Wallets, Keys & Custody

Key Concepts

Module 1

• Course Introduction: Explore the course objectives and expectations for the Bitcoin Diploma.
• Class Discussion — Five Questions on Money: Engage in a reflective exercise by answering five key questions about money.
• Understanding Money
• Functions, Properties, and Types
• Class Discussion — Why We Need Money
• Psychology of Money

Module 2

• Introduction to Money's History and Evolution: Explore the history and evolution of money. Understand how ancient forms of trade led to the development of the currency we use today.
• Barter Game Activity: Engage in a hands-on barter game experience to grasp the challenges of direct exchange and appreciate the need for a more efficient system.
• Evolution of Currency: Explore the transition from ancient forms like shells and beads to the emergence of coinage and paper money. Follow the journey from paper to plastic, unraveling the evolution of currency throughout history.
• Digital Currency Revolution

Module 3

• Fiat Money Origins: Explore the origins of fiat money through a brief historical overview, understanding how it became a dominant form of currency.
• Fractional Reserve Banking Activity: Engage in the Fractional Reserve Banking activity to gain insights into how this system operates, highlighting its reliance on debt and the implications for the broader economy.
• The Fiat System: Grasp the fundamental aspects of the fiat system, including its nature as a monetary system by decree, the role of fractional reserve banking, and the key players controlling this system.
• Central Bank Digital Currencies (CBDCs): Explore the evolving landscape of Central Bank Digital Currencies (CBDCs) and their potential impact on the future of money.

Module 4

• Decreasing Purchasing Power: Understand the concept of monetary inflation and its impact on purchasing power. Engage in the Effects of Inflation: An Auction Activity to experience the effects firsthand.
• The Fiat System's Consequences Activity: Participate in the Consequences of the Fiat System activity, shedding light on the broader repercussions of the current monetary framework.
• Global Debt Burden and Social Inequality: Explore the dual impacts of the global debt burden and social inequality. Recognize the individual and societal consequences, emphasizing the loss of purchasing power and the widening wealth gap.
• The Cypherpunks and Decentralization: Learn the Cypherpunks' story and their motivation for seeking a decentralized currency. Differentiate between centralized and decentralized systems, gaining insights from a brief history of digital currencies.

Module 5

• Satoshi Nakamoto and the Creation of Bitcoin: Explore the mysterious figure of Satoshi Nakamoto and the origin story of Bitcoin, understanding the initial motivations behind its development.
• Class Activity — Consensus Building: Engage in the Consensus Building in a Peer-to-Peer Network activity to gain practical insights into how consensus is achieved within the Bitcoin network.
• Bitcoin as Sound Digital Money: Examine Bitcoin's role as sound digital money, discussing its evolution, functions, and properties, and participate in a class discussion on whether Bitcoin qualifies as sound money.
• How Bitcoin Works: A look into the mechanics of Bitcoin, including the Nakamoto Consensus Mechanism. Identify the key players in the Bitcoin network, such as miners, nodes, users, developers, and projects, and grasp the collaborative dynamics between them.
• Embracing Personal Responsibility: Emphasize the concept of personal responsibility in the context of Bitcoin, encouraging an understanding of individual roles and accountability within the decentralized ecosystem.

Module 6

• Acquiring Bitcoin: Explore methods like peer-to-peer transactions and exchanges, discussing privacy concerns related to KYC processes.
• Peer-to-Peer Transactions: Engage in decentralized transactions to experience the core principles of Bitcoin exchanges.
• Setting Up a Bitcoin Wallet: Learn the essential steps to download, create keys, and back up a Bitcoin wallet for secure transactions.
• Bitcoin Wallet Types: Differentiate between open source, closed source, custodial, and noncustodial wallets, understanding the role of keys in security.

Module 7

• Introduction to Lightning Network: Recognize the evolution of Bitcoin through technologies like the Lightning Network, enhancing its capabilities.
• Setting Up a Lightning Wallet: Learn the essential steps to set up a Bitcoin Lightning wallet, facilitating faster and more scalable transactions.
• Hands-On Activity: Engage in a practical Lightning wallet relay race, promoting a dynamic understanding of Lightning Network transactions.
• Lightning Wallet Types: Differentiate between open source, closed source, custodial, and noncustodial Lightning wallets for varied user preferences.
• Lightning Transactions: Explore the process of sending and receiving Lightning transactions, emphasizing the speed and efficiency of the Lightning Network.

