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Bitcoin infographic

How a Bitcoin transaction works

Bob, an online merchant, decides to begin accepting bitcoins as payment.
Alice, a buyer, has bitcoins and wants to purchase merchandise from Bob.

WALLETS AND ADDRESSES

Bob and Alice both have Bitcoin "wallets" on their computers

Wallets are files that provide access to multiple Bitcoin addresses.

An address is a string of letters and numbers such as LGULMwZEPkjEPeCH438ekjlybLCWropN

Each address has its own balance of bitcoins.

CREATING A NEW ADDRESS

-Bob creates a new Bitcoin address for Alice to send her payment to.

SUBMITTING A PAYMENT

-Alice tells her
Bitcoin client
that shed like
to transfer
the purchase
amount to
Bob’s address.

Private key Public Key

-Alice's wallet holds the private key for each of her addresses. The Bitcoin client signs her transaction request with the private key of the address she's transferring bitcoins from.

-Anyone on the network can now use
the public key to verify that the transaction
request is actually coming from the
legitimate account owner.

VERIFYING THE TRANSACTION

-Gari Garth and Glenn are Bitcoin miners.

-The computers bundle the transactions of the past 10 minutes into a new “transaction block”

-The miners’ computers are set up to calculate cryptographic hash functions.

>Cryptographic Hashes
Cryptographic hash functions
transform a collection of data into an
alphanumeric string with a fixed length,
called a hash value. Even tiny changes in
the original data drastically change the
resulting hash value. And it’s essentially
impossible to predict which initial data set
will create a specific hash value.

The root of all evil > 6d0a189g086a..(56 more characters)
The root of all evil >486c 6be4 6dde.
The root of all veil >b8db7eegB3g2

Nonces

-To create different hash values from the
same data, Bitcoin uses “nonces. A nonce is
just a random number that’s added to data
prior to hashing. Changing the nonce results
in a wildly different hash value.

Hash value +
• Each new hash value contains Information about all previous Bitcoin transactions.
+ Nonce > New hash value
+ Nonce > New hash value
+ Nonce > New hash value

-The mining computers
calculate new hash values
based on a combination of the
previous hash value, the new
transaction block, and a nonce.

The root of all evil??? > 0000 0000 0000...

-Creating hashes Is computationally
trivial, but the Bitcoin system requires
that the new hash value have a
particular form—specifically, it must
start with a certain number of zeros.

-The miners have no way to predict which nonce will produce a hash value with the required number of leading zeros. So they're forced to generate many hashes with different nonces until they happen upon one that works.

-Each block includes a coinbase transaction that pays out 50 bitcoins to the winning miner—in this case. Gary. A new address is created in Gary’s wallet with a balance of newly minted bitcoins.

TRANSACTION VERIFIED
-As time goes on. Alice’s transfer to Bob gets buried beneath other.
more recent transactions. For anyone to modify the details, he
would have to redo the work that Gary did—because any changes
require a completely different winning nonce—and then redo the
work of all the subsequent miners. Such a feat Is nearly impossible.



->Private key Public Key
-Public Key Cryptography 101
When Bob creates a new address,
what he’s really doing Is generating a
cryptographlc key pair, composed of
a private key and a public key. If you sign
a message with a private key (which only
you know), it can be verified by using the
matching public key (which is known
to anyone). Bob’s new Bitcoin address
represents a unique public key, and the
corresponding private key is stored in his
wallet. The public key allows anyone to
verify that a message signed with the
private key is valid.

->It’s tempting to think of addresses as bank
accounts, but they work a bit differently. Bitcoin
users can create as many addresses as they wish
and in fact are encouraged to create a new one
for every new transaction to increase privacy.
So long as no one knows which addresses are
Alice’s, her anonymity is protected.

Bitcoin infographic

shared by bpalacio@mac.com on May 24, 2012 in Technology

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Infographic explaining the steps in a Bitcoin transaction, and how security is built into the system, making it impenetrable to hackers.
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