Bitcoin infographic

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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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.