Ebook mastering bitcoin unlocking digital crypto currencies

15 Transactions, Blocks, Mining, and the Blockchain 15 Bitcoin Overview 16 Buying a cup of coffee 16 Bitcoin Transactions 18 Common Transaction Forms 20 Constructing a Transaction 22 Get

Andreas M Antonopoulos

Mastering Bitcoin

Mastering Bitcoin

by Andreas M Antonopoulos

Copyright © 2010 Andreas M Antonopoulos LLC All rights reserved.

Printed in the United States of America.

Published by O’Reilly Media, Inc., 1005 Gravenstein Highway North, Sebastopol, CA 95472.

O’Reilly books may be purchased for educational, business, or sales promotional use Online editions are

also available for most titles (http://safaribooksonline.com) For more information, contact our corporate/ institutional sales department: 800-998-9938 or corporate@oreilly.com.

Editors: Mike Loukides and Allyson MacDonald

Production Editor: Melanie Yarbrough

Copyeditor: FIXME FIXME

Proofreader: FIX ME!

Indexer: FIXME FIXME

Cover Designer: Karen Montgomery

Interior Designer: David Futato

Illustrator: Rebecca Demarest December 2014: First Edition

Revision History for the First Edition:

2014-04-07: Early release revision 1

2014-06-02: Early release revision 2

2014-06-27: Early release revision 3

2014-07-30: Early release revision 4

2014-09-16: Early release revision 5

2014-10-07: Early release revision 6

See http://oreilly.com/catalog/errata.csp?isbn=9781449374044 for release details.

Nutshell Handbook, the Nutshell Handbook logo, and the O’Reilly logo are registered trademarks of O’Reilly Media, Inc !!FILL THIS IN!! and related trade dress are trademarks of O’Reilly Media, Inc.

Many of the designations used by manufacturers and sellers to distinguish their products are claimed as trademarks Where those designations appear in this book, and O’Reilly Media, Inc was aware of a trademark claim, the designations have been printed in caps or initial caps.

While every precaution has been taken in the preparation of this book, the publisher and authors assume

no responsibility for errors or omissions, or for damages resulting from the use of the information contained herein.

ISBN: 978-1-449-37404-4

[?]

