Peter Kent - Bitcoin For Dummies

So, what does the node tell itself? It says, in effect: “This message, sending money from the address 1L7hHWfJL1dd7ZhQFgRv8ke1PTKAHoc9Tq, was sent by the private key that was used to create this same address so the address must have been sent by the person who owns the address and therefore owns the money associated with the address.”

We know this concept can be confusing and 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, they are verifying ownership and validating the transaction.

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

Okay, so maybe more people have 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 the private key legitimately or legally own it, but they can control it nonetheless. So, protect your private keys!

The public key is associated with the private key; in fact, it’s created from the private key. The address is associated with the public key; in fact, it’s created from the public key. So, all three are mathematically, and uniquely, associated with each other.

As we mention earlier, it’s the wallet that sends messages to the blockchain. But it’s more than that. The wallet is where everything begins as far as your Bitcoin is concerned. When you create a wallet file, the wallet software creates 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 Bitcoin. You can give the address to someone from whom you’re buying Bitcoin or to an exchange, for example, and they can send the Bitcoin to that address — in other words, they send a message to the blockchain saying, “Send x amount of Bitcoin from address x to address y .” Now the address exists in the blockchain, and it has Bitcoin 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 stores your private and public keys.

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

It uses your public keys to create addresses you can give to other people when they need to send Bitcoin to you.

There’s lots more to find out about wallets; you can discover more about them in Chapter 4.

Here’s a quick summary and an image (see Figure 2-4) to reiterate the wallet’s role and to help you put it all together:

1 Bitcoin is stored in the blockchain.

2 Your Bitcoin is associated with an address in the blockchain.

3 That address is mathematically associated with a public key.

4 The public key is mathematically associated with a private key.

5 Those keys are stored in your wallet.

FIGURE 2-4:The Bitcoin 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.

Part 2

IN THIS PART …

Making your first small Bitcoin purchases

Understanding how to work with exchanges

Setting up and managing your own Bitcoin wallet

Learning the secrets to keeping your Bitcoin safe

Investing in Bitcoin and other cryptocurrencies

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