What is a cryptocurrency?1 2A cryptocurrency is digital money that issecured using cryptography. The most popular cryptocurrency is bitcoin.Although it has been artificially made, due to its security and anonymityfeatures it has shot up in value. At the time of writing, 1BTC = 11,421.
69$. 3What is a bitcoin wallet? A bitcoin wallet is the user interface betweenthe bitcoin system and the user. Since the system of transactions isdecentralised, it is transparent and everyone knows about every transaction.The bitcoin system is such that no trust is required. A group of strangersmanage each others financial transactions.
Sending and receiving money in bitcoininvolves two types of keys: private and public. A key is simply a random wordof a specified length. The private key is used to sign the transaction with adigital signature which is unique to the transaction and the private key. Thepublic key is known to everyone and is used to check if your signature isauthentic and thus verify the transaction.
The sign depends also on the messageso it is different for every transaction and any change in the key leads tochange in the message and vice versa so tampering with either is difficult.4 5 A bitcoin wallet is like a keychain that holdsall your public keys. A bitcoin wallet address is a mathematically computedversion of your public key. 6 Bitcoin is anonymous but it is completelytransparent and trackable. Some transactions and public keys can thus beidentified as belonging to the same person and may violate the privacy of theindividual. Thus ideas to take anonymity further as implemented in thecrowdfunded Dark Wallet were developed. 7How do transactions work?8A transaction tells the network that the ownerof some bitcoin value has authorised the transfer of that value to anotherowner. The new owner can spend it by creating another transaction thattransfers to another person and so on.
This creates a chain of transactionsthat proves ownership. Each transaction contains one or more “inputs”which are previous transactions to the owner of the transaction and are proofof the fact that the person has enough money for it. Such transactions form a chain where theinputs of the current transaction are the outputs of some previoustransactions. Any node that sees a valid transaction that ithas not seen before will forward it to all other nodes so that it getsrecognised and the transaction can be completed. (flooding) Transactions are bundled into blocks, whichtake a lot of computation to prove but very little to verify.
This verificationprocess is called mining. Mining nodes validate all transactions. Mining alsocreates new bitcoins in each block, this is fixed and diminishes with time. This transaction is now not yet committed tothe chain of ledgers in the world. Each node maintains a pool of unverifiedtransactions. Miners construct new blocks and add uncommitted to the block andthen try to prove the validity of the block. These are prioritised by highestminer fee.
Spending the transaction is as simple as usingit as an input for another transaction.Types of wallets9Bitcoin wallets according to platform:- Desktop wallets are accessible only on thecomputer on which it is installed and provide complete autonomy and control offunds.- Mobile wallets are easy to use and do not takeup too much space.
– Web wallets are accessed through a browser andstored and operated by a third party. One gives up control for greater ease ofuse in this scheme.- Hardware wallets are extremely secure and selfcontained on special purpose hardware.- Paper wallets are printed QR codes for publicand private keys. Wallets depending how they interact with thenetwork 10- Full node clients store the entire history ofbitcoin transactions, manages wallets, and can initiate transactions. Theyprovide complete autonomy and independent transaction verification- Lightweight clients offer simple paymentverification, connects to full nodes for access to information, but storeswallet locally and create validates and transmits transactions.- Third party API client interacts with bitcointhrough a third party system of APIs.
The wallet could be stored by user orthird party but all transactions go through the third party. Wallets based on number of signatures- Single signature wallets require only oneprivate key to send funds, that is, only one person verifies transactions.- Multisig wallets are like joint bank accounts in the sense that two people need to signa transaction before it can be sent out. Thus we prevent a single person’s keyfrom being able to compromise a wallet. 11 12 While some wallets are single currency, othersare multi-currency which means that you can use the same software for multiplecryptocurrencies. Wallets based on key generation techniques:- Deterministic: Each key is generated based ona single master key called the seed.
