BitcoinWallets

How are My Bitcoins Stored?

By September 13, 2017 No Comments

An Ingenious New Technology

You don’t have to be a computer scientist to understand how an ingenious new technology can reliably store your digital currency without the need for any banker or credit card company to keep track of your balance.  The simple answer is that you don’t need a banker or credit card company to keep an eye on your balance because it’s not really a balance at all and millions of “eyes” all over the world are constantly  keeping track of it.

 

blockchain

The network is keeping millions of “eyes” on your bitcoin balance

Millions of “Eyes” Keeping Track

That may sound weird or even downright creepy but it’s true – and the real beauty of this bizarre-sounding setup is that none of these “eyes” have any idea who you are, exactly how many bitcoins you have, where you got them, or how you ultimately spend them.  But even without knowing any of that information, you can still rely on them to always have your accurate balance at hand and ready for you to access or spend any time, anywhere in the world, even when every bank is closed.

Sooooooo Not Cloud Storage

cloud-storage-parody

This is sooooooo NOT cloud storage

Now your mind may immediately jump to an idea you’re already familiar with – cloud storage.  When you store documents in Dropbox, Google drive, or iCloud drive for example, they’re not stored on your computer at all but you can access them from any internet-connected device.  So it seems like your information is stored and guarded “in the cloud”, and not by anyone in particular.

The Cloud Illusion

But when examined a bit closer, this so-called “cloud” technology is really just an illusion.  Sure, your info isn’t stored on your own computer’s hard drive, which is great because even if your computer crashes or gets dropped in the tub, your data is completely safe.  But it is stored on a hard drive of a computer (called a server) somewhere, usually with backup copies stored on several other servers.  You have to trust Amazon or Google to keep those copies as the only official, “true” copies of your data.   You can, of course, edit your data going forward, and you can also go back to previous versions and “restore” them, like going backwards in time.  So cloud storage requires a trusted, centralized third party to keep and verify your data, and changes can be made going forward or backwards in time.

Not A Balance At All

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Instead of a bitcoin balance, you own the addresses at the end of the chain of transactions for all your bitcoins

Actually your bitcoin balance is not a balance at all.  It’s a list of a chain of trades or transactions in which all the bitcoins you now own were passed from hand to hand to hand, like digital dollar bills, until they were ultimately passed into your hand.  The millions of eyes keeping track of your transactions and everyone else’s are millions of computers all over the world that keep a list of every verified transaction for every coin, grouped into blocks, and ordered into a chronological chain.  When you hear people talking about “blockchain” technology that’s what they mean – and it really is an astonishing, ingenious breakthrough.  Let’s see why.

No Keeper of “Truth”

Unlike cloud storage, there is no central server that is the keeper of “truth”, but rather millions of computers all over the world that keep a copy of the entire blockchain.  So if someone wanted to try to fool the system with a fake transaction or counterfeit money, instead of just fooling a single server, they’d have to fool millions.  This characteristic is called “decentralization”.

In Sync?

bitcoin-storage-blockchain

blocks of transactions are only given a spot in the chain once they are “solved” with the answer to a super-difficult and time-consuming math puzzle.

But how do all these decentralized computers stay in sync?  The answer is that blocks of transactions are only given a spot in the chain once they are “solved” with the answer to a super-difficult and time-consuming math puzzle.  The math is so complex that it would take a powerful desktop computer years to solve it, so an entire network of computers is required.  And the answer is unique, so no other block of transactions could have the exact same answer.

A Puzzle and a Coded Link

As all the computers in the network race to solve the next block, nobody knows who will win because random numbers are involved in the puzzle.  Once solved, the winner gets a reward in bitcoins, and the new block is linked by code to the puzzle solution of the final block in the previously verified chain.  That unique coded link can only exist between those exact blocks, containing those verified transactions.

blockchain-transaction-solution

Now all the computers on the network can communicate the validity of the blockchain mathematically because only one unique block of transactions will fit, like a puzzle piece, into the mathematical puzzle slot that is next in the chain.

Now all the computers on the network can communicate the validity of the blockchain mathematically because only one unique block of transactions will fit, like a puzzle piece, into the mathematical puzzle slot that is next in the chain.  That’s how all the eyes, all over the world, can maintain the integrity and validity of the chain.

Privacy and Proof of Ownership

Now what about the privacy of your transactions themselves?  After all, everyone on the network can see from/to addresses and amounts of transactions.  Once again a clever math puzzle comes to the rescue to protect your privacy.  Even though there is no need to keep a balance, you can only spend your bitcoins if you can prove that you own each and every one.  This is done by proving that you are the legitimate owner of the address at the end of the chain of transactions for those bitcoins.

bitcoin-storage-public-private-keys

You never need to reveal your personal identity.  All you need is a private “key”, which is like a fingerprint, that proves you own the public address (like an email address) to which those coins were sent.

 

You never need to reveal your personal identity.  All you need is a private “key”, which is like a fingerprint, that proves you own the public address (like an email address) to which those coins were sent.  You can have as many public addresses as you want, each one of which links, by code, to a separate private key you own.  You can store all of your keys in a secure “wallet”, online or offline.

The Magic of Blockchain

If they only know the public address to which the coins were sent, there is no way anyone can figure out who owns the address.  Without access to your private keys, no one can figure out how many bitcoins you receive, spend, or own.  But with blockchain technology, they can easily verify for themselves, just like you can, that every one of those transactions is a valid one.

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