Bitcoin Internals by Clark Chris

Author:Clark, Chris [Clark, Chris]
Language: eng
Format: epub
Published: 2013-06-16T00:00:00+00:00

6.2 Ownership

There are two ways to track ownership of a currency:

Possession of a token that independently represents value (e.g. paper cash, metal coins, and Chaum’s digital cash)

Possession of a key that controls access to records in a ledger (e.g. checks, credit cards, Paypal, and Bitcoin)

Designing a decentralized currency is challenging because it is not obvious how either of these methods can be used without some trusted authority like a bank. In method 1, somebody has to issue the tokens and in method 2, somebody has to maintain the ledger. If anyone can issue tokens or edit the ledger, then the system is bound to fail. Bitcoin uses the ledger-based method, but it manages to work due to a novel method that allows a distributed network of untrusted peers to maintain a trustworthy ledger.

Bitcoin’s ledger, known as the block chain, can be thought of as a record of receipts for all transactions that have ever occurred in the Bitcoin system. Unlike a typical bank’s ledger, it doesn’t contain any account balances. Rather than recording a quantity of bitcoins for each owner, it records an owner for each quantity of bitcoins transacted. The owner is just the recipient listed on the transaction receipt in the block chain (until the bitcoins in that transaction are spent). To spend bitcoins, the owner creates a new transaction that takes the bitcoins from a prior transaction (one that was sent to the owner) and assigns them to someone else. The owner is the only one who has the ability to create such a transaction because it requires their digital signature.

The previous transaction from which bitcoins are taken is called an input. When a transaction is used as an input, we say that the transaction itself is spent because all of its value will be sent to the recipient(s) and the transaction can never be used as an input again. If an input’s value is greater than the desired payment amount, that is not a problem; transactions allow multiple recipients, so the owner can send a portion of the input’s value back to one of their own addresses as change.

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