The Bitcoin Address

Bitcoin uses a public ledger that indicates the number of bitcoins and their owners at any given time. But instead of associating names of people with accounts, the ledger only lists Bitcoin addresses. Each address can be thought of as a pseudonym for a person (or group of people, business, etc.), and the use of pseudonyms is why people can use bitcoins without revealing personal information. The following is an example of a Bitcoin address:

Like a bank account number, a Bitcoin address consists of a string of letters and numbers (usually beginning with the number 1). To send bitcoins to others (e.g., an online merchant, a friend, or a family member), you only need to know their Bitcoin address. In turn, when you share your address with others, they can send you bitcoins. Because Bitcoin addresses are cumbersome to type, many people use quick response (QR) codes to represent their address (see Figure 2-1).[1] For convenience, you can put your Bitcoin address, either typed or as a QR code (or both), on your business card, personal website, or storefront (if you're a merchant). Although you need an Internet connection to send bitcoins, you don't need to be connected to receive them. For example, if you work for a charity and pass out thousands of business cards containing your Bitcoin address and a statement like "Please consider donating in bitcoins," your organization can collect bitcoins while you sleep.

QR codes can be used to represent arbi¬trary data. They are easy to scan with smartphones and so are convenient for sharing the long strings of characters used for Bitcoin addresses.

Figure 2-1: QR codes can be used to represent arbitrary data. They are easy to scan with smartphones and so are convenient for sharing the long strings of characters used for Bitcoin addresses.

As you know, in traditional banking, moving money from one account to another means that the bank would update its privately held ledger that listed every account at that bank. If a fire or other disaster destroyed that ledger, information about who owned the assets at the bank might be lost forever. Although Bitcoin also uses a ledger, identical copies of it are distributed across millions of computers around the world. Consequently, no central point of failure exists, and transactions recorded on the Bitcoin ledger are permanent and impossible to erase. Moving bitcoins from one address to another is equivalent to sending an instruction to all of the computers on the Bitcoin network to update each ledger in the same way.

Because all transactions on the Bitcoin ledger are public information, maintaining privacy (if that is desired) can be a challenge. Although no personal information is on the ledger, if you share your Bitcoin address with your friends or post it in a public place that others can associate with your identity, your Bitcoin balance at that address will be known to everyone (including all incoming and outgoing transactions). To enhance your privacy, you can use many Bitcoin addresses but publicly share only some of them.

So how do you move bitcoins from one address to another (i.e., spend them)? Well, this action requires a private key.

The Private Key

A private key, like a Bitcoin address, is a long string of numbers and letters (usually beginning with the number 5). As with Bitcoin addresses, QR codes are often used to represent private keys because of their length. Each private key is paired with a single Bitcoin address and is able to unlock the bitcoins at that address (i.e., move them elsewhere). The following is an example of a private key:

Whereas a Bitcoin address is similar to a bank account number, a private key is more like a PIN: You need it to authorize a withdrawal or an expenditure. When a transaction is broadcast to the Bitcoin network, instructing bitcoins to be moved from one address to another, computers on the network check whether the transaction is authorized before making any updates to the public ledger. Specifically, they check whether the transaction has been digitally signed using a private key. A digital signature is extra data appended to a transaction that can only be created by someone possessing the corresponding private key. Similar to a PIN, a private key should be kept secret. If someone obtains your private key, he will be able to spend your bitcoins.

Note that although a private key can be used to produce a digital signature, a digital signature cannot be used to obtain a private key. Digital signatures also cannot be reused to make new transactions; therefore, broadcasting a signed transaction to the Bitcoin network is not a risk. This action is fundamentally different from making an online payment with a credit card. When you use a credit card, you provide your credit card number to someone to authorize a transaction. That number can then be reused (maliciously) to authorize more transactions that you never intended.

Unlike a PIN, which both you and the bank know, only you know the private key. The risk you take in this circumstance is if you lose the private key to an address in which you've stored bitcoins, those bitcoins will remain locked in that address forever. Clearly, it is extremely important not to lose your private key! Fortunately, you can easily make digital backups of your private keys or write them on a piece of paper and keep them in a safe place. Losing your Bitcoin address is not a problem, however, as it can be recovered from the corresponding private key (Bitcoin wallet programs, described later in this chapter, can do this for you automatically).

Although it's possible to use Bitcoin with only a single address and private key, in practice most people use many addresses, each with its own private key, and store them in a digital wallet.

  • [1] The QR code is just one of many ways to easily share a Bitcoin address. Another method is to use a first bits scheme in which you share only the first few characters of your Bitcoin address, which has been abbreviated by a Bitcoin address-shortening services (similar to a URL-shortening service). Starting with version 0.9 and later, Bitcoin also supports human-readable Bitcoin addresses that replace the traditional ones—much as a website address such as toys.com replaces the less user-friendly IP address of 123.100.101.111.
 
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