Public and private keys vs public address

To Understand bitcoin and its intricate structure, you need to know the difference between three terms whose definitions are often, easily (and mistakenly), interchanged.

Private keys:

In their purest form, private keys are 256 bit numbers that are generated randomly and used to authorise the spending of bitcoin. ‘Bit’ is short for binary figures : a0 or  a 1.

Since the number of possible 256 bit combination is extremely large, a simpler system has been created to represent the private key.

A 64 character hexadecimal system using letters a-f and numbers 1-9 like so: (digital coin address).

Public keys:

Derived from the mathematical theory of elliptic curve multiplication, public keys are created from private keys. They are used to confirm that the data sent in the block chain is authentic, in other words that it comes from the owner of the specific private key.

Thanks to the public key, the private key takes the shape of a digital signature, without ever being publicly revealed.

The receiver, or any peer in the network, will only see the digital signature and public key. Example of a public key: (as a public key).

Public address:

Also known as the bitcoin address, the public address is also a major identifier for a transaction and it’s derived from the public key.

In fact, this is the information that people need to input it they wish to send you bitcoin.

Each bitcoin transaction carries with it a unique public address, generated by applying the public key into a cryptographic algorithm called Secure Hash Algorithm (SHA).

TRUST:

You’ve heard the term “trusted third party” before, right? Traditionally speaking, this third party is the mediator between any customer and any merchant.

Banks and financial institutions or online payment processors are conventional third parties that help facilitate transactions.

Naturally, any transactions that involve people’s money must be built on trust. After the 2008 financial crisis, this core principle was shaken as the concepts of fraud and disputes became more prominent.

Traditional trust constitutes good faith towards the middle man, should any disputes or claims of fraud arise, it is up to this intermediary to settle them.

The system works relatively  well, but merchants end up incurring costs, customers are asked for more information, and transactional fees increase.

Coupled with fact that the traditional trust system took a hit after 2008, Satoshi Nakamoto came up with the Bitcoin Network as a new kind of trust system, based on the P2P network.

Decentralisation & the peer to peer network

The core principle of decentralisation is the removal of a central, controlling body, whether that be an entity in the form of a financial institution (i. e. a bank), a trusted “third party” in the form of a payment provider, or an individual middle man between the sender and the receiver of a transaction.

One type of decentralised system like this has existed for many decades. Known as peer to peer. Or P2P for short.

This network consists of in its most simplified definition, two or more computers connected to one another and sharing all types of data.

Torrent file sharing, which is widespread and allows users to download music, movies, documents and other types of files is based on a P2P network.

P2P technology has a long history. As a fault tolerant network, P2P was initially designed for the purpose of transmitting military messages without any vulnerability to human fatality, natural phenomena or technical malfunction.

Its primary feature is its autonomy  in other words, its inherent decentralised nature.

P2P network has no centralised authority or regulatory entity that monitors, facilitates or controls any of the data that is shared between the two peers.

Satoshi Nakamoto

Emerging from the world of cryptography in the mid 2000s, the mysterious Satoshi Nakamoto is credited as the mastermind creator behind bitcoin the currency, and bitcoin the network.

Is that is real name? Is he Japanese? Or American? Is he or she, in fact, a lot of people merged under one pseudonym? To this day, no one knows.

As a direct response to the financial crisis of 2008, Satoshi Nakamoto envisioned a new and decentralised digital currency system he called bitcoin.

In October 2008,Nakamoto published a paper entitled “Bitcoin” : A peer to peer Electronic Cash System” which detailed a payment system based on chains of data blocks (later to become knowns as block chain) and the removal of third parties between transactions.

I came at a perfect time, of course, because a lot of people had lost trust in traditional financial institutions due to the crisis.

Nakamoto’s proposal detailed how the new system would function without financial institutions, how a peer to peer network would resolve the issue of double spending and what this new system would mean for transactional.

Privacy

A few years after his proposal, Satoshi Nakamoto stopped being involved in the development of bitcoin and completely disappeared from all public forums.