Bitcoin FAQ

What is Bitcoin?

Cryptocurrency invented by anonymous author in 2008. White-paper is here: https://bitcoin.org/bitcoin.pdf

How does it work?

I will use analogy (copy-pasted from lurkmore.to/Bitcoin) to explain this. Imagine a golden coins with teleport built-in and public log of transactions.

There is no better analogy than that, so I will explain it in more detail:

• Golden coins - because overall count of bitcoins is fixed to 21 mega coins. New coins can be earned with slow speed via mining. Mining will completely stop in some point in future.

• With built-in teleport - because, like BitTorrent, it is hard to block bitcoin during it's distributed nature.

• And public log of transactions - because each node stores full list of transactions done since start of bitcoin network, forever, and this list is available for reading to anyone.

Bitcoin is opensource. It is based on opensource cryptographic functions (ECDSA for keys and SHA256 for Proof-of-Work).

Is there any centralized control of this?

No. It is distributed system. Let us compare the behavior of bitcoin and behavior of normal online pay system.

User A sends funds using normal online pay system. His computer asks server something like this: "Hello, here is me, please, transfer 5 bucks from me to the user B". Server decides to complete transfer, or refuse to complete.

With the bitcoins it goes different. User A creates a message like "I do transfer 0.0005 bitcoins to the user B". Than use private key corresponding to the wallet A to make a cryptographic signature. And send this signed message to every node. Each node decides on his own whether to include this transaction into list, or not.

So, if you want to shutdown the normal online pay system, it is as easy as shutdown the server. With bitcoin network you have to shutdown the network, which is harder to perform.

Bitcoin can suffer from "51 percent" attack. Another flaw is network segmentation in case of local internet disconnections when international internet lines are heavily filtered and censured (in near future).

What is a blockchain?

It is a way to protect public list from modifications. Sort of. If you modify a block, this will lead to block hash change. Any upper blocks become invalid and needs to be rehashed again.

What is mining?

It is a process of maintaining the network. Miners do create blocks containing new transactions and append it to the blockchain. Miners become profit from each block (new block reward + transaction fees). Proof of work is there to slow down the process of mining, so miners will not mine all blocks instantly. PoW difficulty gets auto-regulated so each new block comes circa each 10 minutes. If computing power (hashrate) rises, than difficulty rises too.

How Proof-of-Work works?

Easy. Block hash must contain leading zeros in it's binary value. The only way to find this hash is to hash it multiple times with various nonce each time until the right one is found. PoW can be useful in your other contraptions to reduce spam, for example.

How many storage is needed to store the blockchain of bitcoin?

356.1 GB at time of this post.

How to create a wallet?

Install some software. There are multiple opensource bitcoin clients for desktop. Electrum is a nice one. It does not need to store full blockchain, just the newest part. It will generate keys for you. No internet is needed to create a key. You can create as much addresses as you want. They will be empty, of course.

How to fill wallet with money?

Ask someone to send you bitcoins. There are a lot of people that change fiat money to bitcoin and vice-versa.

Another possibility is mining.

Do I need to keep my computer running to receive bitcoins?

No. Only when spending.

How do I spend bitcoins?

You will need to enter destination address and quantity and press "send" button. Your software will make the rest. It will push transaction to the network. If other nodes see it eligible, they will...