DAY 2
CHAPTER 1
How Bitcoins Work
Bitcoins are completely virtual coins
designed to be 'self- contained' for their
value, with no need for banks to move
and store the money. Once you own
bitcoins, they behave like physical gold
coins: they possess value and trade just
as if they were nuggets of gold in your
pocket.
In order to engage in a transaction with
bitcoins, you will have to acquire a
bitcoin address which will serve as a bank
account where you can receive, store and
send bitcoin units. Rather than having
your bitcoin units stored inside a secured
vault, they are protected with a public
key setup.
In particular a code is used to
ensure that your bitcoin unit will be in
your name. All bitcoin addresses consist
of both a public key which is visible to
everyone and a private key which the
user needs to keep as a secret. Anybody
can send or transfer bitcoin units to any
public key but only the owner or the
users who know the private key can
transfer bitcoins to other people or to
use them as payment for purchases of
goods or services.
But even if your bitcoin
address is made known to the public,
nobody really has to know that you own
that particular bitcoin address. This is the
reason why bitcoins are referred to as
“pseudonymous.” The address can
particularly be used as a means of listing
information on what it is and to show
that it is an authentic bitcoin. The only
key is that you will hold the rights to that
particular bitcoin if you have bought it,
taken care of a transaction with it or
have actually mined it yourself.
What Is a Bitcoin Made of?
Bitcoin, at its core, is a very simple data
ledger file called a 'blockchain'. A
blockchain’s file size is quite small,
similar to the size of a long text message
on your smartphone.
Each bitcoin blockchain has three parts,
two of which are very simple: its
identifying address (of approximately 34
characters), and the history of who has
bought and sold it (the ledger).
The complex part of the bitcoin is its third
part: the private key header log. This
header is where a sophisticated digital
signature is captured to confirm each and
every transaction for that particular
bitcoin file. Each digital signature is
unique to each individual user and
his/her personal bitcoin wallet.
These signature keys are the security
system of bitcoins: every single trade of
bitcoin blockchains is tracked and tagged
and publicly disclosed, with each
participant's digital signature attached to
the bitcoin blockchain as a 'confirmation'.
These digital signatures, when given
several seconds to confirm their
transactions across the network, prevent
transactions from being duplicated and
people from forging bitcoins.
Note: while every bitcoin
records the digital address of
every bitcoin wallet it
touches, the bitcoin system
does NOTrecord the names
of the individuals who own
wallets. In practical terms,
this means that every bitcoin
transaction is digitally
confirmed but is completely
anonymous at the same time.
Your bitcoins are stored on a computer
device of your choice, but the history of
each bitcoin you own or spend is publicly
stored on the bitcoin network, and every
user will be able to see every bitcoin's
history.
Next Topic
Who Makes Bitcoins?
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