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356 11 Electronic Commerce Payment Systems and Order Fulfillment

currently worth around $450 which is over $11,000. Also, if QR code which is easily displayed on a mobile device so the
you are thinking about joining the ranks of the miners, these address can be scanned instead of typing the character
days it takes a lot of computing power to handle the compu- representation.
tations. As a consequence, groups of miners have formed When someone wants to execute a transaction, he or she
Bitcoin mining pools that share computing resources and uses his or her private key to digitally sign a message that
split the bitcoin payoff. includes:
There are easier ways to obtain bitcoins besides mining
for them. Someone who has their own bitcoins could give • Input—the funds to be transferred or more specifically the
some of them to you. You can buy them from any one of the source transactions that assigned ownership to the bit-
commercial bitcoin exchanges (e.g., coinbase.com or cex. coins being sent.
io) using another currency (e.g., USD). Also, you could sell • Amount—the amount of bitcoins being sent.
someone goods or services in exchange for bitcoins. • Output—the Bitcoin address of the recipient.
Regardless of the method, how do they “give” them to you,
and where do they go after you get them? After all, bitcoins The message is broadcast to the nodes on the Bitcoin net-
aren’t physical, they are digital, and there is no bank where work at which point the verification process begins.
you can deposit them. Sometime later if it is verified by one or more machines it
While Bitcoin is a payment system for exchanging value, will be posted. Typically, this process takes about 10 min.
at its technical base it is a messaging system built on its peer- In reality, if a user had to remember and handle all of the
to- peer (Internet) network. The messages that are sent are the details of a transaction, the Bitcoin ecosystem would have
transactions. These messages are sent and received in much never gained much traction. Fortunately, most of these details
the same way that encrypted message are sent and received are hidden by the Bitcoin wallets which is client software that
over the Internet using asymmetrical public and private keys is used to create the keys and addresses and to send and receive
(similar to those described Section 10.6). However, in this bitcoins. Electronic Bitcoin wallets come in three versions:
instance the type of encryption that is used is called Elliptical Desktop, Mobile (Apps), and Web. Figure 11.6 displays the
Curve Digital Signature Algorithm (ECDSA). Web wallet for a dummy account. The first panel of this figure
In order to send or receive a message over the Bitcoin shows the initial screen which displays the Bitcoin address and
network, a user needs a private key and a Bitcoin address. A its associated QR code, shows pertinent transaction data includ-
Bitcoin private key is a randomly generated number ing the balance for this user, and menu selections for sending
between 1 and 2 (i.e., 2 raised to the 256th power) that is and receiving bitcoins. The second panel shows the entries
256
used by the owner to initiate and digitally sign transactions required to send bitcoins. In this case you only need to enter an
and used by the network to verify them. You can think of it address and an amount. The address can either be the alphanu-
like a password or PIN that is used to gain access to funds in meric string or the scanned image of the associated QR code.
a bank account, although in this case the funds are not stored There are a lot of details about how the Bitcoin ecosystem
in an account but are recorded in a ledger. Just like any pass- operates. This discussion has only touched on a few. For
word, this private key can be used by anyone who has it to those who are interested, refer to: Antonopoulos (2015),
gain access to the protected bitcoins whether they are the the diagram at bitcoin.stackexchange.com/questions/4838/
rightful owner or not. So it pays to keep it secret. Also, like what-does-a-bitcoin-transaction-consist-of, and en.wiki-
any other password, if the owner loses or forgets it, then the pedia.org/wiki/Bitcoin_network.
funds it protects can no longer be accessed. In this case, how-
ever, they are lost for eternity because there is no way for Advantages and Disadvantages of Bitcoin
anyone to reset it.
A Bitcoin address is an alphanumeric string that identi- The adherents and supporters of Bitcoin, of which there
fies the recipient of a Bitcoin transaction. You can think of many, point to number of advantages of Bitcoin over fiat cur-
the Bitcoin address like the bank account number that is rencies and other virtual currencies. Most of these revolve
password protected by the private key. Bitcoin addresses are around it’s decentralized structure. Some of the more fre-
generated in a two step process. First, elliptical curve math- quently cited advantages include (Hochstein 2016):
ematics are used to create a paired public key from the pri-
vate key. Second, a special mathematical function called a • Anonymity. Even though transactions are public, there is
“hash function” is used to generate a Bitcoin address from nothing to tie a user’s name to the particular encrypted
the public key. A Bitcoin address starts with either a 1 or a 3 address or signatures unless the user wants to make the
and has between 27 and 34 alphanumeric characters (except connection public. It’s also the case that users can have
for 0 or O and 1 or l because these pairs are easily mistaken multiple addresses, even a new one for every transaction.
for one another). The identifier can also be represented as a This increases the anonymity. However, the shear fact that