Difference between revisions of "Help:Introduction"

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(Putting it all together: Fix link for BItcoin Monitor article.)
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==See Also==
==See Also==
* [http://www.youtube.com/watch?v=Um63OQz3bjo What is Bitcoin?] video introduction
* Installing Bitcoin [[getting started]]  
* Installing Bitcoin [[getting started]]  
* [[How bitcoin works]]
* [[How bitcoin works]]

Revision as of 00:13, 23 March 2011





Bitcoin is a system of owning and voluntarily transferring amounts of so-called bitcoins, in a manner similar to an on-line banking interface, but anonymously and without reliance on a central authority to decide on what is true. These bitcoins are valuable because they require the spending of real resources (CPU time and electricity) to produce, cannot be spent more than once, and cannot be removed from a person's ownership without illicit access to his/her computer.

Preventing stealing


  • Bob sends his public key to Alice.
  • Alice signs the transaction with her secret private key.




Preventing double-spending


  • When multiple valid continuations to this chain appear, the longest such branch is accepted as the correct one and built upon.




Bitcoin "accounts" do not have people's names on them and do not have to correspond to individuals. Each balance is simply associated with a randomly generated public-private key pair and the money "belongs" to whoever has the private key and can sign transactions with it. The transactions that are signed using those keys also don't have to include names.

A bitcoin address looks like this:


Each person can have many such key pairs, each with its own balance, and this can make it more difficult to identify which person owns what amount. In order to protect his privacy, Bob can even generate a new public-private key pair for each individual transaction. So David receiving the coin from Charley will not be able to identify who is the second person in the list of transactions. The only thing David will know is the address of Bob which is a shortened (hashed) version of his public key.

Creation of coins

As we saw, both Bob and Charley need to verify that the original coin from Alice is valid. Alice cannot simply generate coins instantly, out of thin air, because the appearance of a coin is a transaction that needs to be accepted by others. In order for the coin-creation transaction to be accepted, the transaction and the block in which it appears must be part of the longest chain of blocks. For new blocks to be added as continuations to this coin-generating block, it must be considered valid by those who generate blocks. For the chain to remain the longest, the speed at which blocks are added to it must be faster than that of any other chain. Therefore, for the coin-generating transaction to exist, it must be considered valid by the software that is running on the majority of the CPUs on the network.


The coin received by Alice is an incentive for her to perform this computation work. However, it is currently agreed that the reward for generating a block will be reduced to half every 4 years. Meaning that, at some point in the year 2013, the majority of the CPUs will stop accepting blocks in which the generating transaction adds 50BTC to the sum of money, and they will only accept blocks adding half that amount (or less?). The same thing will happen in the years 2017, 2021, 2025 and so on, unless different Bitcoin client software has prevailed in the network.

Since this incentive will eventually diminish, another way for Alice to gain bitcoins when she generates blocks is to accept transaction fees. There is a voluntary transaction fee that can be paid in every transfer of bitcoins, the amount of which is chosen, and paid, by the person who sends the money. This amount is given to the person who generates the "proof-of-work" block in which the transaction appears, which is necessary for the transaction to be accepted. Since Alice is free to include in her block whichever set of transactions she wants, she can choose to include only the transactions with the highest transaction fees. If everybody acts that way, then eventually, and depending on the total number of transactions, a minimum transaction fee will be required for a transaction to appear in the chain of blocks.

Putting it all together






See Also