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Sibit Demonstrates How Bitcoin Works

  • Moscow, Russia
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Bitcoin was a big technical mystery for me. All the articles I’d read about it sounded extremely complex and absolutely indigestible. Until I got stuck with a task: I had to integrate Zold, our experimental non-Blockchain cryptocurrency, with Bitcoin. I had to study the architecture of Bitcoin and I found this short and simple video (I highly recommend you watch it). I managed to implement the integration and understand how Blockchain works. Here is my short summary. I hope it will be helpful.

The Invention of Lying (2009) by Ricky Gervais et al.
The Invention of Lying (2009) by Ricky Gervais et al.

First, there is a private key, which is a short piece of text, for example:


How did I generate it? It’s random. You can generate one too. Install Sibit, my Ruby gem, and run the following (it’s a command line tool):

$ sibit generate

Every time you call sibit generate you will get a new private key. It is just a random piece of text (well, a large hex number). Then, you create an address from your private key. Each private key has exactly one address. Here is how you create it:

$ sibit create c93a36feb31712c390a78b37337cb85d45d3b2f9f6e55108bde32477cbabac5f

You give it to someone who wants to send you a payment. A transaction in Bitcoin is not what you’re used to thinking about when you imagine a bank transaction. A Bitcoin transaction has a number of input and output addresses. Say, three inputs of 10 BTC each and two outputs of 25 BTC and 5 BTC. The sum of all inputs must be equal to the sum of all outputs.

Thus, in one transaction you can move a lot of digital money between addresses. You can take a hundred input addresses and send them to another hundred output addresses. This is what surprised me a bit when I discovered it. The transactions could be pretty large in size. And the sizes matter. They are calculated in bytes. A transaction with one input and one output will consume about 220 bytes. Keep this number in mind, we will get back to it soon.

As you can imagine already, in order to calculate how much money you have on your address you just go through all the transactions in the entire database (there are over 400 million already) and see how many transactions had your address as their outputs (your inputs). Then you deduct any transactions that were your outputs and someone else’s inputs. You get the balance. There are many public and free web services which can do this work for you. You don’t need to search the entire database yourself, just use Blockchain API (for example) and they will provide you with the information about any Bitcoin address. Try this address, for example:

$ sibit balance 1MUhYhaBqzgpwL1focqJNhTymdXbyky9UY

It is in satoshi, which is 0.2 BTC. Click here and you will see the inputs and outputs of this address. There is only one transaction that mentioned this address. That transaction had a single input and two outputs. One of its outputs was mine. I got 0.2 bitcoins and they are still here, since there are no transactions which move them somewhere else.

Thus, simply put, the Blockchain database is a large list of transactions with inputs and outputs in each of them. Once a new transaction gets into this database, the balance of a few addresses change. The database only grows and no previous transactions can be deleted or modified. Thus, once your transaction gets in, the money is moved from address to address.

To create a transaction you need to know all the input addresses, their private keys, and all the output addresses. You need multiple inputs if you want to send an amount that is larger than you have in a single address. There is something known as a wallet in Bitcoin, which is a piece of software, like Electrum, which keeps track of all your addresses and knows how to create a transaction, combining a number of addresses and using them as inputs. That’s all.

So, you know the inputs, you specify the outputs and you are expected to leave a small amount unspent. Let’s say your inputs have 10,000 satoshi and you specify an output for 8,000. You leave the residual 2,000 unspent. They are called miner fees. You send your transaction to all Bitcoin nodes, they place it in their memory pool, and attempt to combine a few thousand transactions in a block. They all attempt together and only one of them manages to do it, approximately once every ten minutes. Once a winner manages to solve a block, it wins that 2,000 you left untouched in your transaction. Every transaction in the block pays that winner some small fee.

Is it possible to pay nothing? Yes. However, the smaller the fee you leave in your transaction, the lower the chances that your transaction will go into the next block. Each miner wants to make the maximum out of each block and puts the most “generous” transactions in the block, when trying to mine it.

The fee depends on the size of the transaction in bytes. Since any transaction may include many inputs and outputs, its size is the only thing that matters. For example, the fee I paid in this transaction was 8,971 satoshi, which is approximately 40 satoshi per byte, since my transaction included 225 bytes.

To send your transaction to all Bitcoin nodes you have two options. The first one is to start your own full node, which will communicate with other nodes through the Bitcoin protocol. The second option is to use one of the HTTP relays, where you just post your transaction in a POST HTTP request and the relay sends it to all Bitcoin nodes; this is one of them.

Sibit automates this process. You just say:

$ sibit pay 200000 L \
  1K3J...se1TYe:c93a36feb3...e55108bde32477cbabac5f \
  153dF1xKyVX5X8brBDroaqKkPmcB8kLtDB \

Here, the first argument is the amount you are sending. The second one is the fee you want to leave untouched. I made it easier for you, to help you avoid calculations. Just say S, M, L or XL and the fee will be calculated more or less correctly. The third argument is a list of addresses and their private keys, separated by a colon. The fourth argument is the target address (Sibit makes it possible to send to only one address). The last argument is the address where the change will be sent.

If you have 50,000 satoshi in your inputs and you want to send 15,000 satoshi to a friend, you have to find a place where the other 35,000 will be sent—well, minus the miner fee. You just provide your own address and the change will arrive there.

This is pretty much all you need to know about Bitcoin and Blockchain, in order to use it. What did I miss?

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