Friday, September 19, 2014

Bitcoin and Digital Wallets

If you want to know about Bitcoin, you might find this post useful, for more information https://bitcoin.org.

Let's quote Bitcoin.org on what is bitcoin:

Bitcoin is a consensus network that enables a new payment system and a completely digital money. It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen. From a user perspective, Bitcoin is pretty much like cash for the Internet. Bitcoin can also be seen as the most prominent triple entry bookkeeping system in existence.

Satoshi Nakamoto

As you may know, Bitcoin was proposed by Satoshi Nakamoto[1], someone that nobody knows who he was but seems that he/she was a genius. On his paper[2] he proposes a system that wants to avoid financial institutions, therefore creating a decentralized trade system that has some interesting characteristics.

Bitcoin

Satoshi's paper proposes a system that:
  1. Removes the possibility of reversing transactions.
  2. Removes the need of trust by adding cryptographic functions on a peer to peer system.
  3. Proof-of-Work that establish an algorithm based on SHA256 that store transactions on a chain.
  4. Indirectly uses game theory to establish a network of nodes that work together to secure the network in exchange for new blocks (each generated block contains approximately 25 bitcoins.
  5. You are your own bank.
  6. Removes most of the fees that you may pay to a financial institutions

So let's see, how do i actually use this digital currency?

First of all you should download a wallet, there are several wallets, for novices i would recommend them to download Multibit or bitcoin-qt, although if you download bitcoin-qt you'll have to download around 30 GB of data containing all the information of the blockchain that stores all bitcoin transactions, for expert users i'll recommend using Armory.

After you download Multibit, you'll be able to make a "wallet" where people can send your bitcoins and you'll be able to send them as well. It will be as easy as writing down the address that you want to send the bitcoins and sending it.

But wait, what is this blockchain thing?

block chain is a transaction database shared by all nodes participating in a system based on the Bitcoin protocol. A full copy of a currency's block chain contains every transaction ever executed in the currency. With this information, one can find out how much value belonged to each address at any point in history. - Bitcoin.org[3]

How do you get dem bitcoins?

There are several methods of getting bitcoins, the most popular are:

Mining 
Mining them your self. It was possible in the past to use CPUs to do the proof of work using programs like cgminer, then cpu became obsolete as GPU came to dominate the market and at last ASIC came to take over GPUS and are the only viable way to mine bitcoins at the moment.

Bitcoin gambling
Sites like primedice, where you'll get free amounts of btc to start gambling, you can deposit btc and play higher bets, etc.. take a look, even a newbie can figure it out.

Trading sites 
You can actually trade btc using a middle man, those are exchange sites like Bitstamp or btc-e, you might have to pay fees when using such trading sites for buying or selling bitcoins.

Wallets

Each wallet is unique and your wallet will have 2 keys, a public key and private key. For an wallet example 12NXRguKpxyjrz2bwDr8J3aediRjRD57Gd where that address belongs to me and is unique.

Each address have a private key and a public key, having access to the private key means that you can spend the bitcoins that are inside of your wallet, most users wont notice this but you'll have to learn about cryptography to secure your wallet from hackers or anybody that want to steal your bitcoins and for proving that you actually own an address when you sign a message with your private key. YOU'll never give away the private key, (it is safe to reveal your public key) although you can sign messages and prove that you own an specific bitcoin address. The private key will be used automatically if you have it attached to your wallet, in case that you restore your wallet but do not import the private key, you won't be able to use your wallet.

Confirmations

Each bitcoin transaction needs to be accepted by the miners and added to the blockchain, you have to pay a small fee to the network so that the miners have an incentive onto adding your transaction to the blockchain. The fee is around 0.0001 BTC, its important to know that if you do not pay a fee to the network, your transaction might take weeks to arrive. After any amount of btc is sent, you'll have to wait at least 6 confirmations, in other words, you'll have to wait that at least 6 blocks are found to be sure that the transaction was done successfully. For example, you'll send bitcoins from your wallet to a friend's wallet, after sending it with the client, he'll see the funds received but waiting on confirmations, after confirmations are done then he will be able to use the funds that you sent him.


Other cryptocurrencies

  1. The second cryptocurrency that is well known is litecoin, it uses scrypt algorithm instead of SHA256 for the proof-of-work. For an in depth comparison of bitcoin and litecoin: https://litecoin.info/Comparison_between_Litecoin_and_Bitcoin
  2. Dogecoin
  3. Darkcoin
  4. Sexcoin
  5. ...


References

[2] - Satoshi Nakamoto's paper - https://bitcoin.org/bitcoin.pdf
[3] - Bitcoin Blockchain - https://en.bitcoin.it/wiki/Block_chain
[4] - ASIC - http://en.wikipedia.org/wiki/Application-specific_integrated_circuit

This post will be updated for: correcting errors, adding more content, etc.
If you wish to donate some coins: 1HhS7VMqP9UFhTzqWrUkH9bHBKY3KBK2gD


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