Bitcoin (₿) is the most well-known cryptocurrency and there are a lot of other cryptocurrencies. As of December 28, 2019, there are a least 4,972 cryptocurrencies according to coinmarketcap. [1] Bitcoin was invented in 2008 by an unknown person or group of people using the name Satoshi Nakamoto [2] and started in 2009 when its source code was released as open-source software.[3] There are five (5) main components of a cryptocurrency and I describe Bitcoin since it is most widely known but you can create your own.
- Public-private key encryption
Public and Private encryption helps to encrypt data to ensures information is protected during transmission. Both public and private keys are very long random numbers.
A Bitcoin address [4] is the public portion (anyone can see) of a public/private key pair and a private key is a secret number that allows bitcoins to be spent.
Every Bitcoin wallet contains one or more private keys, which are saved in the wallet file. All the private keys generated by the wallet’s address are mathematically related.
Because the private key is the “ticket” that allows someone to spend bitcoins, it is important that these are kept secret and safe. Private keys can be kept on computer files, but are can be written to on a piece of paper – secret bank account number.
- Transactions
A cryptocurrency is a chain of digital signatures that is written to a special ledger/database. The transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain.
- Timestamp Server
The timestamp proves that the data must have existed at the time. Each timestamp includes the previous timestamp in its hash, forming a chain, with each additional timestamp reinforcing the ones before it.
- Proof-of-Work Mining
To implement a distributed timestamp server on a peer-to-peer basis, we will need to use a proof-of-work system.[5] The proof-of-work involves scanning for a value that when hashed, such as with SHA-256, the hash begins with a number of zero bits.
Bitcoin mining is done by specialized computers. The role of miners is to secure the network and to process every Bitcoin transaction. Miners achieve this by solving a computational problem which allows them to chain together blocks of transactions (hence Bitcoin’s famous “blockchain”). For this service, miners are rewarded with newly-created Bitcoins and transaction fees.
- Network
The steps to run the network are:
- New transactions are broadcast to all nodes
(special computer).
- Each node collects new transactions into a block.
- Each node works on finding a difficult proof-of-work for its block.
- When a node finds a proof-of-work, it broadcasts the block to all nodes.
- Nodes accept the block only if all transactions in it are valid and not already spent.
- Nodes express their acceptance of the block by working on creating the next block in the chain, using the hash (a unique ID) of the accepted block as the previous hash.
- Process is repeated
[1] https://coinmarketcap.com/all/views/all/
[2] https://bitcoin.org/bitcoin.pdf
[3] https://bitcoincore.org/en/about/
[4] There are currently three bitcoin address formats in use. There are 460 million addresses today according to Chainalysis.
- P2PKH which begin with the number 1,
1BvBMSEYstWetqTFn5Au4m4GFg7xJaNVN2.
- P2SH type starting with the number 3,
3J98t1WpEZ73CNmQviecrnyiWrnqRhWNLy.
- Bech32 type starting with bc1,
bc1qar0srrr7xfkvy5l643lydnw9re59gtzzwf5mdq.
[5] Hashcash is a proof-of-work system used to limit email spam and denial-of-service attacks created in 1997 by Adam Back – “Hashcash – A Denial of Service Counter-Measure”.