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I’m an engineer, aspiring entrepreneur, this is where I write interesting things I’ve learned. What is Bitcoin at a high level? First, a brief high-level overview of what Bitcoin is. At its core, Bitcoin is just a digital file that lists accounts and money like a ledger. A copy of this file is maintained on every computer in the Bitcoin network. These numbers don’t represent anything in the physical world, they only have value because people are willing to trade real goods and services for a higher number next to their account, and believe that others will do the same.

To send money, you broadcast to the network that the amount on your account should go down, and the amount on a receiver’s account up. Nodes, or computers, in the Bitcoin network apply that transaction to their copy of the ledger, and then pass on the transaction to other nodes. This, with some math-based security, is really all there is–a system that lets a group of computers maintain a ledger. While this may sound similar to the way a bank maintains a ledger, the fact that the ledger is maintained by a group rather than a single entity introduces a number of important differences.

For one, unlike at a bank where you only know about your own transactions, in Bitcoin, everyone knows about everyone else’s transactions. Also, while you can trust your bank, or can at least sue it if something goes wrong, in Bitcoin, you’re dealing with anonymous strangers, so you shouldn’t trust anyone. The Bitcoin system is amazingly designed so that no trust is needed–special mathematical functions protect every aspect of the system. The rest of this entry will explain in detail how Bitcoin allows such a group of strangers to manage each other’s financial transactions. 0 BTC from Alice to Bob. Every node that receives it will update their copy of the ledger, and then pass along the transaction message.

But how can the nodes be sure that the request is authentic, that only the rightful owner has sent the message? Like a real handwritten signature, it proves the authenticity of a message, but it does so through a mathematical algorithm that prevents copying or forgery in the digital realm. Unlike a simple static password, a completely different Digital Signature is required for every transaction. Keep in mind that in Bitcoin, you’re dealing with complete strangers, so you never want to reveal a password that could be copied and reused by someone else. You can think of the private key as the true password, and the signature as an intermediary that proves you have the password without requiring you to reveal it.

Bitcoin, so when you send someone money, you’re really sending it to their public key. To spend money, you must prove that you’re the true owner of a public key address where money was sent, and you do that by generating a Digital Signature from a transaction message and your private key. Other nodes in the network can use that signature in a different function to verify that it corresponds with your public key. Through the math behind the Digital Signature, they are able to verify that the sender owned a private key without actually seeing it. Importantly, because the signature depends on the message, it will be different for every transaction, and therefore can’t be reused by someone for a different transaction. This dependence on the message also means that no one can modify the message while passing it along the network, as any changes to the message would invalidate the signature. More at the end of the video.

So far, we know that Digital Signatures are used to ensure a transaction is authorized, but I’ve over-simplified how nodes in the network keep track of account balances. In fact, no records of account balances are kept at all. If you don’t keep track of how much money any given person has, how do you know if they have enough to send to someone else? Instead of balances, ownership of funds is verified through links to previous transactions. 0 BTC to Bob, Alice must reference other transactions where she received 5 or more Bitcoins.

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