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556 lines
38 KiB
Plaintext
[role="pagenumrestart"]
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[[ch01_intro_what_is_bitcoin]]
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== Introduction
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=== What Is Bitcoin?
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((("bitcoin", "defined", id="GSdefine01")))Bitcoin is a collection of concepts and technologies that form the basis of a digital money ecosystem. Units of currency called bitcoin are used to store and transmit value among participants in the Bitcoin network. Bitcoin users communicate with each other using the Bitcoin protocol primarily via the internet, although other transport networks can also be used. The Bitcoin protocol stack, available as open source software, can be run on a wide range of computing devices, including laptops and smartphones, making the technology easily accessible.
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[TIP]
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====
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In this book, the unit of currency is called "bitcoin" with a small _b_,
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and the system is called "Bitcoin", with a capital _B_.
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====
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Users can transfer bitcoin over the network to do just about anything
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that can be done with conventional currencies, including buying and selling
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goods, sending money to people or organizations, or extending credit. Bitcoin
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can be purchased, sold, and exchanged for other currencies at
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specialized currency exchanges. Bitcoin is arguably the perfect form
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of money for the internet because it is fast, secure, and borderless.
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Unlike traditional currencies, the bitcoin currency is entirely virtual. There are no
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physical coins or even individual digital coins. The coins are implied in
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transactions that transfer value from spender to receiver. Users of
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Bitcoin control keys that allow them to prove ownership of bitcoin in the
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Bitcoin network. With these keys, they can sign transactions to unlock
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the value and spend it by transferring it to a new owner. Keys are often
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stored in a digital wallet on each user’s computer or smartphone.
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Possession of the key that can sign a transaction is the only
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prerequisite to spending bitcoin, putting the control entirely in the
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hands of each user.
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Bitcoin is a distributed, peer-to-peer system. As such, there is no
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central server or point of control. Units of bitcoin
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are created through a process called "mining," which involves repeatedly
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performing a competitive computational task that references a list of recent Bitcoin
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transactions. Any participant in the Bitcoin network may operate as a
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miner, using their computing devices to help secure
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transactions. Every 10 minutes, on average, one Bitcoin miner can add security to
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past transactions and is rewarded with both brand new
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bitcoin and the fees paid by recent transactions. Essentially, Bitcoin
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mining decentralizes the currency-issuance
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and clearing functions of a central bank and replaces the need for any
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central bank.
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The Bitcoin protocol includes built-in algorithms that regulate the
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mining function across the network. The difficulty of the computational
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task that miners must perform is adjusted dynamically so that, on
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average, someone succeeds every 10 minutes regardless of how many miners
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(and how much processing) are competing at any moment. The protocol also
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halves the rate at which new bitcoins are created,
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limiting the total number of bitcoins that will be created to a fixed total
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just below 21 million coins. The result is that the number of bitcoins in
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circulation closely follows an easily predictable curve where half of
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the remaining coins are added to circulation every four years. By the
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time the third edition of this book has been published for ten years, 99% of all bitcoins
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that will ever exist will have been issued. Due to bitcoin's
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diminishing rate of issuance, over the long term, the Bitcoin currency
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is deflationary. Furthermore, nobody can force you to accept
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any bitcoins that were created beyond the
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expected issuance rate.
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Behind the scenes, Bitcoin is also the name of the protocol, a peer-to-peer network, and a distributed computing innovation. Bitcoin builds on decades of research in cryptography and distributed systems and includes at least four key innovations brought together in a unique and powerful combination. Bitcoin consists of:
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* A decentralized peer-to-peer network (the Bitcoin protocol)
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* A public transaction ledger (the blockchain)
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* ((("mining and consensus", "consensus rules", "satisfying")))A set of rules for independent transaction validation and currency issuance (consensus rules)
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* A mechanism for reaching global decentralized consensus on the valid blockchain (Proof-of-Work algorithm)
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As a developer, I see Bitcoin as akin to the internet of money, a network for propagating value and securing the ownership of digital assets via distributed computation. There's a lot more to Bitcoin than first meets the eye.
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In this chapter we'll get started by explaining some of the main concepts and terms, getting the necessary software, and using Bitcoin for simple transactions. In the following chapters, we'll start unwrapping the layers of technology that make Bitcoin possible and examine the inner workings of the Bitcoin network and protocol.((("", startref="GSdefine01")))
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[role="pagebreak-before less_space"]
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.Digital Currencies Before Bitcoin
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****
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((("digital currencies", "prior to bitcoin")))The emergence of viable digital money is closely linked to developments in cryptography. This is not surprising when one considers the fundamental challenges involved with using bits to represent value that can be exchanged for goods and services. Three basic questions for anyone accepting digital money are:
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1. Can I trust that the money is authentic and not counterfeit?
