Understanding Bitcoin

Bitcoin vs Fiat money

Bitcoin solves the Double Spending Problem

  • Cryptography — Cryptography is a branch of computer science that provides techniques to protect information. It’s all about secure communication safe from attackers and is at the heart of the Bitcoin protocol. Originated from Greek words ‘kryptos’ (hidden/secret) and ‘graphien’ (to write).
  • Public-private key pair: Two random strings mathematically linked are used to encrypt and decrypt messages. This is called asymmetric encryption where separate keys are required for encrypting and decrypting the message. You make your public key public i.e., you share it with people so that they can send you encrypted messages. To decrypt the message you are required to use your private key which is private to you and only you have access to. You store your private key in a safe place.
  • Hashing — Hashing is the process of converting any form of data into a unique fixed-size output that cannot be decrypted again. Hash functions are deterministic which means they will always produce the same output for any given input.
  • Digital signature — A mathematical technique to sign digital data using the private key and make it encrypted. Digital signatures confirm that the message originated from the right source with the signer’s approval and is not altered. The only way to decrypt and authenticate is to use the signer’s public key. This makes digital signatures tamper-proof and secure.

Bitcoin address

UTXO Model

Bitcoin uses the UTXO model, source Bitcoin whitepaper

Bitcoin Protocol: behind the scenes

  • Validate a transaction ensuring that bitcoin is legit
  • Once Validated, updating the state of the transaction to ‘pending’
  • Broadcast the transaction to nearby nodes via gossip protocol until each node in the network knows the transaction and moves it to ‘mempool’ (a pool of pending transactions)
Bitcoin chain of blocks, source Bitcoin whitepaper

Bitcoin transactions are public

Final Thoughts

  • Bitcoin whitepaper
  • The basics of Bitcoins and Blockchains — Antony Lewis

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Ronak Vijay

Ronak Vijay

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