Bitcoin Wallets, Bitcoin Transactions, Miners and The Blockchain
Our Bitcoin Tutorial will take you quickly through the basic operations of Bitcoin. Bitcoin allows people to carry out transactions without the need for traditional intermediaries, such as Banks or credit card companies. We are all used to keeping our credit cards and banknotes in physical wallets, and bitcoin actually replicates the use of Wallets. However Bitcoin Wallets are not made of leather or nylon, they are digital apps that you keep on your computer or smartphone. To protect your privacy, most Bitcoin Wallets can easily be setup to generate a completely new and apparently random Bitcoin address every time you receive Bitcoin. Each bitcoin address is a shortened version of something known in cryptology as a ‘Public Key’.
The best place to find a trustworthy Bitcoin Wallet, is from the Bitcoin.org website. Navigate to Bitcoin.org and have a look at some of the Wallets they recommend. Bitcoin.org lists trustworthy Cryptocurrency exchanges, where you can exchange your local currency for Bitcoin.
When you first install your Bitcoin Wallet on your Computer or Smartphone, it will generate a set of Private Keys, usually around sixty four characters in length, made from a mixture of both letters and numbers.
You don’t need to do anything with your Private Keys, except keep them safe and confidential. Your Private keys mathematically generate your Wallet’s Public Keys, and a set of unique Bitcoin addresses which are used to receive Bitcoins. Importantly, the mathematical process that creates your Bitcoin Addresses from your Private Keys cannot be reversed. This means it’s impossible for anyone with a list of your Wallet’s Bitcoin Addresses – to work out in reverse what your Private Keys are. All of the Bitcoin Addresses that your Wallet generates will appear to be completely random.
Your Private keys are also used to authorize Bitcoin transactions leaving your wallet. Your Private Keys must always remain confidential to you alone, as losing your Private Keys could mean losing the contents of your Wallet.
The number of possible mathematical variations of each Private Key is a number larger than all the grains of sand on the Earth – combined. This immense number of possible variations for each Private Key prevents anyone or anything from simply guessing what your Private Keys actually are.
If someone discovered what your Private Key actually was, it would be possible to steal the Bitcoins stored in your Wallet, so it is essential that you never share your Private Key with anyone.
Sending Bitcoins To Another Wallet
Let’s look at what happens when Bitcoins are sent from one Bitcoin Wallet to another.
- In the Bitcoin Wallet of the person sending the Bitcoins, we simply enter the number of Bitcoins, and the destination Bitcoin Address.
- A very small transaction fee may also be deducted from the Senders wallet automatically, and included in this transaction. Although it’s not technically required to include a transaction fee, it does take far longer to process transactions without fees, and in reality today, fees are usually included.
- When we press the Send Button, the details of the transaction is published to the internet, where it is picked up by Computers called Miners.
- Each of these Bitcoin Mining Computers holds an identical copy of a single large file, containing all Bitcoin transactions, called the Blockchain Public Ledger. The Blockchain is not stored in any one place, it is distributed across hundreds of thousands of Mining Computers and some Bitcoin Wallet Applications across the entire Internet.
- As the Blockchain is updated with new Blocks of Bitcoin Transactions, it is updated across all of these Computers, all at the same time. The Blockchain is the distributed ledger technology at the heart of Bitcoin and many other cryptocurrencies.
- When a Bitcoin transaction is first sent, in both the Senders and Receiver’s Bitcoin Wallet’s the transaction will actually say ‘unconfirmed’ for some time, and the recipient will not be able to spend these Bitcoins.
- Every few minutes, all the latest unconfirmed bitcoin transactions are gathered together into a single block, usually containing a few hundred, to a couple of thousand individual bitcoin transactions. This new Block of transactions then poses a mathematical puzzle to Bitcoin Mining Computers who compete with each other to guess the correct answer that will unlock this new block of transactions. The puzzle that needs solving is to find a number that when combined with the data inside the block, produces a result that is within a certain range. This acts like a key, and unlocks the block. No advanced mathematics or computation is involved, it’s basically just guesswork.
- The first Miner to guess correctly will unlock the new block of transactions. When this happens, the Miner announces this to the other Miners on the Internet.
- The other miners then check that the solution to the block puzzle is correct, and that the Senders of the Bitcoin transactions included inside the block have the right to spend the included Bitcoins.
- For doing this work, the winning Miners receive a reward in Bitcoin. In order for Miners to earn Bitcoin rewards, they must verify at least one megabytes worth of transactions, and also be the first Miner to arrive at the right answer that unlocks a block puzzle. This is called “proof of work”.
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Confirming Bitcoin Transactions – Double Spending Problem
6 confirmed blocks – the ‘usual’ minimum.