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2. Can I trust that the digital money can only be spent once (known as the “double-spend” problem)?
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3. Can I be sure that no one else can claim this money belongs to them and not me?
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Issuers of paper money are constantly battling the counterfeiting problem by using increasingly sophisticated papers and printing technology. Physical money addresses the double-spend issue easily because the same paper note cannot be in two places at once. Of course, conventional money is also often stored and transmitted digitally. In these cases, the counterfeiting and double-spend issues are handled by clearing all electronic transactions through central authorities that have a global view of the currency in circulation. For digital money, which cannot take advantage of esoteric inks or holographic strips, cryptography provides the basis for trusting the legitimacy of a user’s claim to value. Specifically, cryptographic digital signatures enable a user to sign a digital asset or transaction proving the ownership of that asset. With the appropriate architecture, digital signatures also can be used to address the double-spend issue.
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When cryptography started becoming more broadly available and understood in the late 1980s, many researchers began trying to use cryptography to build digital currencies. These early digital currency projects issued digital money, usually backed by a national currency or precious metal such as gold.
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((("decentralized systems", "vs. centralized", secondary-sortas="centralized")))Although these earlier digital currencies worked, they were centralized and, as a result, were easy to attack by governments and hackers. Early digital currencies used a central clearinghouse to settle all transactions at regular intervals, just like a traditional banking system. Unfortunately, in most cases these nascent digital currencies were targeted by worried governments and eventually litigated out of existence. Some failed in spectacular crashes when the parent company liquidated abruptly. To be robust against intervention by antagonists, whether legitimate governments or criminal elements, a _decentralized_ digital currency was needed to avoid a single point of attack. Bitcoin is such a system, decentralized by design, and free of any central authority or point of control that can be attacked or corrupted.
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****
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=== History of Bitcoin
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((("Nakamoto, Satoshi")))((("distributed computing")))((("bitcoin",
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"history of")))Bitcoin was first described in 2008 with the publication of a
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paper titled "Bitcoin: A Peer-to-Peer Electronic Cash
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System,"footnote:["Bitcoin: A Peer-to-Peer Electronic Cash System,"
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Satoshi Nakamoto (https://bitcoin.org/bitcoin.pdf).] written under the
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alias of Satoshi Nakamoto (see <<satoshi_whitepaper>>). Nakamoto
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combined several prior inventions such as digital signatures and Hashcash to create
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a completely decentralized electronic cash system that does not rely on
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a central authority for currency issuance or settlement and validation
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of transactions. ((("Proof-of-Work algorithm")))((("decentralized
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systems", "consensus in")))((("mining and consensus", "Proof-of-Work
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algorithm")))A key innovation was to use a distributed computation
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system (called a "Proof-of-Work" algorithm) to conduct a global
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"election" every 10 minutes, allowing the decentralized network to
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arrive at _consensus_ about the state of transactions. ((("double-spend
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problem")))((("spending bitcoin", "double-spend problem")))This
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elegantly solves the issue of double-spend where a single currency unit
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can be spent twice. Previously, the double-spend problem was a weakness
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of digital currency and was addressed by clearing all transactions
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through a central clearinghouse.
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The Bitcoin network started in 2009, based on a reference implementation
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published by Nakamoto and since revised by many other programmers. The
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implementation of the Proof-of-Work algorithm (mining) that provides
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security and resilience for Bitcoin has increased in power
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exponentially, and now exceeds the combined number of computing operations of the
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world's top supercomputers. Bitcoin's total market value has at times
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exceeded $1 trillion US dollars, depending on the bitcoin-to-dollar
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exchange rate. The largest transaction processed so far by the network
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was over a billion US dollars.
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Satoshi Nakamoto withdrew from the public in April 2011, leaving the responsibility of developing the code and network to a thriving group of volunteers. The identity of the person or people behind Bitcoin is still unknown. ((("open source licenses")))However, neither Satoshi Nakamoto nor anyone else exerts individual control over the Bitcoin system, which operates based on fully transparent mathematical principles, open source code, and consensus among participants. The invention itself is groundbreaking and has already spawned new science in the fields of distributed computing, economics, and econometrics.
