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simple bitcoin .pdf


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A​ ​Simple​ ​Explanation​ ​of​ ​Bitcoin
Consider​ ​“traditional”​ ​electronic​ ​currency,​ ​such​ ​as​ ​PayPal.​ ​There​ ​is​ ​a​ ​database
controlled​ ​by​ ​a​ ​central​ ​entity​ ​(in​ ​this​ ​example,​ ​PayPal)​ ​which​ ​contains​ ​your​ ​username,
password,​ ​and​ ​amount.​ ​To​ ​transfer​ ​some​ ​amount​ ​to​ ​another​ ​user,​ ​you​ ​have​ ​to​ ​prove​ ​ownership
of​ ​the​ ​sending​ ​account​ ​by​ ​providing​ ​your​ ​username​ ​and​ ​password.​ ​The​ ​entity​ ​will​ ​then​ ​alter​ ​the
database​ ​by​ ​subtracting​ ​the​ ​amount​ ​sent​ ​from​ ​your​ ​account​ ​and​ ​adding​ ​it​ ​to​ ​the​ ​account​ ​of​ ​the
receiver.
There​ ​are​ ​some​ ​problems​ ​with​ ​this​ ​model.​ ​First,​ ​if​ ​the​ ​entity​ ​goes​ ​down,​ ​there​ ​is​ ​no​ ​way
to​ ​access​ ​your​ ​funds.​ ​For​ ​instance,​ ​if​ ​the​ ​U.S.​ ​government​ ​decided​ ​to​ ​seize​ ​PayPal’s​ ​servers,
your​ ​funds​ ​would​ ​be​ ​in​ ​limbo​ ​for​ ​an​ ​indeterminate​ ​amount​ ​of​ ​time.​ ​Second,​ ​the​ ​database​ ​can​ ​be
edited​ ​by​ ​the​ ​controlling​ ​entity.​ ​This​ ​means​ ​that​ ​they​ ​can​ ​seize​ ​funds​ ​from​ ​your​ ​account,​ ​and​ ​it
also​ ​means​ ​that​ ​they​ ​can​ ​create​ ​or​ ​destroy​ ​money​ ​as​ ​they​ ​please.​ ​Third,​ ​the​ ​controlling​ ​entity
can​ ​deny​ ​the​ ​sending​ ​or​ ​receiving​ ​of​ ​funds.​ ​This​ ​means​ ​that​ ​your​ ​donation​ ​to​ ​Snowden​ ​(who
PayPal​ ​doesn’t​ ​like)​ ​can​ ​be​ ​blocked,​ ​and​ ​payments​ ​from​ ​Snowden​ ​to​ ​you​ ​can​ ​also​ ​be​ ​blocked.
All​ ​of​ ​the​ ​problems​ ​above​ ​stemmed​ ​from​ ​the​ ​fact​ ​that​ ​one​ ​single​ ​entity​ ​controlled​ ​the
database.​ ​So​ ​how​ ​do​ ​we​ ​fix​ ​this?​ ​We​ ​give​ ​everybody​ ​a​ ​copy​ ​of​ ​the​ ​database.​ ​Whenever​ ​we
make​ ​a​ ​change​ ​to​ ​the​ ​database,​ ​we​ ​tell​ ​other​ ​people​ ​around​ ​us.​ ​These​ ​people​ ​will​ ​go​ ​on​ ​to​ ​tell
people​ ​around​ ​them​ ​about​ ​the​ ​changes,​ ​and​ ​very​ ​quickly,​ ​the​ ​entire​ ​network​ ​will​ ​be​ ​aware​ ​of​ ​the
change.​ ​In​ ​this​ ​way,​ ​we​ ​can​ ​cut​ ​out​ ​the​ ​middleman​ ​and​ ​create​ ​a​ ​trustless,​ ​permissionless
payment​ ​platform.
But​ ​wait!​ ​To​ ​send​ ​funds​ ​from​ ​an​ ​account,​ ​we​ ​need​ ​to​ ​prove​ ​ownership​ ​of​ ​it.​ ​But​ ​since
everybody​ ​has​ ​a​ ​copy​ ​of​ ​the​ ​database,​ ​your​ ​password​ ​would​ ​be​ ​available​ ​for​ ​everybody​ ​to​ ​see.
What​ ​we​ ​need​ ​is​ ​a​ ​way​ ​to​ ​prove​ ​we​ ​know​ ​the​ ​password​ ​without​ ​actually​ ​revealing​ ​the​ ​password.
This​ ​is​ ​where​ ​digital​ ​signatures​ ​come​ ​in.​ ​In​ ​this​ ​system,​ ​you​ ​have​ ​two​ ​keys:​ ​a​ ​public​ ​key​ ​(which

