Bitcoin—an overview

Since its introduction in 2008 by Satoshi Nakamoto, Bitcoin has gained immense popularity and is currently the most successful digital currency in the world, with billions of dollars invested in it. The current market cap at the time of writing for this currency is 702,565,989,960 USD.

Its popularity is also evident from the high number of users and investors, the increasing price of Bitcoin, daily news related to Bitcoin, and the many start-ups and companies that are offering Bitcoin-based online exchanges. It is now also traded as Bitcoin futures on the Chicago Mercantile Exchange (CME).

Interested readers can read more about Bitcoin futures at http://www.cmegroup.com/trading/bitcoin-futures.html.

It is built on decades of research in the field of cryptography, digital cash, and distributed computing. In the following section, a brief history is presented to provide the background required to understand the foundations behind the invention of Bitcoin. Digital...

Cryptographic keys

On the Bitcoin network, possession of Bitcoins and the transfer of value via transactions are reliant upon private keys, public keys, and addresses. Elliptic Curve Cryptography (ECC) is used to generate public and private key pairs in the Bitcoin network. We have already covered these concepts in Chapter 4, Public Key Cryptography, and here we will see how private and public keys are used in the Bitcoin network.

Private keys in Bitcoin

Private keys are required to be kept safe and normally reside only on the owner's side. Private keys are used to digitally sign the transactions, proving ownership of the bitcoins.

Private keys are fundamentally 256-bit numbers randomly chosen in the range specified by the SECP256K1 ECDSA curve recommendation. Any randomly chosen 256-bit number from 0x1 to 0xFFFF FFFF FFFF FFFF FFFF FFFF FFFF FFFE BAAE DCE6 AF48 A03B BFD2 5E8C D036 4140 is a valid private key.

Private keys are usually encoded using Wallet Import Format (WIF) in...

Transactions

Transactions are at the core of the Bitcoin ecosystem. Transactions can be as simple as just sending some bitcoins to a Bitcoin address, or can be quite complex, depending on the requirements. Each transaction is composed of at least one input and output. Inputs can be thought of as coins being spent that have been created in a previous transaction, and outputs as coins being created. If a transaction is minting new coins, then there is no input, and therefore no signature is needed. If a transaction should send coins to some other user (a Bitcoin address), then it needs to be signed by the sender with their private key. In this case, a reference is also required to the previous transaction to show the origin of the coins. Coins are unspent transaction outputs represented in Satoshis.

Transactions are not encrypted and are publicly visible on the blockchain. Blocks are made up of transactions, and these can be viewed using any online blockchain explorer.

The transaction...

Blockchain

As we discussed in Chapter 1, Blockchain 101, a blockchain is a distributed ledger of transactions. Specifically, from Bitcoin's perspective, the blockchain can be defined as a public, distributed ledger holding a timestamped, ordered, and immutable record of all transactions on the Bitcoin network. Transactions are picked up by miners and bundled into blocks for mining. Each block is identified by a hash and is linked to its previous block by referencing the previous block's hash in its header.

The data structure of a Bitcoin block is shown in the following table:

Field	Size	Description
Block size	4 bytes	The size of the block.
Block header	80 bytes	This includes fields from the block header described in the next section.
Transaction counter	Variable	The field contains the total number of transactions in the block, including the coinbase transaction. Size ranges from 1-9 bytes.
Transactions	Variable	All transactions in the block.

The block header mentioned...

Mining

Mining is a process by which new blocks are added to the blockchain. Blocks contain transactions that are validated via the mining process by mining nodes on the Bitcoin network. Blocks, once mined and verified, are added to the blockchain, which keeps the blockchain growing. This process is resource-intensive due to the requirements of PoW, where miners compete to find a number less than the difficulty target of the network. This difficulty in finding the correct value (also called sometimes the mathematical puzzle) is there to ensure that miners have spent the required resources before a new proposed block can be accepted. The miners mint new coins by solving the PoW problem, also known as the partial hash inversion problem. This process consumes a high expanse of resources, including computing power and electricity. This process also secures the system against fraud and double-spending attacks while adding more virtual currency to the Bitcoin ecosystem.

Roughly one new block...

Summary

This chapter started with an introduction to Bitcoin and explained how a transaction works from the user's point of view. Then, an introduction to transactions from a technical point of view was presented. After this, the public and private keys used in Bitcoin were discussed. In the next section, we introduced addresses and their different types, followed by a discussion on transactions and their types and usage.

Following on from this, we looked at blockchain, with a detailed explanation of how blockchain works and the various components included in the Bitcoin blockchain. In the last few sections of the chapter, mining processes and relevant concepts such as hardware systems, their limitations, and bitcoin rewards were introduced.

In the next chapter, we will examine concepts related to the Bitcoin network, its elements, and client software tools.

Bitcoin programming

Bitcoin programming is a very rich field. The Bitcoin Core client exposes various JSON-RPC commands that can be used to construct raw transactions and perform other functions via custom scripts or programs. Also, the command-line tool bitcoin-cli is available, which makes use of the JSON-RPC interface and provides a rich toolset to work with Bitcoin.

These APIs are also available via many online service providers in the form of Bitcoin APIs, and they provide a simple HTTP REST interface. Bitcoin APIs, such as blockchain.info (https://blockchain.info/api), BitPay (https://bitpay.com/api), block.io (https://www.block.io), and many others, offer a myriad of options to develop Bitcoin-based solutions.

Various libraries are available for Bitcoin programming. A list is shown as follows. Those of you who are interested can explore the libraries further:

• Libbitcoin: Available at https://libbitcoin.dyne.org/ and provides powerful command-line utilities...

Summary

In this chapter, we looked at Bitcoin payments and payment processors, along with some important Bitcoin innovations, which included topics such as BIPs and advanced Bitcoin protocols.

The chapter continued with an introduction to Bitcoin installation, followed by a discussion on source code setup and how to set up Bitcoin clients for various networks. After this, we examined various command-line options available in Bitcoin clients. Lastly, we saw which APIs are available for Bitcoin programming and the main points to keep in mind while evaluating APIs for usage.

In the next chapter, we’ll introduce smart contracts, which are an integral element of programmable blockchains and allow programmers to write programs that are stored on blockchain and implement business logic on the chain.

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