Mastering Bitcoin : unlocking digital crypto-currencies

Want to join the technological revolution that’s taking the world of finance by storm? Mastering Bitcoin is your guide through the seemingly complex world of bitcoin, providing the requisite knowledge to help you participate in the internet of money. Whether you’re building the next killer app, investing in a startup, or simply curious about the technology, this practical book is essential reading.Bitcoin, the first successful decentralized digital currency, is still in its infancy and it’s already spawned a multi-billion dollar global economy. This economy is open to anyone with the knowledge and passion to participate. Mastering Bitcoin provides you with the knowledge you need (passion not included).This book includes:A broad introduction to bitcoin—ideal for non-technical users, investors, and business executivesAn explanation of the technical foundations of bitcoin and cryptographic currencies for developers, engineers, and software and systems architectsDetails of the bitcoin decentralized network, peer-to-peer architecture, transaction lifecycle, and security principlesOffshoots of the bitcoin and blockchain inventions, including alternative chains, currencies, and applicationsUser stories, analogies, examples, and code snippets illustrating key technical concepts Copyright 6 Table of Contents 7 Preface 13 Writing the Bitcoin Book 13 Intended Audience 13 Why Are There Bugs on the Cover? 14 Conventions Used in This Book 14 Code Examples 15 Using Code Examples 15 Safari® Books Online 16 How to Contact Us 16 Acknowledgments 17 Early Release Draft (GitHub Contributions) 19 Quick Glossary 21 Chapter 1. Introduction 25 What Is Bitcoin? 25 History of Bitcoin 27 Bitcoin Uses, Users, and Their Stories 28 Getting Started 30 Quick Start 31 Getting Your First Bitcoins 33 Sending and Receiving Bitcoins 34 Chapter 2. How Bitcoin Works 39 Transactions, Blocks, Mining, and the Blockchain 39 Bitcoin Overview 40 Buying a Cup of Coffee 40 Bitcoin Transactions 42 Common Transaction Forms 44 Constructing a Transaction 45 Getting the Right Inputs 46 Creating the Outputs 47 Adding the Transaction to the Ledger 48 Bitcoin Mining 49 Mining Transactions in Blocks 51 Spending the Transaction 52 Chapter 3. The Bitcoin Client 55 Bitcoin Core: The Reference Implementation 55 Running Bitcoin Core for the First Time 55 Compiling Bitcoin Core from the Source Code 57 Using Bitcoin Core’s JSON-RPC API from the Command Line 62 Getting Information on the Bitcoin Core Client Status 64 Wallet Setup and Encryption 65 Wallet Backup, Plain-text Dump, and Restore 66 Wallet Addresses and Receiving Transactions 66 Exploring and Decoding Transactions 68 Exploring Blocks 72 Creating, Signing, and Submitting Transactions Based on Unspent Outputs 73 Alternative Clients, Libraries, and Toolkits 80 Libbitcoin and sx Tools 80 pycoin 81 btcd 82 Chapter 4. Keys, Addresses, Wallets 85 Introduction 85 Public Key Cryptography and Cryptocurrency 86 Private and Public Keys 87 Private Keys 87 Public Keys 89 Elliptic Curve Cryptography Explained 89 Generating a Public Key 92 Bitcoin Addresses 94 Base58 and Base58Check Encoding 96 Key Formats 100 Implementing Keys and Addresses in Python 105 Wallets 108 Nondeterministic (Random) Wallets 109 Deterministic (Seeded) Wallets 109 Mnemonic Code Words 110 Hierarchical Deterministic Wallets (BIP0032/BIP0044) 111 Advanced Keys and Addresses 121 Encrypted Private Keys (BIP0038) 121 Pay-to-Script Hash (P2SH) and Multi-Sig Addresses 122 Vanity Addresses 123 Paper Wallets 128 Chapter 5. Transactions 133 Introduction 133 Transaction Lifecycle 133 Creating Transactions 134 Broadcasting Transactions to the Bitcoin Network 134 Propagating Transactions on the Bitcoin Network 135 Transaction Structure 135 Transaction Outputs and Inputs 136 Transaction Outputs 137 Transaction Inputs 139 Transaction Fees 142 Adding Fees to Transactions 143 Transaction Chaining and Orphan Transactions 144 Transaction Scripts and Script Language 145 Script Construction (Lock + Unlock) 146 Scripting Language 147 Turing Incompleteness 150 Stateless Verification 150 Standard Transactions 150 Pay-to-Public-Key-Hash (P2PKH) 151 Pay-to-Public-Key 152 Multi-Signature 153 Data Output (OP_RETURN) 154 Pay-to-Script-Hash (P2SH) 156 Chapter 6. The Bitcoin Network 161 Peer-to-Peer Network Architecture 161 Nodes Types and Roles 162 The Extended Bitcoin Network 163 Network Discovery 166 Full Nodes 169 Exchanging “Inventory” 170 Simplified Payment Verification (SPV) Nodes 171 Bloom Filters 174 Bloom Filters and Inventory Updates 179 Transaction Pools 180 Alert Messages 181 Chapter 7. The Blockchain 183 Introduction 183 Structure of a Block 184 Block Header 184 Block Identifiers: Block Header Hash and Block Height 185 The Genesis Block 186 Linking Blocks in the Blockchain 187 Merkle Trees 188 Merkle Trees and Simplified Payment Verification (SPV) 194 Chapter 8. Mining and Consensus 197 Introduction 197 Bitcoin Economics and Currency Creation 198 Decentralized Consensus 200 Independent Verification of Transactions 201 Mining Nodes 203 Aggregating Transactions into Blocks 203 