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.A Solution to a Distributed Computing Problem
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****
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((("Byzantine Generals' Problem")))Satoshi Nakamoto's invention is
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also a practical and novel solution to a problem in distributed
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computing, known as the "Byzantine Generals' Problem." Briefly, the
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problem consists of trying to get multiple participants without a leader
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to agree on a course of action by exchanging information over an
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unreliable and potentially compromised network. ((("central trusted
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authority")))Satoshi Nakamoto's solution, which uses the concept of
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Proof-of-Work to achieve consensus _without a central trusted
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authority_, represents a breakthrough in distributed computing.
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****
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[[user-stories]]
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=== Bitcoin Uses, Users, and Their Stories
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((("bitcoin", "use cases", id="GSuses01")))Bitcoin is an innovation in the ancient technology of money. At its core, money simply facilitates the exchange of value between people. Therefore, in order to fully understand Bitcoin and its uses, we'll examine it from the perspective of people using it. Each of the people and their stories, as listed here, illustrates one or more specific use cases. We'll be seeing them throughout the book:
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North American e-commerce retails::
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((("use cases", "retail sales")))Alice lives in Northern California's Bay Area. She has heard about Bitcoin from her techie friends and wants to start using it. We will follow her story as she learns about Bitcoin, acquires some, and then spends her bitcoin to buy a laptop from Bob's online store. This story will introduce us to the software, the exchanges, and basic transactions from the perspective of a retail consumer.
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North American high-value retail::
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Carol is an art gallery owner in San Francisco. She sells expensive paintings for bitcoin. This story will introduce the risks of a "51% attack" for retailers of high-value items.
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Offshore contract services::
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((("offshore contract services")))((("use cases", "offshore contract services")))Bob, the cafe owner in Palo Alto, is building a new website. He has contracted with a web developer, Gopesh, who lives in Bangalore, India. Gopesh has agreed to be paid in bitcoin. This story will examine the use of Bitcoin for outsourcing, contract services, and international wire transfers.
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Web store::
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((("use cases", "web store")))Gabriel is an enterprising young teenager in Rio de Janeiro, running a small web store that sells Bitcoin-branded t-shirts, coffee mugs, and stickers. Gabriel is too young to have a bank account, but his parents are encouraging his entrepreneurial spirit.
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Charitable donations::
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((("charitable donations")))((("use cases", "charitable donations")))Eugenia is the director of a children's charity in the Philippines. Recently she has discovered Bitcoin and wants to use it to reach a whole new group of foreign and domestic donors to fundraise for her charity. She's also investigating ways to use Bitcoin to distribute funds quickly to areas of need. This story will show the use of Bitcoin for global fundraising across currencies and borders and the use of an open ledger for transparency in charitable organizations.
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Import/export::
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((("use cases", "import/export")))Mohammed is an electronics importer in Dubai. He's trying to use Bitcoin to buy electronics from the United States and China for import into the UAE to accelerate the process of payments for imports. This story will show how Bitcoin can be used for large business-to-business international payments tied to physical goods.
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Mining for bitcoin::
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((("use cases", "mining for bitcoin")))Jing is a computer engineering student in Shanghai. He has built a "mining" rig to mine for bitcoin using his engineering skills to supplement his income. This story will examine the "industrial" base of Bitcoin: the specialized equipment used to secure the Bitcoin network and issue new currency.
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Each of these stories is based on the real people and real industries currently using Bitcoin to create new markets, new industries, and innovative solutions to global economic issues.((("", startref="GSuses01")))
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=== Getting Started
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((("getting started", "wallet selection",
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id="GSwallet01")))((("wallets", "selecting",
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id="Wselect01")))((("bitcoin", "getting started",
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id="BCbasic01")))Bitcoin is a protocol that can be accessed using an
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application that speaks the protocol. A "Bitcoin wallet" is the
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most common user interface to the Bitcoin system, just like a web
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browser is the most common user interface for the HTTP protocol. There
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are many implementations and brands of Bitcoin wallets, just like there
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are many brands of web browsers (e.g., Chrome, Safari, Firefox, and
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Internet Explorer). And just like we all have our favorite browsers
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(Mozilla Firefox, Yay!) and our villains (Internet Explorer, Yuck!),
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Bitcoin wallets vary in quality, performance, security, privacy, and
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reliability. There is also a reference implementation of the Bitcoin
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protocol that includes a wallet, known as "Bitcoin Core," which is
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derived from the original implementation written by Satoshi Nakamoto.
