Bitcoin Internals: A Technical Guide to Bitcoin

Bitcoin Internals: A Technical Guide to Bitcoin

Language: English

Pages: 49


Format: PDF / Kindle (mobi) / ePub

"There are three eras of currency: Commodity-based, politically-based, and now, math-based." - Chris Dixon, Internet Entrepreneur and Investor (as quoted by

"Bitcoin will do to banks what email did to the postal industry" - Rick Falkvinge, IT Entrepreneur

Bitcoin is a revolutionary new digital currency that has the potential to create a paradigm shift in money and banking. No government or corporation controls Bitcoin; it's operated by a decentralized network of computers that anyone can join. This is the first time the world has ever seen such a radically new monetary system. But to fully appreciate Bitcoin, you need to see what's going on under the hood.

"[Bitcoin] is a techno tour de force." - Bill Gates, Founder of Microsoft

Bitcoin Internals will guide you through the inner workings of the Bitcoin system, exposing its brilliant design and all the underlying technologies that make it possible. You'll learn

  • how the Blockchain records ownership of Bitcoins and prevents double-spending
  • the cryptographic techniques used for transaction processing
  • how solving a proof of work problem can create new money in mining
  • the precursors that led to the development of Bitcoin
  • and much more

















Using Bitcoin 2.1 Wallets To get started with Bitcoin, you need a wallet to hold your bitcoins. See for a list of options. The options for obtaining a wallet are: Running a bitcoin client on your computer or smartphone (clients come with wallets). Using a service that manages your wallet for you. Using a service may be somewhat easier, but you really have to trust the service because they can potentially lose or steal your bitcoins. Since transactions

are offline electronic devices that store keys in a micro-controller’s memory. Because they are not connected to the internet and often require a user’s confirmation of each transaction on the device, they are much harder to hack. To use a hardware wallet, you setup a payment on your computer and then plug the device into a USB port. The software on your computer will request the keys from the device and wait for you to confirm the transaction by pressing a button on the device. Then the device

has to issue the tokens and in method 2, somebody has to maintain the ledger. If anyone can issue tokens or edit the ledger, then the system is bound to fail. Bitcoin uses the ledger-based method, but it manages to work due to a novel method that allows a distributed network of untrusted peers to maintain a trustworthy ledger. Bitcoin’s ledger, known as the block chain, can be thought of as a record of receipts for all transactions that have ever occurred in the Bitcoin system. Unlike a typical

bank’s ledger, it doesn’t contain any account balances. Rather than recording a quantity of bitcoins for each owner, it records an owner for each quantity of bitcoins transacted. The owner is just the recipient listed on the transaction receipt in the block chain (until the bitcoins in that transaction are spent). To spend bitcoins, the owner creates a new transaction that takes the bitcoins from a prior transaction (one that was sent to the owner) and assigns them to someone else. The owner is

addresses. This allows a transaction to pull money from multiple sources, pool it together, and then distribute it to multiple destinations. Of course, any transaction that distributes more money than it pulls in will be considered invalid and will be ignored (except coinbase transactions that will be explained later). The nVersion variable is a version number for the transaction so that the peer-to-peer network can still function even when different nodes have different versions of the Bitcoin

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