Peter Kent - Cryptocurrency Mining For Dummies

So, the node — a computer containing a copy of the cryptocurrency blockchain — receives the message. It takes the public key that has been attached and decrypts the message. The node learns something: “This message must have been encrypted — signed — by the private key associated with the public key.” Of course, that’s not really saying much. It’s virtually a tautology! By definition, if the public key can decrypt a message, the message must have been encrypted with the matching private key. Whoop-de-doo.

But remember, the public key is mathematically associated with the address 1L7hHWfJL1dd7ZhQFgRv8ke1PTKAHoc9Tq. So now the node can examine the two, asking in effect “Is the public key associated with the address?” If the answer is yes, then the node also knows that the private key is associated with the address (all three are uniquely associated with each other). So, what does the node tell itself?

“This message, sending money from 1L7hHWfJL1dd7ZhQFgRv8ke1PTKAHoc9Tq, was sent by the private key that was used to create this address … so the address must have been sent by the person who owns the address and therefore owns the money associated with the address.”

I know this concept can be confusing; it’s hard to “get your head around.” So here’s another way to think about it: The only person who could have sent an encrypted message with transaction instructions for this address along with the public key that originally created the address is the person controlling the associated private key — that is, the owner of the address and the money associated with it, thus verifying ownership and validating the transaction.

Okay, so maybe there are more people with access to the key. But as far as the technology is concerned, it doesn’t matter. Whoever has access to the private key has the cryptographic right to control the money assigned to the blockchain address associated with the key. You may hear the phrase “whoever has the private key owns the money” or “not your private key, not your Bitcoin.” They may not have acquired it legitimately or legally own it, but they can control it nonetheless. So, protect your private keys!

Some cryptocurrencies are more anonymous than others. Bitcoin, for example, is often termed pseudonymous because it’s only partially anonymous. Imagine that someone subpoenas transaction records from an exchange and discovers that you purchased a couple of Bitcoin on the exchange and your identity was tied to those transactions via AML (anti-money laundering) and KYC (know your customer) data collection procedures required by law in the United States (and other countries). They’ll have the address that the exchange used to store those Bitcoin, right? Well, now they can trace the transactions from that address through the blockchain using a blockchain explorer. And different addresses can be associated with each other in certain ways, so it would be possible for someone with the information — a tax authority, for example, or police agency — from a single starting point, to create a picture of a person’s Bitcoin transactions. So, Bitcoin as it is commonly used today is not fully anonymous. Other currencies, such as Monero or Zcash, claim to get much closer to true anonymity. However, improvements to Bitcoin, such as conjoin and Layer 2, are likely to make Bitcoin more anonymous in the future.

So that’s the crypto in cryptocurrency! You can control money in the blockchain anonymously through the use of cryptography, using public and private key pairs and associated addresses, by cryptographically signing messages.

The following sections take a look at how the basic components of cryptocurrency fit together.

The wallet is where everything begins as far as your cryptocurrency is concerned. When you create a wallet file, the wallet software will create a private key. That private key is used to create a public key, and the public key is used to create an address. The address has never before existed in the blockchain and still doesn’t exist in the blockchain yet.

After you have an address, you have a way to store cryptocurrency. You can give the address to someone from whom you’re buying cryptocurrency or an exchange, for example, and they can send the cryptocurrency to that address — in other words, they send a message to the blockchain saying “Send x amount of crypto to address x .” Now the address exists in the blockchain, and it has cryptocurrency associated with it.

A wallet program is a messaging program that stores your keys and addresses in a wallet file. The wallet program does these primary things:

It retrieves data from the blockchain about your transactions and balance.

It sends messages to the blockchain transferring your crypto from your addresses to other addresses, such as when you make a purchase using your cryptocurrency.

It creates addresses you can give to other people when they need to send cryptocurrency to you.

The private key in your wallet is used to create the public key that is used to unencrypt your messages sent to the blockchain. Private keys must be kept private; anyone with access to the private key has access to your money in the blockchain.

Public keys are also used to create addresses. The first time an address is used, someone’s wallet software sends a message to the blockchain saying “Send x amount of cryptocurrency to address x from address y. ” Until this point, the address did not exist in the blockchain. After the wallet software has sent the message, though, the address is in the blockchain, and money is associated with it.

The private key controlling the address is a hugely critical concept in cryptocurrency, and people who lose access to their cryptocurrency, or have their cryptocurrency stolen, don’t understand this (see Figure 1-4). In this book, we won’t be going into detail about protecting private keys, but make sure you protect your private keys! Don’t lose them and don’t let other people discover them!

FIGURE 1-4:The cryptocurrency is associated with an address in the blockchain; the address is derived from the public key, which is associated with a private key … which is kept safe in a wallet.

A fork occurs when one cryptocurrency splits into two. That is, the network nodes fall out of consensus, and a copy is made of the cryptocurrency software, a change is made to the copy, and the two different software sets then build separate blockchains Thus, for example, in January 2015, a copy of the DASH code, named DNET, was made. Both DASH and DNET then continued development as separate cryptocurrencies, and DNET was later renamed PIVX (Private Instant Verified Transaction).