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==== Choosing a Bitcoin Wallet
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((("security", "wallet selection")))Bitcoin wallets are one of the most actively developed applications in the Bitcoin ecosystem. There is intense competition, and while a new wallet is probably being developed right now, several wallets from last year are no longer actively maintained. Many wallets focus on specific platforms or specific uses and some are more suitable for beginners while others are filled with features for advanced users. Choosing a wallet is highly subjective and depends on the use and user expertise. Therefore it would be pointless to recommend a specific brand or wallet. However, we can categorize Bitcoin wallets according to their platform and function and provide some clarity about all the different types of wallets that exist. It is worth trying out several different wallets until you find one that fits your needs.
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[role="pagebreak-before"]
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===== Types of Bitcoin wallets
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Bitcoin wallets can be categorized as follows, according to the platform:
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Desktop wallet:: A desktop wallet was the first type of Bitcoin wallet created as a reference implementation and many users run desktop wallets for the features, autonomy, and control they offer. Running on general-use operating systems such as Windows and Mac OS has certain security disadvantages, however, as these platforms are often insecure and poorly configured.
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Mobile wallet:: A mobile wallet is the most common type of Bitcoin
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wallet. Running on smart-phone operating systems such as Apple iOS and
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Android, these wallets are often a great choice for new users. Many are
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designed for simplicity and ease-of-use, but there are also fully
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featured mobile wallets for power users. To avoid downloading and
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storing large amounts of data, most mobile wallets retrieve information
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from remote servers, reducing your privacy by disclosing to third
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parties information about your Bitcoin addresses and balances.
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Web wallet:: Web wallets are accessed through a web browser and store
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the user's wallet on a server owned by a third party. This is similar to
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webmail in that it relies entirely on a third-party server. Some of
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these services operate using client-side code running in the user's
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browser, which keeps control of the Bitcoin keys in the hands of the
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user, although the user's dependence on the server still compromises
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their privacy. Most, however, take control of the Bitcoin keys from
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users in exchange for ease-of-use. It is inadvisable
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to store large amounts of bitcoin on third-party systems.
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Hardware signing devices:: Hardware signing devices are devices that can
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store keys and sign transactions using special-purpose hardware and
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firmware. They usually
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connect to a desktop, mobile, or web wallet via USB cable,
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near-field-communication (NFC), or a camera with QR codes. By handling
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all Bitcoin-related operations on the specialized hardware, these
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wallets are less vulnerable to many types of attacks. Hardware signing
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devices are sometimes called "hardware wallets", but they need to be
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paired with a full-featured wallet to send and receive transactions, and
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the security and privacy offered by that paired wallet plays a critical
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role in how much security and privacy the user obtains when using the
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hardware signing device.
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===== Full-node vs. Lightweight
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Another way to categorize bitcoin wallets is by their degree of autonomy and how they interact with the Bitcoin network:
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Full-node:: ((("full-node")))A full node is a program that validates the
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entire history of Bitcoin transactions (every transaction by every user,
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ever). Optionally, full nodes can also store previously validated
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transactions and serve data to other Bitcoin programs, either on the
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same computer or over the internet. A full node uses substantial
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computer resources--about the same as watching an hour-long streaming
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video for each day of Bitcoin transactions--but the full node offers
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complete autonomy to its users.
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Lightweight client:: ((("lightweight
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clients")))((("simplified-payment-verification (SPV)")))A lightweight
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client, also known as a simplified-payment-verification (SPV) client,
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connects to a full node or other remote server for receiving and sending
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Bitcoin transaction information, but stores the user wallet locally,
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partially validates the transactions it receives, and independently
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creates outgoing transactions.
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Third-party API client:: ((("third-party API clients")))A third-party
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API client is one that interacts with Bitcoin through a third-party
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system of application programming interfaces (APIs), rather than by
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connecting to the Bitcoin network directly. The wallet may be stored by
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the user or by third-party servers, but the client trusts the remote
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server to provide it with accurate information and protect its privacy.
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[TIP]
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====
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Bitcoin is a Peer-to-Peer (P2P) network. Full nodes are the _peers:_
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each peer individually validates every confirmed transaction and can
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provide data to its user with complete authority. Lightweight wallets
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and other software are _clients:_ each client depends on one or more peers
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to provide it with valid data. Bitcoin clients can perform secondary
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validation on some of the data they receive and make connections to
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multiple peers to reduce their depedence on the integrity of a single
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peer, but the security of a client ultimately relies on the integrity of
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its peers.