Before the Bitcoin in the Recipients Wallet can actually be spent, the transaction must be at least six blocks deep within the Blockchain Public Ledger. This is an auditing technique which prevents the possibility of fraud called “double-spending”. By waiting until a further six blocks of transactions have been confirmed, this ensures that there has been no attempt to fraudulently spend the same Bitcoins in other transactions. Six confirmed blocks is the usual minimum for Confirming a Bitcoin Transaction, but for some Bitcoin Wallets or Exchanges, more confirmed blocks, sometimes twenty or more, will be required before the Bitcoin transaction is trusted and fully confirmed.
The length of time transactions take to be confirmed can vary from around an hour, to occasionally very much longer. It depends how many transactions, and Miners are operating. The time taken to confirm Bitcoin transactions may seem like a huge downside, when compared to something like a Credit card transaction. In reality however, Credit Card transactions take days to fully process through the Banking system, and then they can be disputed or reversed, whereas Bitcoin cannot. This is a very simple breakdown of how Bitcoin transactions work, but we’ve really only glanced over the the full technicalities. If you really want to delve into the technical aspects further, then you should start by reading the original Bitcoin paper, available from the official Bitcoin foundation website at Bitcoin.org There’s also good information available from the Bitcoin wiki: Bitcoin.it
Bitcoin vs. ‘Traditional Money’
In this Bitcoin For Beginners course from Learnbycartoon.com, we’re going to take an impartial look at the pros, cons, and potential pitfalls of Bitcoin. To begin, let’s compare Bitcoin to other common forms of currency, or perhaps transaction methods is a better term used today.
- Checks (Cheques)
- and Credit Cards.
Let’s begin with Bitcoin and compare the basic qualities of each transaction method.
Bitcoin exists entirely online. Even though it can be stored in a Bitcoin Wallet on a smartphone, it requires the internet to function. Bitcoin was designed for the digital world, so we’re going to give Bitcoin full marks in the Online Ready section.
Next, what Centralised Overseeing Authority stands behind Bitcoin? I don’t mean the Bitcoin Development Community, but rather an overseeing authority or institution, that has the legal power to step in, and alter the currency in a way that impacts its users.
- With Bitcoin there is no centralised controlling authority, such as a Financial Institution at all. Bitcoin requires only the Internet and its Network of Miners to function. However, a lot of Governments and Banks have their eye on Bitcoin.
So although there is no Central Authority, bitcoin users could potentially be affected in non-direct ways, such as future Government taxation, or Banking interference, especially when exchanging Bitcoin for local currencies, which does involve connecting to Banks. That’s something to keep an eye on.
What if something goes wrong with a transaction, or you are affected by fraud?
Excluding working through the legal system, what recourse is available to get your Bitcoin back? With Bitcoin, there is no central authority, and thus no recourse if you find yourself in a difficult situation. Once your Bitcoin leaves your Bitcoin Wallet, your Bitcoin is gone. You could approach the other party involved in the transaction, or the legal system, but that’s about it.
Next, every form of currency has a cost of use built into it. With Bitcoin, this used to be exceptionally low, only a few cents per transaction, but today this sometimes isn’t the case. As I record this in twenty eighteen, many people have recognised variable transaction fees as a weakness in Bitcoin.
Technically, you can send Bitcoin to another Wallet or online store, and not attach a transaction fee. However the Miners on the Internet that enable the entire system to function, tend to prioritise Bitcoin transactions that include fees. Transactions carrying no fees, or very low fees, can then get pushed backwards in the transaction queue. There have been cases where Bitcoin transactions with low fees attached, have sat in the ‘unconfirmed’ state, which basically means limbo, for days on end until the transaction is finally confirmed by the Miners. So currently, the cost of use for Bitcoin, can in fact vary from extremely low, to actually quite high, at least if you want your transaction processed quickly when the Bitcoin Network is busy.
This is an area that could improve through technology, or an expansion of the Mining Network, but we have to consider this a variable right now.
Next, let’s look at physical Cash. Banknotes and Coins. Cash is of course entirely physical. It is not online ready. As a country’s standard currency, cash is generally controlled at a high level by Governments. If you lose your Cash, then it’s gone, with no recourse to get it back. Cost of use does get a high score, as there is no transaction fees.
Next, we have checks. These are mostly physical, although some Banks allow the use of cellphone pictures of checks to enable digital processing. So some checks are partially online ready. The Authority controlling checks is of course the issuing Bank, and you do have recourse through your Bank if you have a problem with any check transaction, so that’s good. Cost of use is Medium, as Banks tend to either charge for checking accounts or check transactions.
Lastly, we have Credit Cards. As credit cards are used to swipe transactions electronically, and work equally well online, these are really a Digital Product. The Controlling Authority for credit cards is the Issuing Bank, and you also have recourse, should anything untoward happen with your card or a transaction. However, cost of use for Credit Cards, based on interest rates can be extremely high.
When you compare these transaction types, some preconceived ideas fall away. For example, credit cards have only existed since the year nineteen fifty. Everything at some time was brand new.
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