Bitcoin Doesn’t Know Who You Are
As I’ve already discussed one of the features of Bitcoin is anonymity.
When you make a payment through a regular bank the bank is usually required by their regulators to know who you are. There are ‘know your customer’ rules the banks have to adhere to, or they will find themselves with large fines for aiding money laundering.
This isn’t true of Bitcoin. It’s possible to have some money and pay it to someone through our big ledger without anyone knowing who you are.
Above we said that Bitcoin was like a big book with a page for every coin where the owner of the coin is recorded. Furthermore, when the owner makes a payment they have to sign the book. How can this work if the owner is anonymous?
The simple answer, without going into the actual cryptography, is that we don’t use our actual names and signatures. We don’t even use digital names and signatures we might have used elsewhere. We generate a new random name with an associated signature every time a payment is made. The cryptography means that only the person who generated the random name knows how to sign, but if they do sign other people can check that they’ve used the right signature for that name.
This means that when I receive a payment I tell the person paying me to pay it to a random name that I’ve generated. No-one can easily tell that the random name is actually me, so we have anonymity.
What We Call the Name
We don’t call it a ‘random name’ in fact. It’s actually a big binary number and we expect names to be text. So we call it an ‘address’, although in cryptographic terms it’s a ‘public key’. In cryptographic terms the signature information that I will use to pay the money is called the ‘private key’.
I personally think even ‘address’ is misleading, as it’s random and used only once and then discarded. That isn’t what happens with most ‘addresses’. There’s an entire article the Bitcoin wiki on why you can’t really return Bitcoins to the address they came from, which probably wouldn’t have been necessary if they’d been called something else.
Signature Information Is All You Need
One other thing to note here is that the signature information, the private key, is the only thing you need to pay the coins to someone else. If you tell anyone that key, or if you sell your coins for cash by giving someone both the public and private key on a USB stick, say, then they can pay the coins by signing a payment instruction. You can still pay them too, but of course they can only be paid once using that signature.
Having a different random name owning every coin means that you can’t just look at the ledger and work out which coins belong to you. They aren’t in your name. You have to know all the random names that your coins are owned by, the public keys. Also to spend them of course you need signature information, the private keys.
Since both the the public and private keys are actually very big numbers you’re going to need a secure electronic way of storing these. Or an incredible memory. This is where ‘wallets’ come in. A Bitcoin wallet is really just a place to store this information, although it can have other features such as helping you to spend your coins.