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====
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===== Custodial vs. Non-Custodial
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A very important additional consideration is _who controls the keys_. As
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we will see in subsequent chapters, access to bitcoins is
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controlled by "private keys", which are like very long PIN numbers. If
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you are the only one to have *custody* and *control* over these private
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keys, you are in control of your bitcoin. Conversely, if you do not have
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custody, then your bitcoin is managed by a third-party custodian, who
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ultimately controls your funds on your behalf. Wallets fall into two
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important categories based on custody: _non-custodial_ wallets where you
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control the keys and the funds and _custodial_ wallets where some
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third-party controls the keys. To emphasize this point, I (Andreas)
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coined the phrase:
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_Your keys, your coins. Not your keys, not your coins_.
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Combining these categorizations, many Bitcoin wallets fall into a few
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groups, with the three most common being desktop full node
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(non-custodial), mobile lightweight wallet (non-custodial), and web
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third-party wallet (custodial). The lines between different categories
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are often blurry, as many wallets run on multiple platforms and can
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interact with the network in different ways.
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For the purposes of this book, we will be demonstrating the use of a
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variety of downloadable Bitcoin clients, from the reference
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implementation (Bitcoin Core) to mobile and web wallets. Some of the
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examples will require the use of Bitcoin Core, which, in addition to
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being a full node, also exposes APIs to the wallet, network, and
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transaction services. If you are planning to explore the programmatic
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interfaces into the Bitcoin system, you will need to run Bitcoin Core,
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or one of the alternative full node implementations.((("", startref="GSwallet01")))((("",
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startref="Wselect01")))
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==== Quick Start
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((("getting started", "quick start example",
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id="GSquick01")))((("wallets", "quick start example",
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id="Wquick01")))Alice, who we introduced in <<user-stories>>, is not a
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technical user and only recently heard about Bitcoin from her friend
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Joe. While at a party, Joe is once again enthusiastically explaining
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Bitcoin to everyone around him and is offering a demonstration. Intrigued,
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Alice asks how she can get started with Bitcoin. Joe says that a mobile
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wallet is best for new users and he recommends a few of his favorite
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wallets. Alice downloads one of Joe's recommendations
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and installs it on her phone.
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When Alice runs her wallet application for the first time, she chooses
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the option to create a new Bitcoin wallet. Because the wallet she has
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chosen is a non-custodial wallet, Alice (and only Alice) will be in
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control of her keys. Therefore, she bears responsibility for backing
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them up, since losing the keys means she loses access to her bitcoins. To
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facilitate this, her wallet produces a _recovery code_ (explained more in
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<<recovery_code_intro>>) that can be used
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to restore her wallet.
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[[recovery_code_intro]]
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==== Recovery Codes
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Most modern non-custodial Bitcoin wallets will provide a _recovery
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code_ for their user
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to back up. The recovery code usually consists of numbers, letters, or words
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selected randomly by the software, and is used as the basis for the keys
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that are generated by the wallet. See <<recovery_code_sample>> for
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examples.
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[[recovery_code_sample]]
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.Sample Recovery Codes
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[cols="1,1"]
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|===
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| Wallet | Recovery code
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| BlueWallet
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| (1) media (2) suspect (3) effort (4) dish (5) album (6) shaft (7) price (8) junk (9) pizza (10) situate (11) oyster (12) rib
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| Electrum
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| nephew dog crane clever quantum crazy purse traffic repeat fruit old clutch
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| Muun
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| LAFV TZUN V27E NU4D WPF4 BRJ4 ELLP BNFL
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|===
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[TIP]
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====
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A recovery code is sometimes called a "mnemonic" or "mnemonic phrase",
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which implies you should memorize the phrase, but writing the phrase
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down on paper takes less work and tends to be more reliable than most
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people's memories. Another alternative name is "seed phrase" because
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it provides the input ("seed") to the function which generates all of
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a wallet's keys.
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====
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If something happens to Alice's wallet, she can download a new copy of
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her wallet software and enter this recovery code to rebuild the wallet
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database of all the onchain transactions she's ever sent or received.
