Grokking Bitcoin

To the love of my life, my wife, Linnéa. Smart, faithful, real.

And to all awesome Bitcoiners everywhere.

What is the difference between Bitcoin and the various monies used in multiplayer games? Each is defined by software, is created out of nothing, and can have prices comparable to traditional currencies. To a casual observer, they seem much the same.

But there is an important difference in how they’re designed that affects every aspect of their respective systems: whereas game currencies try to stop cheating by reactively banning users suspected of abuse, Bitcoin proactively prevents various types of cheating by making them impossible, impractical, or less profitable than honest behavior.

Grokking Bitcoin describes exactly how Bitcoin accomplishes that. As you learn about hash functions, digital signatures, proof of work, and many other technical concepts, you’ll see over and over that Bitcoin effectively prevents cheating without requiring the global banning of any user.

The book then demonstrates the many benefits of this key feature. As you learn about addresses, wallets, miners, and nodes, you’ll discover that if no one can cheat effectively, it’s safe to allow everyone to participate in every part of the protocol, leaving no one in a trusted position of authority over the system. And with no one holding a trusted position, there’s no need for identities in the first place. Grokking Bitcoin goes on to show how it’s possible for anyone to use the public Bitcoin blockchain with a degree of privacy.

A decentralized system that doesn’t use identities or depend on trust is quite different from the everyday systems with which most of us are familiar. Author Kalle Rosenbaum turns this liability into an asset by starting the explanation of each part of Bitcoin using a centralized, trusted, or identity-dependent system that any reader can intuitively understand. He then transforms that basic system step-by-step into the decentralized, trustless, and pseudonymous system implemented in Bitcoin. With each step filled with clear explanations and many excellent illustrations, even the most highly technical topic is made accessible to the interested layperson.

Bitcoin needs books like Grokking Bitcoin, but it also needs an active group of users who read those books and come to understand the technical principles on which Bitcoin is built. During these early days of what I hope will be the long history of Bitcoin, users are often asked to evaluate proposed changes to the system—changes that may affect the security and privacy of their bitcoins. Those who have read this book will understand how the system prevents cheating and will be able to help ensure that future changes preserve that essential feature and its many benefits.

—David A. Harding
Contributor to Bitcoin documentation

Bitcoin is changing the world.

The world has seen many major improvements to human life, among which are vaccines, electricity, radio, automobiles, and the internet. Some of these technologies start out as rich people’s games, but eventually they trickle down to the general public and bring huge benefits to Earth’s population. Bitcoin will soon be right there among them. This is what makes me super-excited about Bitcoin.

Luckily, I’m fortunate enough to live in a pretty functional society. When conducting financial transactions, I never have to worry that someone will come knocking on my door. I’ve never felt that I need to spend my money immediately because otherwise hyperinflation will eat my lunch. But that also makes it harder for me to grok why Bitcoin is important. Bitcoin is mostly theoretical to me, but when I hear reports from less fortunate people living under oppressive or incompetent regimes about how Bitcoin makes their lives better, it becomes very real. Bitcoin will give people an opportunity to opt out of the system that’s holding them hostage.

Satoshi Nakamoto, a pseudonym for a person or a group that wants to remain unknown, published a scientific paper on a cryptography-oriented e-mail list in October 2008. The title of the paper was, “Bitcoin: A Peer-to-Peer Electronic Cash System” (see web resource 1 in appendix C). Nakamoto’s paper described the vital parts of Bitcoin, the first digital money system where there’s no central authority to issue money or process transactions. In January 2009, Nakamoto published the first software program to implement the described system. Bitcoin didn’t get much attention then, apart from within a very limited set of cryptography experts. Gradually, as the system proved itself to be working, more people became interested. But the resistance against Bitcoin was and is still far bigger and louder than the adopters, as is the case with all groundbreaking new technology. As of 2019, hundreds of millions of people are aware of Bitcoin, and tens of millions of people are using Bitcoin.

When I started exploring Bitcoin in 2013, it took me a long time to acquire a decent understanding of the technology. That’s not because I’m remarkably stupid; it’s because Bitcoin is a complex system. It’s not just a fancy database—it’s a mishmash of economy, mathematics, technology, and anthropology.

I started a technical blog about Bitcoin in 2015, and I guess Manning liked my content, because the company sent me an email asking if I was interested in writing a book about “blockchain.” Since my passion is Bitcoin—not only the blockchain, an overly hyped word for Bitcoin’s database—I replied and thanked Manning and said I’d be interested in writing a book about Bitcoin. I’ve struggled a few years trying to find a place in the Bitcoin community, and this opportunity seemed like a great fit. The project started, and it turned out to be far harder and far more time-consuming than I expected.