you​ ​make​ ​available​ ​to​ ​everybody),​ ​and​ ​a​ ​private​ ​key​ ​(which​ ​you​ ​keep​ ​to​ ​yourself).​ ​These​ ​keys
are​ ​mathematically​ ​linked​ ​is​ ​such​ ​a​ ​way​ ​that​ ​you​ ​can​ ​“sign”​ ​a​ ​message​ ​using​ ​your​ ​private​ ​key,
and​ ​others​ ​can​ ​“verify”​ ​it​ ​using​ ​your​ ​public​ ​key.​ ​Because​ ​every​ ​public​ ​key​ ​is​ ​associated​ ​with​ ​a
unique​ ​private​ ​key,​ ​we​ ​can​ ​make​ ​the​ ​public​ ​key​ ​your​ ​“username”​ ​and​ ​the​ ​private​ ​key​ ​your
“password”.​ ​If​ ​I​ ​wish​ ​to​ ​authenticate​ ​with​ ​someone,​ ​all​ ​I​ ​have​ ​to​ ​do​ ​is​ ​sign​ ​an​ ​agreed-upon
message​ ​with​ ​my​ ​private​ ​key.​ ​The​ ​other​ ​person​ ​can​ ​verify​ ​the​ ​result​ ​with​ ​my​ ​public​ ​key.
At​ ​this​ ​point,​ ​Satoshi​ ​(the​ ​creator​ ​of​ ​Bitcoin)​ ​could​ ​have​ ​make​ ​a​ ​spot​ ​for​ ​the​ ​signature​ ​in
every​ ​transaction​ ​and​ ​called​ ​it​ ​a​ ​day.​ ​But​ ​his​ ​true​ ​genius​ ​was​ ​implementing​ ​a​ ​scripting​ ​system​ ​to
authenticate​ ​transactions.​ ​By​ ​doing​ ​this,​ ​he​ ​allowed​ ​users​ ​to​ ​program​ ​the​ ​conditions​ ​under
which​ ​the​ ​funds​ ​would​ ​be​ ​unlocked.​ ​So​ ​while​ ​the​ ​majority​ ​of​ ​transactions​ ​today​ ​simply​ ​include​ ​a
program​ ​to​ ​push​ ​and​ ​check​ ​the​ ​signature,​ ​there​ ​have​ ​been​ ​a​ ​handful​ ​of​ ​very​ ​cool​ ​programs
written​ ​to​ ​execute​ ​on​ ​the​ ​blockchain.​ ​See​ ​some​ ​of​ ​them​ ​at
https://medium.com/@alcio/a-look-at-bitcoin-non-standard-outputs-c97f65cccbb6​.
Today,​ ​there​ ​are​ ​other​ ​cryptocurrencies​ ​that​ ​have​ ​built-off​ ​and​ ​extended​ ​Bitcoin.
Ethereum​ ​allows​ ​the​ ​script​ ​to​ ​be​ ​written​ ​in​ ​a​ ​python-like​ ​language​ ​called​ ​Solidity.​ ​Solidity​ ​has
many​ ​advanced​ ​features​ ​that​ ​allows​ ​things​ ​like​ ​building​ ​your​ ​own​ ​currency​ ​on​ ​top​ ​of​ ​the
Ethereum​ ​blockchain​ ​and​ ​automatic,​ ​recurring​ ​payments.​ ​Monero​ ​provides​ ​privacy​ ​and
fungibility​ ​by​ ​obfuscating​ ​the​ ​sender,​ ​receiver,​ ​amount,​ ​and​ ​(soon)​ ​IP​ ​of​ ​transactions.​ ​There​ ​are
infinitely​ ​more​ ​cryptocurrencies​ ​that​ ​I​ ​could​ ​discuss,​ ​but​ ​what​ ​is​ ​important​ ​to​ ​understand​ ​is​ ​that
they​ ​are​ ​all​ ​based​ ​on​ ​the​ ​principles​ ​of​ ​Bitcoin:​ ​decentralized,​ ​trustless,​ ​permissionless​ ​digital
money.


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