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However, recovering from the recovery code will not by itself restore any additional
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data Alice entered into her wallet, such as the names she associated
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with particular addresses or transactions. Although losing access to
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that metadata isn't as important as losing access to money, it can
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still be important in its own way. Imagine you need to review an old
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bank or credit card statement and the name of every entity you paid (or
|
||
who paid you) has been blanked out. To prevent losing metadata, many
|
||
wallets provide an additional backup feature beyond recovery codes.
|
||
|
||
For some wallets, that additional backup feature is even more important
|
||
today than it used to be. Many Bitcoin payments are now made using
|
||
_offchain_ technology, where not every payment is stored in the public block
|
||
chain. This reduces users costs and improves privacy, among other
|
||
benefits, but it means that a mechanism like recovery codes that depends on
|
||
onchain data can't guarantee recovery of all of a user's bitcoins. For
|
||
applications with offchain support, it's important to make frequent
|
||
backups of the wallet database.
|
||
|
||
Of note, when receiving funds to a new mobile wallet for the first time,
|
||
many wallets will often re-verify that you have securely backed-up your
|
||
recovery code. This can range from a simple prompt to requiring the
|
||
user to manually re-enter the code.
|
||
|
||
[WARNING]
|
||
====
|
||
Although many legitimate wallets will prompt you to re-enter
|
||
your recovery code, there are also many malware applications that mimic the
|
||
design of a wallet, insist you enter your recovery code, and then
|
||
relay any entered code to the malware developer so they can steal
|
||
your funds. This is the equivilent of phishing websites that try to
|
||
trick you into giving them your bank passphrase. For most wallet
|
||
applications, the only times they will ask for your recovery code are during
|
||
the initial set up (before you have received any bitcoins) and during
|
||
recovery (after you lost access to your original wallet). If the application
|
||
asks for your recovery code any other time, consult with an expert to
|
||
ensure you aren't being phished.
|
||
====
|
||
|
||
==== Bitcoin addresses
|
||
|
||
Alice is now ready to start using her new bitcoin wallet. ((("", startref="GSquick01")))((("", startref="Wquick01"))) Her wallet application randomly generated a private key (described in more detail in <<private_keys>>) which will be used to derive Bitcoin addresses that direct to her wallet. At this point, her Bitcoin addresses are not known to the Bitcoin network or "registered" with any part of the Bitcoin system. Her Bitcoin addresses are simply random numbers that correspond to her private key that she can use to control access to the funds. The addresses are generated independently by her wallet without reference or registration with any service.
|
||
|
||
[TIP]
|
||
====
|
||
((("addresses", "security of")))((("security", "bitcoin addresses")))There
|
||
are a variety of Bitcoin addresses and invoice formats. Addresses and
|
||
invoices can be shared with other bitcoin users
|
||
who can use them to send bitcoin directly to your wallet. You can share
|
||
an address or invoice with other people without worrying about the
|
||
security of your bitcoins. Unlike a bank account number, nobody who
|
||
learns one of your Bitcoin addresses can withdraw money from your wallet--you
|
||
must initiate all spends. However, if you give two people the same
|
||
address, they will be able to see how much bitcoin the other person sent
|
||
you. If you post your address publicly, everyone will be able to see
|
||
how much bitcoin other people sent you. To protect your privacy, you
|
||
should generate a new invoice with a new address each time you request a
|
||
payment.
|
||
====
|
||
|
||
==== Receiving bitcoin
|
||
|
||
Alice uses the _Receive_ button, which displays a QR code along with a Bitcoin address, shown in <<wallet_receive>>.
|
||
|
||
[[wallet_receive]]
|
||
.Alice uses the Receive screen on her mobile Bitcoin wallet, and displays her address in a QR code format
|
||
image::images/receive.png["Wallet receive screen with QR code displayed"]
|
||
|
||
The QR code is the square with a pattern of black and white dots, serving as a form of barcode that contains the same information in a format that can be scanned by Joe's smartphone camera. Near the wallet's QR code is the Bitcoin address it encodes, and Alice may choose to manually send her address to Joe by copying it onto her clipboard with a tap.
|
||
|
||
[WARNING]
|
||
====
|
||
Any funds sent to the addresses in this book will be lost. If you want
|
||
to test sending bitcoins, please consider donating it to a
|
||
bitcoin-accepting charity.
|
||
====
|
||
|
||
[[getting_first_bitcoin]]
|
||
==== Getting Your First Bitcoin
|
||
|
||
((("getting started", "acquiring bitcoin")))The first task for new users is to acquire some bitcoin.