Only a single backup at the time ofcreation is required.13 14- Non-deterministic:Each key is independently generated and is random which means that we need totake frequent backups or reuse addresses to be able to remember all the keys,which reduces security. To help keep your own wallet secure: encryptit, take regular backups, procure a multisig enabled wallet and/or store yourkeys offline.15Benefits of using wallet 16 17 18Wallets are open to everyone. The software canbe installed worldwide. They don’t require identification and are anonymous,provide full autonomy over your money, and don’t require you to trust a thirdparty. Transactions are broadcasted in seconds andbecome irreversible within an hour. They do not require personal identificationso they are suitable for the privacy conscious.
Nevertheless the basis isopensource and public so every transaction can be publicly verified and thereare mathematical safeguards against unverified transactions. Since the bitcoin system is decentralised, noone can block or manipulate transactions. Transactions are not reversible but there isstill consumer protection. Merchants cannot add service charges withoutconsulting the customer, so there are no hidden fees when it comes to bitcoin. The system is online and available 24 hours aday, 365 days per year. Transaction costs are much lower than with conventionalcurrencies. This is usercentric technology that is fast,secure and anonymous.
It emancipates individuals from the government and frombanks who cannot be trusted to do what’s best for the client. Bitcoin and othercryptocurrencies ensure that this is the case and that the merchant-consumerrelationship is transparent and safe.Different wallets available: 19 20Some of the most popular wallets are:- The original Bitcoin Core: It is afull node and is for desktop. – Mycelium for mobile: It affordsprivacy and is free and opensource. – Trezor and Ledger Nano arehardware wallets that are multi-currency and secure. They are HD wallets andare similar in functionality.21- Green address is a user-friendlymulti-platform bitcoin client.
It is multisig but a third party must be presentfor transactions to occur.- Blockchain.info is a beginnerfriendly web and mobile based bitcoin client. Wallets are generally secure: web wallets aremost vulnerable to attack and hardware wallets are the least.
Backing up your wallet, keeping your clientand system software up-to-date and adding extra security layers like goodpasswords and two factor authentication and additional pin codes helps to keepit more secure.1 http://cryptocurrencyfacts.com/what-is-a-cryptocurrency-wallet/ 2 Bitcoinand Cryptocurrency Technologies: A Comprehensive Introduction. PrincetonUniversity Press, Princeton, NJ, USA.
Chapters 1-4.3 https://bitinfocharts.com/ (as of 18 January 2018)4 http://www.imponderablethings.com/2013/07/how-bitcoin-works-under-hood.
html 5 http://chimera.labs.oreilly.com/books/1234000001802/ch04.html#private_public_keys 6 http://www.
dummies.com/software/other-software/bitcoin-public-private-keys/ 7 https://www.darkwallet.is/ 8 https://www.makeuseof.com/tag/how-does-bitcoin-work/ 9 Andreas M.
Antonopoulos – Mastering Bitcoin:Programming the Open Blockchain: Chapters 1,2,510 https://www.mycryptopedia.com/full-node-lightweight-node/ 11 http://cryptorials.io/bitcoin-wallets-explained-how-to-choose-the-best-wallet-for-you/ 12 https://en.bitcoin.it/wiki/Multisignature#Multisignature_Wallets 13 https://bitcoinmagazine.com/articles/deterministic-wallets-advantages-flaw-1385450276/ 14 https://en.bitcoin.it/wiki/Deterministic_wallet 15 https://www.coindesk.com/information/how-to-store-your-bitcoins/ 16 https://www.forbes.com/sites/investopedia/2013/08/01/how-bitcoin-works/#1cd9f66f17ff17 https://en.bitcoin.it/wiki/Main_Page18 https://decentralize.today/5-benefits-of-cryptocurrency-a-new-economy-for-the-future-925747434103 19 https://blockgeeks.com/guides/cryptocurrency-wallet-guide/ 20 https://blockgeeks.com/guides/cryptocurrency-wallet-guide/ 21 nasdaq.com/article/bitcoin-hardware-wallet-review-ledger-may-have-caught-up-to-trezor-with-nano-s-cm679849