{"id":338,"date":"2012-09-16T01:00:00","date_gmt":"2012-09-15T23:00:00","guid":{"rendered":"https:\/\/www.fussylogic.co.uk\/blog\/?p=338"},"modified":"2012-11-17T10:46:51","modified_gmt":"2012-11-17T10:46:51","slug":"bitcoin-explained-iv","status":"publish","type":"post","link":"https:\/\/www.fussylogic.co.uk\/blog\/?p=338","title":{"rendered":"Bitcoin Explained (IV)"},"content":{"rendered":"

This is part IV<\/a> in my \u00e2\u20ac\u0153Bitcoin Explained\u00e2\u20ac\u009d series.<\/p>\n

At the end of part III<\/a> we saw that the Bitcoin network\u00e2\u20ac\u2122s primary function is to act as a peer to peer timestamping system. That the blocks could, in principle, verify any data its operators wished.<\/p>\n

The catch of course is that those operators need an incentive to operate that system. There is nowhere near enough demand for verifying lost works of copyright music, photographs of cheques, or preventing contract fraud to encourage people to dedicate their computing resources to running such a timestamping network. In that sense then, it is absolutely necessary that the primary application for a peer to peer timestamping system like Bitcoin must be financial. What\u00e2\u20ac\u2122s more, some of that finance must be diverted to the node operators; or more particularly, the miners (the non-miners in the network are connected for their own benefit\/interest, rather than for monetary reward).<\/p>\n

We\u00e2\u20ac\u2122re therefore going to move on to talking about how the Bitcoin block chain is used to implement the bitcoin currency. We\u00e2\u20ac\u2122re going to be concerned almost entirely with the payload part of the blocks now; with only the connection between block and payload relevant to us. The payload of the Bitcoin block chain\u00e2\u20ac\u2122s block is a list of bitcoin transactions. A hash (of special type) of that payload is included in the block header \u00e2\u20ac\u201d no more. From a certain perspective, the block payload is only<\/em> that special hash; but as a convenience the entire list of transactions is available from the nodes as well.<\/p>\n

Let\u00e2\u20ac\u2122s get the reward out of the way quickly. Being the creator of a block gets you one special ability that nobody else has. You gain the ability to write the first entry in the transaction list and<\/em> you get to write it as a special type of transaction; one that generates coins from nowhere (for now). That then is your incentive to contribute your computing power to the network: if you are the miner that finds the block, you get to keep those freshly generated coins. Now: you can\u00e2\u20ac\u2122t just generate any number of coins you like, the other nodes in the network will simply reject your block. You can (for now) give yourself fifty coins. There is more to say on this, but it can wait until a later article; all we need for now is that there is an incentive, and simultaneously (and more importantly) a way in which new coins enter the bitcoin economy.<\/p>\n

Let\u00e2\u20ac\u2122s leave Bitcoin for a little while, and talk about public key cryptography. In particular cryptographic signatures. Digital signatures and public key encryption go mathematically hand in hand. Public key cryptography is typified (regardless of the underlying mathematics) by having two-part keys: a public part and a private part. These two parts are inseparably joined, they are only valid as a pair. There is no particular mystique about them, fundamentally they are two long numbers. Usually long numbers like these are represented using hexadecimal for computer systems; so they look scary to non-computer scientists. You shouldn\u00e2\u20ac\u2122t be scared: they really are just numbers, and in general the user doesn\u00e2\u20ac\u2122t have much to do with them \u00e2\u20ac\u201d they\u00e2\u20ac\u2122re usually just stored in a file. From a user perspective though, here\u00e2\u20ac\u2122s what you need to know:<\/p>\n