Home Education Bitcoin for the befuddled

As you can see, Satoshi was able to sign a message with his own private key and thus prove to Crowley that he (Satoshi) owned a certain Bitcoin address. To understand how this is possible, you need to learn about a weird asymmetry that mathematicians discovered a long time ago:

1. It's very easy to figure out if a large number has factors (i.e., that it isn't a prime number).

2. It can be very, very hard to figure out what those factors are.

Now, most regular people would expect that these two ideas would be equally hard to figure out: After all, it seems like there's no way to know whether factors exist without actually finding those factors. But as it turns out, mathematicians came up with some strange algorithms that can solve problem #1 without needing to solve problem #2 (one popular algorithm is called the Miller-Rabinprimality test).

So why does this little asymmetry matter? Actually, almost every modern technology you can think of was invented by some clever person who noticed a seemingly inconsequential asymmetry:

• Antibiotics exploit tiny asymmetries in bacterial versus animal cell metabolism.

• A steam engine exploits small pressure differences between steam and water mixed with air.

• Computer chips work due to tiny differences between two impure variants of silicon, called p-type and n-type silicon.

Heck, cosmologists tell us that the only reason our galaxy exists at all is due to tiny asymmetries in the amount of matter and antimatter that were

created by the Big Bang, leaving a surplus of matter that went on to create everything we see!

Anyway, some smart guys in the 1970s looked at this asymmetry in number factoring and noticed that if they multiplied two large prime numbers (which are very easy to find, given #1), it was virtually impossible to figure out what the original numbers were (because of #2)!

Most modern cryptography is based on this little fact: It turns out that using such prime numbers, you can create a private/public cryptographic key pair (we cover this cryptography in detail in Chapter 7), which is exactly what private and public Bitcoin addresses are!

Why does this matter? Well, it turns out that if you have such a pair of keys, you can do a couple of almost magical tasks with them:

1. If a person has a public key, they can create a message that only the owner of the private key can read. (This is called public key encryption.)

2. If a person has the private key, they can create a message that cannot be forged, because any person can use the public key to verify the authenticity of this message. (This is called a digital signature.)

In our example, Satoshi signed a message with his private key in this way while promising 1 bitcoin to Crowley. As you saw, this is Satoshi's public key:

Here is the message promising the bitcoin to go to Crowley's Bitcoin address:

Here is the signature, created with the fancy-pants cryptography we've been discussing:

At this point, you should be asking one very important question: Can we actually prove that this is a valid, signed message? Why yes, we can do so very easily! Just follow these steps:

1. Go to brainwallet.org/#verify (or one of many other sites like it).

2. Enter the message and the signature.

3. Click Verify Message.

4. You can now see that the message was signed by Satoshi, the owner of Bitcoin address 17QGqFshx9N-fXh5Tr-fMkn1m34bWr2hL1AY!

WHY BITCOIN IS A BIG DEAL

There is no question that Bitcoin is a novel technology, and certainly the idea of a universal stateless currency is audacious. However, many doubt that Bitcoin will make a lasting impact on the world's economies. Indeed, you may be wondering: Is Bitcoin a world-altering technology or merely a technological gimmick? In this chapter, we'll discuss both sides of this question. Because reviewing the past is often the first step in understanding the future, let's start by briefly delving into the history of Bitcoin and digital currencies in general.

The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.

—Satoshi Nakamoto, first post on the P2Pfoundation forum about Bitcoin, February 11, 2009

I think that the Internet is going to be one of the major forces for reducing the role of government. The one thing that's missing, but that will soon be developed, is a reliable e-cash. A method whereby, on the Internet, you can transfer funds from A to B, without A knowing B or B knowing A.

—Milton Friedman, American economist and Nobel laureate, 1999 interview conducted by the National Taxpayers Union Foundation

Are you kidding?! In the future, when people look back at the early days of Bitcoin, they'll say, "It was so obvious that the ability to move money anywhere, instantly, at near-zero cost would be a huge success." Bitcoin is to money what the Internet was to communication.

—Adam Draper, founder and CEO of Boost, Curt Hopkins's "Venture Capitalists Take a Chance on the 'Bitcoin Revolution,'" The Daily Dot, March 19, 2013

Stay away. Bitcoin is a mirage. It's a method of transmitting money. [...] A check is a way of transmitting money, too. Are checks worth a whole lot of money just because they can transmit money? Are money orders? [... ] The idea that it has some huge intrinsic value is just a joke in my view. —Warren Buffett, chair and CEO of Berkshire Hathaway, CNBC's Squawk Box, March 14, 2014

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