Table of Contents

Preface ix

1 Introduction 1

What is Bitcoin? 1

History of Bitcoin 3

Bitcoin Uses, Users and Their Stories 4

Getting Started 6

Quick Start 7

Getting your first bitcoins 9

Sending and receiving bitcoins 10

2 How Bitcoin Works 15

Transactions, Blocks, Mining, and the Blockchain 15

Bitcoin Overview 16

Buying a cup of coffee 16

Bitcoin Transactions 18

Common Transaction Forms 20

Constructing a Transaction 22

Getting the right inputs 22

Creating the outputs 24

Adding the transaction to the ledger 25

Bitcoin Mining 26

Mining transactions in blocks 28

Spending the transaction 29

3 The Bitcoin Client 31

Bitcoin Core - The reference implementation 31

Running Bitcoin Core for the first time 32

Compiling Bitcoin Core from the source code 33

iii

Using Bitcoin Core’s JSON-RPC API from the command line 39

Getting information on the Bitcoin Core client status 41

Wallet setup and encryption 41

Wallet backup, plain-text dump and restore 42

Wallet addresses and receiving transactions 43

Exploring and decoding transactions 45

Exploring blocks 48

Creating, signing and submitting transactions based on unspent outputs 50

Alternative clients, libraries and toolkits 56

Libbitcoin and sx tools 56

pycoin 57

btcd 58

4 Keys, Addresses, Wallets 61

Introduction 61

Public key cryptography and crypto-currency 62

Private and Public Keys 63

Private Keys 63

Public Keys 65

Elliptic Curve Cryptography Explained 65

Generating a public key 68

Bitcoin Addresses 70

Base58 and Base58Check Encoding 72

Key Formats 76

Implementing Keys and Addresses in Python 81

Wallets 84

Non-Deterministic (Random) Wallets 85

Deterministic (Seeded) Wallets 86

Mnemonic Code Words 86

Hierarchical Deterministic Wallets (BIP0032/BIP0044) 88

Advanced Keys and Addresses 98

Encrypted Private Keys (BIP0038) 98

Pay To Script Hash (P2SH) and Multi-Sig Addresses 99

Vanity Addresses 100

Paper Wallets 105

5 Transactions 111

Introduction 111

Transaction Lifecycle 111

Creating Transactions 112

Broadcasting Transactions to the Bitcoin Network 112

Propagating Transactions on the Bitcoin Network 113

iv | Table of Contents

Transaction Structure 113

Transaction Outputs and Inputs 114

Transaction Outputs 115

Transaction Inputs 117

Transaction Fees 120

Adding Fees to Transactions 121

Transaction Chaining and Orphan Transactions 122

Transaction Scripts and Script Language 123

Script Construction (Lock + Unlock) 123

Scripting Language 125

Turing Incompleteness 127

Stateless Verification 128

Standard Transactions 128

Pay to Public Key Hash (P2PKH) 128

Pay-to-Public-Key 131

Multi-Signature 132

Data Output (OP_RETURN) 133

Pay to Script Hash (P2SH) 134

6 The Bitcoin Network 139

Peer-to-Peer Network Architecture 139

Nodes Types and Roles 140

The Extended Bitcoin Network 142

Network Discovery 144

Full Nodes 147

Exchanging “Inventory” 148

Simplified Payment Verification (SPV) Nodes 150

Bloom Filters 154

Bloom Filters and Inventory Updates 159

Transaction Pools 160

Alert Messages 161

7 The Blockchain 163

Introduction 163

Structure of a Block 164

Block Header 164

Block Identifiers - Block Header Hash and Block Height 165

The Genesis Block 166

Linking Blocks in the Blockchain 167

Merkle Trees 170

Merkle Trees and Simplified Payment Verification (SPV) 175

Table of Contents | v

8 Mining and Consensus 177

Introduction 177

Bitcoin Economics and Currency Creation 178

De-centralized Consensus 181

Independent Verification of Transactions 182

Mining Nodes 183

Aggregating Transactions into Blocks 184

Transaction Age, Fees, and Priority 184

The Generation Transaction 186

Coinbase Reward and Fees 187

Structure of the Generation Transaction 188

Coinbase Data 189

Constructing the Block Header 191

Mining the Block 192

Proof-of-Work Algorithm 193

Difficulty Representation 198

Difficulty Target and Re-Targeting 199

Successfully Mining the Block 201

Validating a New Block 201

Assembling and Selecting Chains of Blocks 202

Blockchain Forks 204

Mining and the Hashing Race 209

The Extra Nonce Solution 210

Mining Pools 211

Consensus Attacks 214

9 Alternative Chains, Currencies, and Applications 219

A taxonomy of alternative currencies and chains 220

Meta-Coin Platforms 220

Colored Coins 221

Mastercoin 222

Counterparty 222

Alt-coins 222

Evaluating an alt-coin 224

Monetary Parameter Alternatives: Litecoin, Dogecoin, Freicoin 224

Consensus Innovation: Peercoin, Myriad, Blackcoin, Vericoin, NXT 225

Dual-Purpose Mining Innovation: Primecoin, Curecoin, Gridcoin 227

Anonymity-Focused Alt-Coins: CryptoNote, Bytecoin, Monero, Zerocash/ Zerocoin, Darkcoin 228

Non-currency alt-chains 230

Namecoin 230

Bitmessage 232

vi | Table of Contents

Ethereum 232

Future of Currencies 233

10 Bitcoin Security 235

Security principles 235

Developing Bitcoin Systems Securely 236

The Root of Trust 237

User Security Best Practices 238

Physical Bitcoin Storage 239

Hardware Wallets 239

Balancing Risk (loss vs theft) 239

Diversifying Risk 239

Multi-sig and Governance 240

Survivability 240

Conclusion 240

A Appendix: Available commands with sx tools 241

B Appendix - pycoin, ku and tx 247

C Appendix: Transaction Script Language Operators, Constants and Symbols 255

D Appendix - Bitcoin Improvement Proposals 259

Table of Contents | vii

Writing the Bitcoin Book

I first stumbled upon bitcoin in mid-2011 My immediate reaction was more or less

“Pfft! Nerd money!” and I ignored it for another 6 months, failing to grasp its impor‐ tance This is a reaction which I have seen repeated among many of the smartest people

I know, which gives me some consolation The second time I came across bitcoin in a mailing list discussion, I decided to read the white paper written by Satoshi Nakamoto,

to study the authoritative source and see what it was all about I still remember the moment I finished reading those 9 pages, when I realized that bitcoin was not simply a digital currency, but a network of trust that could also provide the basis for so much more than just currencies That realization: “This isn’t money, it’s a de-centralized trust network,” started me on a four month journey to devour every scrap of information about bitcoin I could find I became obsessed and enthralled, spending twelve or more hours each day glued to a screen, reading, writing, coding and learning as much as I could I emerged from this state of fugue, more than 20 lbs lighter from lack of consistent meals, determined to dedicate myself to working on bitcoin

Two years later, after creating a number of small startups to explore various bitcoin-related services and products, I decided that it was time to write my first book Bitcoin was the topic that had driven me into a frenzy of creativity, consumed my thoughts and was the most exciting technology I had encountered since the Internet It was now time

to share my passion about this amazing technology with a broader audience

Intended Audience

This book is mostly intended for coders If you can use a programming language, this book will teach you how cryptographic currencies work, how to use them and how to develop software that works with them The first few chapters are also suitable as an in-depth introduction to bitcoin for non-coders - those trying to understand the inner workings of bitcoin and crypto-currencies

ix

Why Are There Bugs On The Cover?

