Bitcoin is a virtual currency stored on a blockchain and secured using encryption. Technically speaking it’s an Elliptical Curve Digital Signature Algorithm (ECDSA) that is used to store, validate, and transfer digital tokens on a digital ledger called the blockchain. Recording transaction is an exhaustive process otherwise referred to as “mining.”
Miners are computers from homes, data centers, and in the cloud from all around the world. In return for the energy spent on recording transactions to the blockchain, bitcoin creates digital tokens which can be paid or traded to anyone with a bitcoin wallet.
Digital signatures are the public-key primitives of data authentication. In the physical world, it is common to use handwritten signatures on handwritten or typed messages. They are used to bind authenticity to the writing. Similarly, a digital signature is a technique that binds a person/entity to the digital data by encrypting it into hash keys.
Cryptographic Hash Function
A cryptographic key is created by a special kind of hash function that must use advanced encryption methods to make it suitable for use in cryptography.
A hash function uses input data, often called the message, and modifies it using a practically impossible to predict algorithm or “puzzle.”
The algorithm compresses each string into a random encrypted code known as the “hash” key. The hash function encrypts messages from sender to receiver to prevent tampering while transmitting. Even the smallest change of information to any input data will require a worldwide consensus of at least 51% node confirmation.
The hash key can be of almost any size. For Example, Bitcoin uses the SHA-256 algorithm, which creates a hash sized at 32 bytes. It is highly improbable that another message sequence would produce the same hash output. The transaction enters back into the blockchain, therefore, must be recorded to a block, and thereby a new cryptographic hash key is computed.
Bitcoin Wallet Storage
The Bitcoin blockchain is practically impossible to hack or crack; it is impenetrable. Each hash is unique and unpredictable, and each represents a transaction, wallet, or node. Each operation can be viewed publicly, and by tracking back through the blockchain.
The blockchain makes it possible to validate the exact amount any wallet should have at a given time.
The data input onto the blockchain contains many blocks, each one holding multiple transactions; stored as hash inputs. It serves both as a form of identification, and it is used to verify its own integrity. Identification functions which also helps to authenticate its integrity are known as self-certifying identifiers.
A Bitcoin wallet is a safe address kept on the blockchain; used for storing your digital tokens. Each address has a public and private hash key which is used to send and receive cryptocurrency. They also provide proof that a transaction has come from the owner using a digital signature.
Private keys, public keys, and digital signatures
A randomly generated 256-bit string of numbers and letters that is to be kept safe and confidential. Whoever owns the Private key has full access to the funds and can send and receive Bitcoin. You should never give our your private spend key.
Calculated from the private key and can be shared to receive Bitcoin. A public key can be used to decide if a signature is valid and belongs to the private key.
Created mathematically using both the hash and public key. The signature verifies the transaction in the public ledger. It only allows the owner of a private Bitcoin address to transfer funds to another valid address.