How Bitcoin works

This is a talk I gave at Philly.rb about Bitcoin. I went into the mechanics of how the protocol works, followed by a real-world example of moving bitcoins between wallets. In one of the transactions, I used the bitcoin-ruby client to create a wallet and send money from it.

Transcript

1. How B⃦itcoin Works
2. @gammons
3. Bitcoin?
5. P2P Network Alice Sue Walt Bob Mary Jim Miner Joe Miner Dave Miner Amy Miner Tom
6. Wallet Public/private keypair 15VoGpK8zXWnjXR93uuR3PTjCabwecPv8m (Send me money)
7. Transactions 15VoGpK8zXWnjXR93uuR3PTjCabwecPv8m 14vWNjD38DBxpVcwsJgy4V4URKYoDzaeBB 5 BTC Bob Alice
8. Signing Alice I, Bob, am giving alice 5 BTC. 5 BTC to you, Alice! <signed, Bob> Bob <pubkey> <privkey> <pubkey> <privkey> Mary Jim Walt
9. > require 'bitcoin'
 => true
 > key = Bitcoin::generate_key
 => ["ab378a05", "04ad070e2c"]
 > pubkey = key[1]
 > address = Bitcoin::pubkey_to_address(pubkey)
 => "14vWNjD38DBxpVcwsJgy4V4URKYoDzaeBB" Boom, new wallet
10. Ledger 1231 1232 1233 TX id 1234 TX id
11. P2P Network 5 BTC to you, Alice! <signed, Bob>
12. Transactions Inputs: Bob:10 BTC Outputs: Bob: 5 BTC Alice: 5 BTC
13. Transactions 1231 1232 1233 TX id 1234 TX id Inputs: Bob:10 BTC Prev output: Tx 1233 Outputs: Bob: 5 BTC Mary: 5 BTC Inputs: John: 7 BTC (Tx 1231) Outputs: Bob: 10 BTC John: 3 BTC (Tx 1232)
14. P2P Network Alice Sue Walt Bob Mary Jim Miner Joe Miner Dave Miner Amy Miner Tom
15. Proof-of-work require 'digest/md5'
 tx_details = 'hashed tx details'
 nonce = 0
 hashed = Digest::MD5.hexdigest(tx_details + nonce.to_s)
 while hashed[0..5] != '000000'
 nonce += 1
 hashed = Digest::MD5.hexdigest(tx_details + nonce.to_s)
 end > nonce
 => 8788482
 > hashed
 => "000000513d90dae10c23e4a5e49a00fb"
16. Block chain
17. Mining Reward 25 BTC 25 BTC to me!
22. Example Mary Bob 5 5 Balance: 0BTC Balance: 0BTC
23. Testnet cd /Applications/Bitcoin-Qt.app/Contents/MacOS ./Bitcoin-Qt -testnet
25. tpfaucet.appspot.com
27. require 'bitcoin'
 Bitcoin.network = :testnet3
 ks = Bitcoin::Wallet::SimpleKeyStore.new({ 
 file: "keys.json"
 })
 ks.new_key('mary') Mary Create wallet
28. [
 {
 "label": "mary",
 "addr": "mvGfDvC3ZzJTrvvgpAHzuHwcJzt3kHska1",
 "priv": "d6e3673dc8",
 "pub": "04f69bf04"
 }
 ] Create wallet Mary
30. Balance: 8.7BTC Balance: 3.7BTC Example Balance: 0BTC 5 Balance: 5BTC Mary Bob
32. {
 "hash":"bb8b9b8a57c5ec90e11831a5f8d79128b6a9428bd5605488a8674b36fd9cc6ba",
 "ver":1,
 "vin_sz":1,
 "vout_sz":2,
 "lock_time":0,
 "size":226,
 "in":[
 {
 "prev_out":{
 "hash":"5732fdfb5c319e8836e7d9f64cc1778dd73a1378e3ffed1758394dcc7514f974",
 "n":0
 },
 "scriptSig":"3045022100b8c5056689da7c9e1464b0a..."
 }
 ],
 "out":[
 {
 "value":"3.70000000",
 "scriptPubKey":"OP_DUP OP_HASH160 105cdfe… OP_EQUALVERIFY OP_CHECKSIG"
 },
 {
 "value":"5.00000000",
 "scriptPubKey":"OP_DUP OP_HASH160 a1d5d018… OP_EQUALVERIFY OP_CHECKSIG"
 }
 ]
 }
33. new_tx = build_tx do |t|
 # input from previous transaction
 t.input do |i|
 i.prev_out prev_tx i.prev_out_index 1
 i.signature_key key
 end
 # sending back to bitcoin-qt t.output do |o|
 o.value 500000000 # 5 BTC
 o.script {|s| s.recipient "mzfBp7iyyAPDGgCxks3DwmzeYF8znMgGvU" }
 end
 end
 puts new_tx.to_json
34. {
 "hash":"a8ee1848ddb89399c043f1913c4efebfa93325d5899a12eb5ac92c82cdba3103",
 "ver":1,
 "vin_sz":1,
 "vout_sz":1,
 "lock_time":0,
 "size":224,
 "in":[
 {
 "prev_out":{
 "hash":"bb8b9b8a57c5ec90e11831a5f8d79128b6a9428bd5605488a8674b36fd9cc6ba",
 "n":1
 },
 "scriptSig":"304502207659addc..."
 }
 ],
 "out":[
 {
 "value":"5.00000000",
 "scriptPubKey":"OP_DUP OP_HASH160 d1f9008a85f3b5d682bc1558aac95970e46c633b OP_EQUALVERIFY OP_CHECKSIG"
 }
 ]
 }
39. Discussion
40. Thanks! @gammons