The Leafcutter Ant is a species that exhibits highly complex behavior in a colony super-organism, but each individual ant operates on a set of simple rules driven by social interaction and the exchange of chemical scents (pheromones) Per Wikipedia: “Next

to humans, leafcutter ants form the largest and most complex animal societies on Earth.” Leafcutter ants don’t actually eat leaves, but rather use them to farm a fungus, which is the central food source for the colony Get that? These ants are farming!

While ants form a caste-based society and have a queen for producing offspring, there

is no central authority or leader in an ant colony The highly intelligent and sophisticated behavior exhibited by a multi-million member colony is an emergent property from the interaction of the individuals in a social network

Nature demonstrates that de-centralized systems can be resilient and can produce emergent complexity and incredible sophistication without the need for a central au‐ thority, hierarchy or complex parts

Bitcoin is a highly sophisticated de-centralized trust network that can support a myriad

of financial processes Yet, each node in the bitcoin network follows a few simple math‐ ematical rules The interaction between many nodes is what leads to the emergence of the sophisticated behavior, not any inherent complexity or trust in any single node Like

an ant colony, the bitcoin network is a resilient network of simple nodes following simple rules that together can do amazing things without any central coordination

Conventions Used in This Book

The following typographical conventions are used in this book:

Italic

Indicates new terms, URLs, email addresses, filenames, and file extensions Constant width

Used for program listings, as well as within paragraphs to refer to program elements such as variable or function names, databases, data types, environment variables, statements, and keywords

Constant width bold

Shows commands or other text that should be typed literally by the user

Constant width italic

Shows text that should be replaced with user-supplied values or by values deter‐ mined by context

x | Preface

This icon signifies a tip, suggestion, or general note.

This icon indicates a warning or caution

Github Source Code

This book is available on Github, as a repository that contains the text, images and code:

https://github.com/aantonop/bitcoinbook

Fork the book code, try the code examples, or submit corrections via Github

Code Examples

The examples are illustrated in Python, C++ and using the command-line of a Unix-like operating system such as Linux or Mac OSX All code snippets are available in the Github repository and can be accessed online at https://github.com/aantonop/bitcoin book in the code subdirectory of the main repository

All the code snippets can be replicated on most operating systems with a minimal in‐ stallation of compilers and interpreters for the corresponding languages Where nec‐ essary, we provide basic installation instructions and step-by-step examples of the out‐ put of those instructions

Some of the code snippets and code output have been re-formatted for print In all such cases, the lines have been split by a backslash “\” character, followed by a newline char‐ acter When transcribing the examples, remove those two characters and join the lines again and you should see identical results as shown in the example

All the code snippets use real values and calculations where possible, so that you can build from example to example and see the same results in any code you write to calculate the same values For example, the private keys and corresponding public keys and ad‐ dresses are all real The sample transactions, blocks and blockchain references have all been introduced in the actual bitcoin blockchain and are part of the public ledger, so you can review them on any bitcoin system

Preface | xi

Using Code Examples

This book is here to help you get your job done In general, if example code is offered with this book, you may use it in your programs and documentation You do not need

to contact us for permission unless you’re reproducing a significant portion of the code For example, writing a program that uses several chunks of code from this book does not require permission Selling or distributing a CD-ROM of examples from O’Reilly books does require permission Answering a question by citing this book and quoting example code does not require permission Incorporating a significant amount of ex‐ ample code from this book into your product’s documentation does require permission

We appreciate, but do not require, attribution An attribution usually includes the title,

author, publisher, and ISBN For example: “Mastering Bitcoin by Andreas M Antono‐

poulos (O’Reilly) Copyright 2014 Andreas M Antonopoulos, 978-1449374044.” Some editions of this books are offered under an open source license, such as

CC-BY-NC (creativecommons.org) in which case the terms of that licenses apply

If you feel your use of code examples falls outside fair use or the permission given above, feel free to contact us at permissions@oreilly.com

Safari® Books Online

Safari Books Online is an on-demand digital library that delivers expert content in both book and video form from the world’s leading authors in technology and business

Technology professionals, software developers, web designers, and business and crea‐ tive professionals use Safari Books Online as their primary resource for research, prob‐ lem solving, learning, and certification training

Safari Books Online offers a range of product mixes and pricing programs for organi‐ zations, government agencies, and individuals Subscribers have access to thousands of books, training videos, and prepublication manuscripts in one fully searchable database from publishers like O’Reilly Media, Prentice Hall Professional, Addison-Wesley Pro‐ fessional, Microsoft Press, Sams, Que, Peachpit Press, Focal Press, Cisco Press, John Wiley & Sons, Syngress, Morgan Kaufmann, IBM Redbooks, Packt, Adobe Press, FT Press, Apress, Manning, New Riders, McGraw-Hill, Jones & Bartlett, Course Technol‐ ogy, and dozens more For more information about Safari Books Online, please visit us

online

How to Contact Us

Please address comments and questions concerning this book to the publisher:

xii | Preface