This book began as a typical technical description of Bitcoin, but it was difficult to teach one topic without the full context. The cognitive load at the beginning of the book would be too overwhelming. It became clear that I needed to do something else. I discussed it with my wife, and we came up with the idea of conceptually building Bitcoin from the ground up. The book starts with a really simple spreadsheet system that anyone can understand, and that system evolves into Bitcoin. Each chapter points out some problems with the current system, and we fix them by adding the technology covered by that chapter.

The manuscript for Grokking Bitcoin will be released under the Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International (CC BY-NC-SA 4.0) license shortly after its print publication. Releasing a version under an open license was a requirement I had in writing this book. It is my way of giving back to the Bitcoin community that has given me so much over the years. It is my, and Manning’s, hope that those who can’t afford to buy this book will benefit from the open source version. There are, of course, less philanthropic reasons. We also hope that open sourcing this book will give it more visibility, as potential readers browse through it. Please buy the beautifully typeset version if you can afford it. Manning and I have spent an enormous amount of time and effort in producing this book, and we would greatly appreciate the income!

I hope you enjoy reading Grokking Bitcoin as much as I suffered writing it!

I have a lot of people to thank for making this book possible.

First, I’d like to thank my wife, Linnéa, for all our valuable discussions and your consistent encouragement. You are absolutely fantastic.

Christina Taylor at Manning, my dear development editor: thank you for keeping me busy. Work work work. Thank you also to Bert Bates for your very valuable input on the pedagogy.

I’d like to also thank everyone else at Manning who contributed with their professionalism, including Ozren Harlovic, Rebecca Rinehart, Candace Gillhoolley, Ana Romac, Michael Stephens, Erin Twohey, Christopher Kaufmann, Matko Hrvatin, and Greg Wild. A special thanks to the fantastic production team: Chuck Larson, illustrator; Rebecca Deuel-Gallegos, copy editor; Kevin Callahan, typesetter; Tiffany Taylor, proofreader; and Lori Weidert, production editor.

I’d also like to thank Jonathan Jogenfors and Pontus Lindblom for reviewing some chapters covering their respective fields of expertise.

A lot of people on various internet forums were very helpful during my research. The ones that stand out the most are David A. Harding, Pieter Wuille, and Mark “Murch” Erhardt. Thank you for all our Twitter conversations and great answers on Bitcoin Stack Exchange (see web resource 2 in appendix C).

I got help from Andreas M. Antonopoulos when negotiating the open source terms for this book. Your encouragement during that process was gold. Thank you! In addition, thanks for the “vegetarian restaurant” analogy used in [ch11]. Thank you also for your amazing talks; you are a major source of inspiration for me.

I wrote this book using Asciidoctor, which is a text markup language. Thank you, Dan Allen, for your hard work on Asciidoctor; it’s fantastic.

The book went through three review rounds, with several reviewers in each round. Those reviews were extremely useful in vetting ideas and finding gaps in the learning path. Thank you to Jan Goyvaerts, Max Humber, Iryna Romanenko, Jean-François Morin, Al Krinker, Joel Kotarski, Markus Beckmann, Christopher Bailey, Viton Vitanis, Paolo Freuli, Tomo Helman, Marcello Seri, Maciej Drozdzowski, Cicero Zandona, Barnaby Norman, Frances Buontempo, Glenn Swonk, and Sergio Fernandez Gonzalez.

Thank you also to all the Manning Early Access Program (MEAP) readers who contributed their thoughts, corrections, and questions on the Manning Forum, and to Aruna Surya for providing feedback via email.

If I left someone out, I’m terribly sorry; thank you, too.

The primary goal of this book is for you to be able to decide for yourself whether you trust Bitcoin. On the way to that goal, you’ll learn a number of Bitcoin concepts—such as digital signatures, proof of work, and peer-to-peer networks—on a pretty deep level. Some secondary goals fall out naturally:

Kalle Rosenbaum has worked as a software developer for 20 years. His passion for Bitcoin began in 2013 and has continued uninterrupted. Kalle started a Bitcoin consultancy company in 2015 and has worked in the Bitcoin industry since then. He also writes a technical blog that explains various technical Bitcoin topics, such as block-propagation improvements, sidechains, and replace-by-fee. The purpose of the blog is to teach himself and let others benefit, too.