This is a read note of Mastering Bitcoin Chapter 01: Introduction.

1 bitcoin

“bitcoin” is the unit of currency that is purly virtual. There are no physical coins or even digital coins per se. The coins are implied in transactions that transfer value from sender to recipient. Users of Bitcoin own keys that allow them to prove ownership of bitcoin in the Bitcoin network. With these keys, they can sign transactions to unlock the value and spend it by transferring it to a new owner. Keys are often stored in a digital wallet on each user’s computer or smartphone. Possession of the key that can sign a transaction is the only prerequisite to spending bitcoin, putting the control entirely in the hands of each user.

2 Bitcoin

“Bitcoin” is the system, the name of the protocol, a peer-to-peer network, and a distributed computing innovation that consist of:

  • A decentralized peer-to-peer network (the Bitcoin protocol)
  • A public transaction ledger (the blockchain)
  • A set of rules for independent transaction validation and currency issuance (consensus rules)
  • A mechanism for reaching global decentralized consensus on the valid blockchain (Proof-of-Work algorithm)

Satoshi Nakamoto’s solution, which uses the concept of Proof-of-Work to achieve consensus without a central trusted authority, represents a breakthrough in distributed computing and has wide applicability beyond currency. It can be used to achieve consensus on decentralized networks to prove the fairness of elections, lotteries, asset registries, digital notarization, and more.

3 Wallet

A “Bitcoin wallet” is the UI or client side to the Bitcoin system.

  • Full-node client is a client that stores the entire history of Bitcoin transactions (every transaction by every user, ever), manages users' wallets, and can initiate transactions directly on the Bitcoin network. A full node handles all aspects of the protocol and can independently validate the entire blockchain and any transaction.
  • A lightweight client, also known as a simplified-payment-verification (SPV) client, connects to Bitcoin full nodes (mentioned previously) for access to the Bitcoin transaction information, but stores the user wallet locally and independently creates, validates, and transmits transactions. Lightweight clients interact directly with the Bitcoin network, without an intermediary.
  • A third-party API client is one that interacts with Bitcoin through a third-party system of application programming interfaces (APIs), rather than by connecting to the Bitcoin network directly. The wallet may be stored by the user or by third-party servers, but all transactions go through a third party.

The common types are desktop full client, mobile lightweight wallet, and web third-party wallet.

4 Mnenonic Phrase

A modern Bitcoin wallet will provide a mnemonic phrase (also sometimes called a “seed” or “seed phrase”) for a new account. The mnemonic phrase consists of 12-24 English words, selected randomly by the software, and used as the basis for the keys that are generated by the wallet. The mnemonic phrase can be used by a user to restore all the transactions and funds in her/his wallet in the case of an event such as a lost mobile device, a software bug, or memory corruption. The recommended way is to write two copies of the mnemonic phrase on paper, with each of the words numbered as the order matters. Then store each copy in a separate secure location such as a locked desk drawer or a fireproof safe.

5 Bitcoin Address

The wallet application randomly generates a private key which will be used to derive Bitcoin addresses that direct to the wallet. Bitcoin addresses are simply random numbers that correspond to the private key that is used to control access to the funds. The addresses are generated independently by the wallet without reference or registration with any service. In fact, in most wallets, there is no association between a Bitcoin address and any externally identifiable information including the user’s identity. Until the moment an address is referenced as the recipient of value in a transaction posted on the bitcoin ledger, the Bitcoin address is simply part of the vast number of possible addresses that are valid in bitcoin. Only once an address has been associated with a transaction does it become part of the known addresses in the network. The Bitcoin address starts with 1, 3, or bc1 and is encoded as a QR code or a string. You can create new addresses as often as you like, all of which will direct funds to your wallet. In fact, many modern wallets automatically create a new address for every transaction to maximize privacy. A wallet is simply a collection of addresses and the keys that unlock the funds within.

Some financial institutions will also require Alice to provide identification documents to comply with local banking regulations/anti-money laundering (AML) practices, a process which is known as Know Your Customer (KYC). Acquiring, holding, and spending bitcoin does not require you to divulge sensitive and personally identifiable information to third parties. However, where bitcoin touches traditional systems, such as currency exchanges, national and international regulations often apply. In order to exchange bitcoin for your national currency, you will often be required to provide proof of identity and banking information. Users should be aware that once a Bitcoin address is attached to an identity, all associated bitcoin transactions are also easy to identify and track. This is one reason many users choose to maintain dedicated exchange accounts unlinked to their wallets.

6 Transaction

The price of bitcoin can be found in many places including:

Each bitcoin can be subdivided into 100 million units, each called a “satoshi” (singular) or “satoshis” (plural). Named for bitcoin’s creator, the Satoshi is the smallest unit of bitcoin, equivalent to 0.00000001 BTC. You can pay transaction fees in the unit of satoshis/byte. A higher fee makes a faster confirmation time. Initially, a transaction is in unconfirmed status. To be confirmed, a transaction must be included in a block and added to the blockchain, which happens every 10 minutes, on average. In traditional financial terms this is known as clearing.