Bitcoin Basics: Keys, Signatures, Addresses and Seed-Phrases — Hug a nerd today!

Figure 1. An example of a distributed ledger containing transactional information.

Keys

In the above paragraphs we highlight that knowing someones address (which we will explain more later) does not give someone the right to spend the coins allocated to that address. For this, you need to possess the keys to that address.

Figure 2. Private Key and Public Key Pairing example..

Signatures

Signatures are where the true beauty comes from Private and Public Key pairs. Say I wanted to send a message to somebody, and I really wanted the integrity of that message to be maintained, but I really really wanted my friend on the receiving end to know that that message had not been intercepted, interfered with or changed. We can use cryptography to achieve this. Without getting into the inner-workings of the cryptographic algorithms (it’s well above my pay-grade), we will just stick to the high level concept. By using a cryptography algorithm, I can cryptographically sign a message (for now I will use an arbitrary piece of data) using my Private Key. When I sign this message, the algorithm signs this message using my Private Key and provides me with a message signature. Figure 3.

Figure 3. I have signed a message with my Private Key, this provides a Message Signature.
Figure 4. The message is verified with the signature and the Public Key.
Figure 5. The message has been changed, the program recognises a mismatch between the signature, the message and the public key and turns red, something is amiss.

Signing Transactions

To understand how we can use Private Key and Public Key pairs in the context of transactions, it can be as simple as just replacing the message in our previous example with a transactional record, with a slight twist.

Figure 6. Signing a transaction record with a Private Key.
Figure 7 — Verified transaction record.
Figure 8 — The nefarious actor adds 1/2 cent to the transaction, but we busted him.

Tying it all together

Using what we learned from the previous article on blockchain, distributed ledgers, nonce’s and mining, we can now add our new knowledge to the blockchain transaction records.

Figure 9. Public Keys and Signatures are added to the blockchain. Seq will increment for identical transactions between the same 2 parties.

Public Addresses and Seed-phrases.

As we can see from our examples above that the Public Keys are quite long. It is very easy to make a mistake if manually typing in a public key if you were to try and complete a transaction. There are many ways developers have tackled this complexity with things such as QR codes, the use of other hash functions checksum operations, and extended public keys.

Figure 10. Seed-phrase to Public Address flow.

Conclusion

This article wraps up most of the technicalities we will go through in the series. To reiterate what has been mentioned previously, I believe that having a fundamental understanding of the blockchain, keys and addressing is essential in your conviction in holding bitcoin as a bearer asset. When these market shake-downs happen, as we recently experience, I like to revisit these core principles and rediscover the marvel behind the tech, the nuance and the specifics that make this a global monetary phenomenon. It is my strong belief that bitcoin has been too well-thought-out to be one player, but rather a conglomerate of cypher-punks with a deep understanding of economics, macro-economics, computer science, cryptography, philosophy and game-theory. But that is pure speculation, it could very well be that this Satoshi Nakamoto had a deep understanding of all these subjects, I guess we will never know, in fact I hope we don’t.

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