Why and How
Where did Bitcoin come from? Why was Bitcoin created? What exactly does a blockchain do? What is mining? This section aims to answer these questions for you.
To really understand a system like Bitcoin in its entirety, you’ll need to have a basic understand of decentralization and cryptography. In this section we’ll cover the foundational pieces of bitcoin.
In this section we finally get into the specifics. When you've finished with this section you will hopfully understand what a node does, what a bitcoin really is and how they are stored in wallets. This will get us nice and prepped for Part II of this course.
Cryptocurrencies are called so because cryptography is the material they are built with. Having a basic understanding of asymmetric cryptography is a prerequisite for comprehending how cryptocurrencies work.
“Public-key cryptography, or asymmetric cryptography, is a cryptographic system that uses pairs of keys: public keys which may be disseminated widely, and private keys which are known only to the owner. The generation of such keys depends on cryptographic algorithms based on mathematical problems to produce one-way functions. Effective security only requires keeping the private key private; the public key can be openly distributed without compromising security.” – Wikipedia
Asymmetric or public/private key cryptography was developed in the 1970s. Prior to then, the only cryptography available was symmetric. Let’s take a look at how symmetric cryptography works to gain some insight into why asymmetric cryptography was developed and the advantages it has.
Alice and Bob want to communicate securely with one another.
To do this Alice creates a message to Bob and scrambles it using a specific formula also called an encryption algorithm. This is done using a secret, or a key.
Let’s look at a much more simplified example of this…
Alice wants to encrypt the word “Hello” to send to Bob. She uses the very simple formula of taking each letter in the word and changing it to the letter two spaces over in the alphabet. This formula is the algorithm or key.
Hello → move over two spaces in the alphabet → Kgnnq
Kgnnq → Key → Hello
If Bob knows this formula, then Alice can securely transmit this message to Bob, and it will look like gibberish to anyone who intercepts the message.
This works just fine; the problem is with transmitting the key to Bob. How do you securely transfer the key? Anyone who intercepts it will be able to read all the communication between Alice and Bob.
This is a fundamental weakness in symmetric cryptography that was solved by asymmetric cryptography. Lets see how it’s done in the next lesson!