What do I need to know about Bitcoin?

There have been several bitcoin discussions at work of late… what actually is Bitcoin? How can the underlying blockchain technology be used for other purposes? I did the Coursera course on the topic some time ago, but these questions pushed me to go a little deeper into the world of BitCoin. I’d thought I’d try to summarise the articles I found useful here.

First, the book associated with the Coursera course has just been made available. I thought this book was a great read. It covers the basic cryptography that you need to understand, and gives some example crypto currencies which don’t quite work, before moving on to explain how the original bitcoin design fixed these issues. The course is very broad, with lectures discussing the motivation of the miners, who need to devote large amounts of computing power [and hence resources] to the network, in the hope of being the chosen node who generates the next accepted block of the transaction chain, and who can therefore gain the reward for the block including the associated transaction fees.

The course also covers the tricks of representation which can be used to allow the block chain to represent the ownership of various assets. I’d overlooked this aspect of the system when I first did the course, but the ability to associate bits of extra data with a transaction has led to extra uses for the block chain. For a small transaction fee that is paid to the miners, a user can record information, say a cryptographic hash of a document, into the block chain, and the permanent ledger property of the block chain can be used to prove that the document was published at a time in the past.

For an interesting idea of the history, I next read Nathaniel Popper’s Digital Gold: BitCoin and the Inside Story of the Misfits and the Millionaires Trying To Reinvent Money. This book covers the story, from the initial idea and paper published on a mailing list by Satoshi Nakamoto to the set of programmers who picked up on it and used their computers for the initial mining efforts. Eventually others invested in the idea, offering real world items in exchange for the virtual currency, and after some time there were investments in activities such as brokering firms who took the risk of converting  real currencies into virtual bitcoins. The book covers the history of Silk Road, the illegal drugs site,  which uses the anonymous nature of bitcoin to allow the trade of items such as drugs. Popper’s book is interesting – it narrates the history in detail [which gets a little tiresome at times] and also tries to explain how a virtual thing can actually have a real world value. The initial miners’ rewards for their mining efforts, including the blocks mined by the creator of bitcoin, are now worth considerable amounts of real world currency.

Obviously you need to know that your transactions are safe and there are loads of papers out there that analyse the safety of the currency. I enjoyed this Msc thesis which used Google App Engine to do various experiments. For an idea of the representational tricks that mean you can use the block chain for recording ownership of things such as cars, OpenAssets is one encoding you could take a look at.

Of course, you probably want to have a play to understand all of this. I started out trying to find where I could get some bitcoins. There are various faucets that occasionally give away free bitcoins, and many online bitcoin wallet management services, but I wasn’t sure if I really wanted to sign up. Fortunately there is a test version of the bitcoin block chain that is used for testing the various clients –  so you have the ability to do the transactions on a set of bitcoins that you can get for free from the Testnet faucet, though the coins have no actual value.

You’re also going to need a library to program against bitcoin, and  for this I selected NBitcoin, whose author has a free book on how to use it.  It is available as a NuGet package so you can easily use it from Visual Studio.

First we need to get a private/public key pair as an identity, from which we can get an address that we can type into the testnet faucet to get some bitcoins. We generate a new key and serialize it to a file for use later. We can then read the key back and generate a bitcoin address. We can type that into the faucet, and we’ll be notified of the pending transfer.

There are lots of websites that let you look up data from the block chain. I can use one to look at the coins owned by my key and look at the details of the transaction that populated it. We can see the process of block chain at work here. The transaction is initially unconfirmed as it makes its way across the peer to peer network until a miner picks it up and it becomes part of the block chain, though you need to wait until the block containing your transaction is several levels from the chain’s head before you can be confident that it will remain [typically 6 levels with one level every 10 minutes on the real block chain]

The NBitcoin library is powerful. It contains a lot of utilities to work with various block chain information sources and contains extensions for dealing with asset management via coloured coins. I quickly tested it out using some C# to transfer some bitcoins associated with key I had generated to another key. With bitcoin, one takes an output of a previous transaction, so I needed to fetch the transaction using the transaction id of the transfer from the blockr block chain information site. I split the output of the transaction that gave the money to me into three outputs: the majority gets transferred back to my account, a second small amount goes to the second account, and I add a little information to the transaction that becomes part of the block chain ledger and could be used to record asset transfer. Any remainng bitcoin is used as a fee for a miner, encouraging one of the miners to include the transaction in the block chain. We can see the results on one of the chain exploration sites.

In the C# code I needed to access the peer network to get my transaction to the miners. You can get a bitcoin client from this site. Running the bitcoin client for a while,

bitcoind -testnet

generated a list of peers in the peers.dat file which I could then use with the NBitcoin library to push my transaction out to the world. Alternatively the library can use a running local node, but I didn’t want to leave the node running so instead decided to use the peer data file. There’s lots of documentation here to discover how you can use the other utilities included in the download.

The block chain idea is fascinating – a distributed ledger with an immutable history, and there are many people trying to find uses for it. One example is the notion of side chains, which manage content but include a pointer to this data from the block chain by using a hashed signature which is included in the real block chain. There’s loads more experimenting to do, and I’m sure there are many interesting discoveries to come.

 

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