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Originally posted by Sugarphreak I don't fully understand how bitcoins can't just be copied endlessly. Can somebody school me in Coles?
Waves near the 69th C-train has one you won't get mugged at
It comes down to asymmetric encryption and the bitcoin network.
The former means that each bitcoin wallet is comprised of two keys. One key is private (only you should have it and never ever share it) and the other is public and anyone can know it and it doesn't matter.
The way the keys work is based on a one way encryption algorithm (known as asymmetric encryption) that the public key is used to encrypt messages but only the private key can decrypt the message. There is only one unique key pairing possible.
When I decide to send you money my client takes your public key (your wallet address) and my private key and generates a message to send to the bitcoin network. Let's say I make up a transaction ID as "XYZ123". Now I take that number and decrypt it with my private key and it spots out the word "HELLO".
So now I put together the bitcoin transaction. Send 1 coin from my address 'qwerty123' to your address 'dvorak0987', the transaction ID is XYZ123 and I sign it with the word HELLO.
Now anyone can see that message within the bitcoin network. Anyone can take my address and the word HELLO and run it through the encryption algorithm and it will spit out XYZ123 so people know it is actually me. So then the bitcoin miners can confirm that as a legitimate transaction and include it in the next block. To prevent roque miners screwing with stuff, each block is re-verified. So 10 minutes in my transaction shows verified blocks: 1, after 20 minutes: 2, etc. A lot of websites require a minimum of 3 transactions before they release the funds or accept is as legitimate.
Now what about brute force cracking the algorithm? That is entirely possible but the size of the encryption means you're looking at the worlds most powerful supercomputers taking many many years upon years to build everyone possible combination.
However what is more common is that people steal the private key. If your personal computer gets hacked or you are using a cloud based service and they get hacked, all your money can be drained instantly (similar to if someone finds out your banking login information). The one nice thing is the system uses push transactions rather than pull transactions which means it is much safer for the users.
Push transactions means I have to sign every transaction with my device for it to work. Pull transaction means anyone can look at my credit card and see the numbers and then enter fake purchases easily. If a Chinese site gets my credit card info they can use it anywhere else. Whereas I can send bitcoins to the most sketchy of sites and its impossible for them to steal anything more than only what I sent.