|
||
|
||
Bitcoin transactions are irreversible. Most electronic payment networks such as credit cards, debit cards, PayPal, and bank account transfers are reversible. For someone selling bitcoin, this difference introduces a very high risk that the buyer will reverse the electronic payment after they have received bitcoin, in effect defrauding the seller. To mitigate this risk, companies accepting traditional electronic payments in return for bitcoin usually require buyers to undergo identity verification and credit-worthiness checks, which may take several days or weeks. As a new user, this means you cannot buy bitcoin instantly with a credit card. With a bit of patience and creative thinking, however, you won't need to.
|
||
|
||
[role="pagebreak-before"]
|
||
Here are some methods for getting bitcoin as a new user:
|
||
|
||
* Find a friend who has bitcoin and buy some from him or her directly. Many Bitcoin users start this way. This method is the least complicated. One way to meet people with bitcoin is to attend a local Bitcoin meetup listed at https://bitcoin.meetup.com[Meetup.com].
|
||
* Use a classified service such as pass:[<a class="orm:hideurl" href="https://localbitcoins.com/">localbitcoins.com</a>] to find a seller in your area to buy bitcoin for cash in an in-person transaction.
|
||
* Earn bitcoin by selling a product or service for bitcoin. If you are a programmer, sell your programming skills. If you're a hairdresser, cut hair for bitcoin.
|
||
* ((("Coin ATM Radar")))((("ATMs, locating")))Use a bitcoin ATM in your city. A bitcoin ATM is a machine that accepts cash and sends bitcoin to your smartphone bitcoin wallet. Find a bitcoin ATM close to you using an online map from http://coinatmradar.com[Coin ATM Radar].
|
||
* ((("exchange rates", "listing services")))Use a bitcoin currency exchange linked to your bank account. Many countries now have currency exchanges that offer a market for buyers and sellers to swap bitcoin with local currency. Exchange-rate listing services, such as https://bitcoinaverage.com[BitcoinAverage], often show a list of bitcoin exchanges for each currency.
|
||
|
||
[TIP]
|
||
====
|
||
((("privacy, maintaining")))((("security", "maintaining
|
||
privacy")))((("digital currencies", "currency exchanges")))((("currency
|
||
exchanges")))((("digital currencies", "benefits of
|
||
bitcoin")))((("bitcoin", "benefits of")))One of the advantages of
|
||
Bitcoin over other payment systems is that, when used correctly, it
|
||
affords users much more privacy. Acquiring, holding, and spending
|
||
bitcoin does not require you to divulge sensitive and personally
|
||
identifiable information to third parties. However, where bitcoin
|
||
touches traditional systems, such as currency exchanges, national and
|
||
international regulations often apply. In order to exchange bitcoin for
|
||
your national currency, you will often be required to provide proof of
|
||
identity and banking information. Users should be aware that once a
|
||
Bitcoin address is attached to an identity, other associated bitcoin
|
||
transactions may also become easy to identify and track--including
|
||
transactions made earlier. This is one reason
|
||
many users choose to maintain dedicated exchange accounts unlinked to
|
||
their wallets.
|
||
====
|
||
|
||
Alice was introduced to bitcoin by a friend so she has an easy way to acquire her first bitcoin. Next, we will look at how she buys bitcoin from her friend Joe and how Joe sends the bitcoin to her wallet.
|
||
|
||
[[bitcoin_price]]
|
||
==== Finding the Current Price of Bitcoin
|
||
|
||
((("getting started", "exchange rates")))((("exchange rates", "determining")))Before Alice can buy bitcoin from Joe, they have to agree on the _exchange rate_ between bitcoin and US dollars. This brings up a common question for those new to bitcoin: "Who sets the bitcoin price?" The short answer is that the price is set by markets.
|
||
|
||
((("exchange rates", "floating")))((("floating exchange rate")))Bitcoin, like most other currencies, has a _floating exchange rate_. That means that the value of bitcoin fluctuates according to supply and demand in the various markets where it is traded. For example, the "price" of bitcoin in US dollars is calculated in each market based on the most recent trade of bitcoin and US dollars. As such, the price tends to fluctuate minutely several times per second. A pricing service will aggregate the prices from several markets and calculate a volume-weighted average representing the broad market exchange rate of a currency pair (e.g., BTC/USD).
|
||
|
||
There are hundreds of applications and websites that can provide the current market rate. Here are some of the most popular:
|
||
|
||
http://bitcoinaverage.com/[Bitcoin Average]:: ((("BitcoinAverage")))A site that provides a simple view of the volume-weighted-average for each currency.
|
||
http://coincap.io/[CoinCap]:: A service listing the market capitalization and exchange rates of hundreds of crypto-currencies, including bitcoin.
