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