Understanding Bitcoin: Cryptography, Engineering and Economics

CHAPTER 8Wallets

As explained in Chapters 6 and 7, bitcoins do not reside in a user’s computers, rather bitcoins are an entry into a distributed ledger, the blockchain. This ledger holds the amount of funds available for each address. The private key associated with an address must be used to sign a transaction spending the funds from that address. A Bitcoin wallet is simply a collection of private keys. Although a Bitcoin wallet derives its name from an analogy with physical wallets, it is important to note the differences between the two:

• A physical wallet holds the physical money. Therefore it cannot be copied. In contrast, a Bitcoin wallet can be copied. Whoever controls a copy of the Bitcoin wallet can spend the funds. An attacker can “steal” a Bitcoin wallet by making a copy of it. In Bitcoin, ownership of funds is determined by spendability Anyone in possession of the private key can spend the funds.
• A Bitcoin wallet can be distributed across several devices, in such a way that accessing the funds might require cooperation between the devices. This can be achieved with multisignature transaction outputs where the private keys of all the required signatures are distributed across several devices. The flexibility provided by the Bitcoin protocol allows for more types of wallets than physical wallets.
• Receive-only Bitcoin wallets are possible. These wallets only hold a copy of the public keys or the Bitcoin addresses. Receive-only wallets can receive funds but cannot spend ...