|
||
http://bit.ly/cmebrr[Chicago Mercantile Exchange Bitcoin Reference Rate]:: A reference rate that can be used for institutional and contractual reference, provided as part of investment data feeds by the CME.
|
||
|
||
In addition to these various sites and applications, some bitcoin
|
||
wallets will automatically convert amounts between bitcoin and other
|
||
currencies.
|
||
|
||
[[sending_receiving]]
|
||
==== Sending and Receiving Bitcoin
|
||
|
||
((("getting started", "sending and receiving bitcoin",
|
||
id="GSsend01")))((("spending bitcoin", "bitcoin wallet quick start
|
||
example")))((("spending bitcoin", see="also transactions")))Alice has
|
||
decided to buy 0.001 bitcoin. After she and Joe check the exchange rate,
|
||
she gives Joe an appropriate amount of cash, opens her mobile wallet
|
||
application, and selects Receive. This
|
||
displays a QR code with Alice's first Bitcoin address.
|
||
|
||
Joe then selects Send on his smartphone wallet and opens the QR code
|
||
scanner. This allows Joe to scan the barcode with his smartphone camera
|
||
so that he doesn't have to type in Alice's Bitcoin address, which is
|
||
quite long and difficult to type.
|
||
|
||
[[wallet-send]]
|
||
[role="smallereighty"]
|
||
.Bitcoin wallet send screen
|
||
image::images/send.png["Wallet send screen"]
|
||
|
||
Joe now has Alice's Bitcoin address set as the recipient. Joe enters the
|
||
amount as 0.001 bitcoins (BTC), see <<wallet-send>>. Some wallets may
|
||
show the amount in a different denomination: 0.001 BTC is 1 millibitcoin
|
||
(mBTC) or 100,000 satoshis (sats).
|
||
|
||
Some wallets may also suggest Joe enter a label for this transaction; if
|
||
so, Joe enters "Alice". Weeks or months from now, this will help Joe
|
||
remember why he sent these 0.001 bitcoins. Some wallets may also prompt
|
||
Joe about fees. Depending on the wallet and how the transaction is
|
||
being sent, the wallet may ask Joe to either enter a transaction feerate or
|
||
prompt him with a suggested feerate. The higher the transaction feerate, the
|
||
faster the transaction will be confirmed (see <<confirmations>>).
|
||
|
||
Joe then carefully checks to make sure he has entered the correct
|
||
amount, because he is about to transmit money and mistakes will soon become
|
||
irreversible. After double-checking the address and amount, he presses
|
||
Send to transmit the transaction. Joe's mobile Bitcoin wallet constructs
|
||
a transaction that assigns 0.001 BTC to the address provided by Alice,
|
||
sourcing the funds from Joe's wallet and signing the transaction with
|
||
Joe's private keys. This tells the Bitcoin network that Joe has
|
||
authorized a transfer of value to Alice's new address. As the
|
||
transaction is transmitted via the peer-to-peer protocol, it quickly
|
||
propagates across the Bitcoin network. After just a few seconds, most of
|
||
the well-connected nodes in the network receive the transaction and see
|
||
Alice's address for the first time.
|
||
|
||
Meanwhile, Alice's wallet is constantly "listening" for new
|
||
transactions on the Bitcoin network, looking for any that match the
|
||
addresses it contains. A few seconds after Joe's wallet transmits the
|
||
transaction, Alice's wallet will indicate that it is receiving
|
||
0.001 BTC.
|
||
|
||
[[confirmations]]
|
||
.Confirmations
|
||
****
|
||
((("getting started", "confirmations")))((("confirmations", "bitcoin wallet quick start example")))((("confirmations", see="also mining and consensus; transactions")))((("clearing", seealso="confirmations")))At first, Alice's address will show the transaction from Joe as "Unconfirmed." This means that the transaction has been propagated to the network but has not yet been recorded in the bitcoin transaction ledger, known as the blockchain. To be confirmed, a transaction must be included in a block and added to the blockchain, which happens every 10 minutes, on average. In traditional financial terms this is known as _clearing_. For more details on propagation, validation, and clearing (confirmation) of bitcoin transactions, see <<mining>>.
|
||
****
|
||
|
||
Alice is now the proud owner of 0.001 BTC that she can spend. Over the next few days, Alice buys more bitcoin using an ATM and an exchange. In the next chapter we will look at her first purchase with bitcoin, and examine the underlying transaction and propagation technologies in more detail.((("", startref="BCbasic01")))
|