is a cryptographic algorithm used by Bitcoin to ensure that funds can only be spent by their rightful owners. Elliptic Curve Digital Signature Algorithm or ECDSA is a cryptographic algorithm used by Bitcoin to ensure that funds can only be spent by their rightful owners.
@ -195,7 +195,7 @@ satoshi::
A satoshi is the smallest denomination of bitcoin that can be recorded on the blockchain. It is the equivalent of 0.00000001 bitcoin and is named after the creator of Bitcoin, Satoshi Nakamoto. ((("satoshi"))) A satoshi is the smallest denomination of bitcoin that can be recorded on the blockchain. It is the equivalent of 0.00000001 bitcoin and is named after the creator of Bitcoin, Satoshi Nakamoto. ((("satoshi")))
Satoshi Nakamoto:: Satoshi Nakamoto::
Satoshi Nakamoto is the name used by the person or people who designed Bitcoin and created its original reference implementation, Bitcoin Core. As a part of the implementation, they also devised the first blockchain database. In the process they were the first to solve the double spending problem for digital currency. Their real identity remains unknown. Satoshi Nakamoto is the name used by the person or people who designed Bitcoin and created its original reference implementation, Bitcoin Core. As a part of the implementation, they also devised the first blockchain database. In the process they were the first to solve the double-spending problem for digital currency. Their real identity remains unknown.
Script:: Script::
Bitcoin uses a scripting system for transactions. Forth-like, Script is simple, stack-based, and processed from left to right. It is purposefully not Turing-complete, with no loops. Bitcoin uses a scripting system for transactions. Forth-like, Script is simple, stack-based, and processed from left to right. It is purposefully not Turing-complete, with no loops.
@ -219,18 +219,15 @@ Segregated Witness::
SHA:: SHA::
The Secure Hash Algorithm or SHA is a family of cryptographic hash functions published by the National Institute of Standards and Technology (NIST). The Secure Hash Algorithm or SHA is a family of cryptographic hash functions published by the National Institute of Standards and Technology (NIST).
simplified payment verification (SPV):: Simplified Payment Verification (SPV)::
SPV or simplified payment verification is a method for verifying particular transactions were included in a block without downloading the entire block. The method is used by some lightweight Bitcoin clients. SPV or simplified payment verification is a method for verifying particular transactions were included in a block without downloading the entire block. The method is used by some lightweight Bitcoin clients.
soft fork:: soft fork::
soft fork or Soft-Forking Change is a temporary fork in the blockchain which commonly occurs when miners using non-upgraded nodes don't follow a new consensus rule their nodes don’t know about. soft fork or Soft-Forking Change is a temporary fork in the blockchain which commonly occurs when miners using non-upgraded nodes don't follow a new consensus rule their nodes don’t know about.
Not to be confused with fork, hard fork, software fork or Git fork. Not to be confused with fork, hard fork, software fork or Git fork.
SPV (aka Simplified Payment Verification)::
SPV or Simplified Payment Verification is a method for verifying particular transactions were included in a block without downloading the entire block. The method is used by some lightweight Bitcoin clients.
Stale Block:: Stale Block::
Block which were successfully mined but which isn’t included on the current best block chain, likely because some other block at the same height had its chain extended first. Not to be confused with orphan block. Block which was successfully mined but which isn’t included on the current best block chain, likely because some other block at the same height had its chain extended first. Not to be confused with orphan block.
timelocks:: timelocks::
A timelock is a type of encumbrance that restricts the spending of some bitcoin until a specified future time or block height. Timelocks feature prominently in many Bitcoin contracts, including payment channels and hashed timelock contracts. A timelock is a type of encumbrance that restricts the spending of some bitcoin until a specified future time or block height. Timelocks feature prominently in many Bitcoin contracts, including payment channels and hashed timelock contracts.

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@ -184,6 +184,7 @@ Following is a list of notable GitHub contributors, including their GitHub ID in
* Craig Dodd (cdodd) * Craig Dodd (cdodd)
* dallyshalla * dallyshalla
* Darius Kramer (dkrmr) * Darius Kramer (dkrmr)
* David Huie (DavidHuie)
* Diego Viola (diegoviola) * Diego Viola (diegoviola)
* Dirk Jäckel (biafra23) * Dirk Jäckel (biafra23)
* Dimitris Tsapakidis (dimitris-t) * Dimitris Tsapakidis (dimitris-t)
@ -220,6 +221,7 @@ Following is a list of notable GitHub contributors, including their GitHub ID in
* Jonathan Cross (jonathancross) * Jonathan Cross (jonathancross)
* Jorgeminator * Jorgeminator
* Kai Bakker (kaibakker) * Kai Bakker (kaibakker)
* Lucas Betschart (lclc)
* Magomed Aliev (30mb1) * Magomed Aliev (30mb1)
* Mai-Hsuan Chia (mhchia) * Mai-Hsuan Chia (mhchia)
* marcofalke * marcofalke
@ -237,6 +239,7 @@ Following is a list of notable GitHub contributors, including their GitHub ID in
* Richard Kiss (richardkiss) * Richard Kiss (richardkiss)
* Ruben Alexander (hizzvizz) * Ruben Alexander (hizzvizz)
* Sam Ritchie (sritchie) * Sam Ritchie (sritchie)
* Sebastian Falbesoner (theStack)
* Sergej Kotliar (ziggamon) * Sergej Kotliar (ziggamon)
* Seiichi Uchida (topecongiro) * Seiichi Uchida (topecongiro)
* Simon de la Rouviere (simondlr) * Simon de la Rouviere (simondlr)
@ -249,4 +252,5 @@ Following is a list of notable GitHub contributors, including their GitHub ID in
* wintercooled * wintercooled
* wjx * wjx
* Wojciech Langiewicz (wlk) * Wojciech Langiewicz (wlk)
* Yancy Ribbens (yancyribbens)
* yurigeorgiev4((("", startref="acknowledge0"))) * yurigeorgiev4((("", startref="acknowledge0")))