Transaction Age, Fees, and Priority 204 The Generation Transaction 206 Coinbase Reward and Fees 207 Structure of the Generation Transaction 208 Coinbase Data 209 Constructing the Block Header 211 Mining the Block 212 Proof-Of-Work Algorithm 212 Difficulty Representation 218 Difficulty Target and Retargeting 219 Successfully Mining the Block 221 Validating a New Block 221 Assembling and Selecting Chains of Blocks 222 Blockchain Forks 223 Mining and the Hashing Race 228 The Extra Nonce Solution 230 Mining Pools 231 Consensus Attacks 234 Chapter 9. Alternative Chains, Currencies, and Applications 239 A Taxonomy of Alternative Currencies and Chains 240 Meta Coin Platforms 240 Colored Coins 241 Mastercoin 242 Counterparty 242 Alt Coins 242 Evaluating an Alt Coin 243 Monetary Parameter Alternatives: Litecoin, Dogecoin, Freicoin 244 Consensus Innovation: Peercoin, Myriad, Blackcoin, Vericoin, NXT 245 Dual-Purpose Mining Innovation: Primecoin, Curecoin, Gridcoin 247 Anonymity-Focused Alt Coins: CryptoNote, Bytecoin, Monero, Zerocash/Zerocoin, Darkcoin 249 Noncurrency Alt Chains 250 Namecoin 250 Bitmessage 252 Ethereum 253 Future of Currencies 253 Chapter 10. Bitcoin Security 255 Security Principles 255 Developing Bitcoin Systems Securely 256 The Root of Trust 257 User Security Best Practices 258 Physical Bitcoin Storage 259 Hardware Wallets 259 Balancing Risk 259 Diversifying Risk 259 Multi-sig and Governance 260 Survivability 260 Conclusion 260 Appendix A. Transaction Script Language Operators, Constants, and Symbols 261 Appendix B. Bitcoin Improvement Proposals 267 Appendix C. pycoin, ku, and tx 271 Key Utility (KU) 271 Transaction Utility (TX) 277 Appendix D. Available Commands with sx Tools 281 Index 287 About the Author 297 Mastering Bitcoin is essential reading for everyone interested in learning about bitcoin basics, the technical operation of bitcoin, or if you're building the next great bitcoin killer app or business. From using a bitcoin wallet to buy a cup of coffee, to running a bitcoin marketplace with hundreds of thousands of transactions, or collaboratively building new financial innovations that will transform our understanding of currency and credit, this book will help you engineer money. You're about to unlock the API to a new economy. This book is your key. This book will help you learn everything you need to know about decentralized digital money, which is one of the most exciting technical revolutions in decades. Just as the Internet has transformed dozens of industries - from media and entertainment to retailing, travel and many more - decentralized digital money, in the form of crypto-currencies, has the ability to transform the foundations of money, credit and financial services. It also has the power to transform other social activities and institutions that we don't usually associate directly with money, such as corporations, governance, voting and the law. As the first successful digital currency, bitcoin is the natural starting point for anyone interested in decentralized digital money, its implications and applications. Mastering Bitcoin describes the technical foundations of bitcoin and other cryptographic currencies, from cryptography basics, such as keys and addresses, to the data structures, network protocols and the consensus mechanism ("mining") that underpin bitcoin. Each technical topic is explained with user stories, elegant analogies and examples, and code snippets illustrating the key concepts. The first two chapters offer a broad and accessible introduction to bitcoin that is intended for all audiences, from new non-technical users to investors and business executives seeking to better understand bitcoin. The remainder of the book dives into the technical details of bitcoin's operation and is aimed at professional developers, engineers, software and systems architects, systems administrators and technically-minded people interested in the inner workings of bitcoin and comparable crypto-currencies. Mastering Bitcoin is intended to be used as a reference book for technical professionals, as a self-study guide for bitcoin entrepreneurs, and as a textbook for university courses on bitcoin and digital currencies. Bitcoin is still in its infancy, and yet it has already spawned a multi-billion dollar, global economy that is growing exponentially. Both new and established companies are adding bitcoin as a payment method, and investors are funding a flurry of new bitcoin and related startups. Mastering Bitcoin can help you become part of this vibrant new economy. The time to get started is now. "A broad introduction to bitcoin--ideal for non-tech users, investors, and business executives; technical foundations of bitcoin and cryptographic currencies for developers, engineers, and software and systems architects; details of the bitcoin decentralized network, peer-to-peer architecture, transaction lifecycle, and security principles; offshoots of the bitcoin and blockchain inventions, including alternative chains, currencies, and applications; user stories, elegant analogies, examples, and code snippets illustrating key technical concepts"--Page 4 of cover