Module 8

• The Bitcoin Ledger: Understand the concept of a decentralized ledger facilitated by nodes and miners, ensuring transparency and security.
• Public and Private Keys: Explore the significance of cryptographic security in Bitcoin transactions through public and private keys, along with an activity demonstrating SHA 256 hashing.
• The UTXO Model: Grasp the Unspent Transaction Output model as a fundamental aspect of Bitcoin's transaction process.

Module 9

• Bitcoin Nodes and Miners: Look into the roles of nodes and miners in maintaining the Bitcoin network, covering aspects like issuance, scarcity, halving, and difficulty.
• The Mempool: Explore the Bitcoin blockchain through the mempool and get hands-on experience through the mempool.space activity.
• How Bitcoin Transactions Work: Gain insight into the entire lifecycle of a Bitcoin transaction, involving the sender, recipient, nodes, miners, and the mempool.

Module 10

• Bitcoin's Future: Delve into the potential trajectory and future developments of Bitcoin as a revolutionary digital currency.
• Central Bank Digital Currencies: Compare Bitcoin's decentralized ethos to that of CBDCs to better understand Bitcoin's role in empowering humanity.
• Philosophical Underpinnings of Bitcoin: Explore the foundational philosophy behind Bitcoin, understanding how it emerged as a response to economic challenges, with a focus on its impact on financial freedom and how it differs from traditional currencies.
• Diploma Reflection

6.0 Introduction

Why would anyone trust nerd money vs. central bank money? Nerds brought you the internet. Banks brought you the Great Depression.

_Satoshi Nakamoto_

Now that we have a better understanding of what bitcoin is and its purpose, it's time to learn how to use it in practice. In this module, we'll guide you through the process of acquiring bitcoin step-by-step, explore the various types of wallets available, help you set up your own Bitcoin wallet, and even practice sending and tracking a Bitcoin transaction on the network. It's time to apply your understanding in action!

6.1 Acquiring Bitcoin

There are many ways to acquire and exchange bitcoin. For example, you can:

• Get paid in bitcoin in exchange for your work and pay for other people’s products and services with bitcoin (more on that in Module 7)
• Mine bitcoin (more on that in Module 9)
• Exchange your fiat currency for bitcoin or exchange your bitcoin for fiat in person.
• Exchange your fiat currency for bitcoin or exchange your bitcoin for fiat online.

Below, we’ll explore exchanging fiat currency for bitcoin and vice versa, through both in-person and online methods, as they are the most common options.

Peer-to-Peer: In Person

Engaging in peer-to-peer (P2P) transactions to buy and sell bitcoin in person involves directly exchanging your fiat currency (or any other goods or services) for bitcoin with another individual, eliminating the need for a bank or other party to be involved.

Both parties agree on the amount and rate. The buyer provides cash, the seller sends the bitcoin, and the transaction is complete once confirmed on the blockchain. Exchanging bitcoin for fiat works the same way in reverse.

Peer-to-Peer: Online

While it's easier to do peer-to-peer exchanges in person by meeting with the other individual directly in the real world, this carries some risk — just like any other in-person trade for cash does. This is why some people choose to exchange bitcoin virtually, wherever they are thanks to the internet.

Enter peer-to-peer platforms, where Bitcoin buyers and sellers meet in cyberspace to conduct transactions without any intermediaries, directly on the internet.

On such platforms, you don’t have to trust anyone with your information or money; you connect with other peers and trade with them directly.

Note

On most peer-to-peer platforms, peers have to escrow some of the funds to ensure each side will comply with their part of the deal. Escrow means putting the money in a safe place under the control of the platform until both parties do what they promised. It's like a trusted friend holding onto your stuff until everyone is satisfied with the deal.

Centralized Exchanges

Centralized exchanges are companies that allow clients to buy and sell bitcoin directly through them. They are the easiest way to acquire and dispose of bitcoin, but this convenience comes with significant trade-offs.

Centralized Exchanges Trade-Offs

It’s important to note that when buying bitcoin through a centralized exchange, you are often required to provide personal information and verify your identity. This creates a risk of identity theft and exposes your personal information to potential threats. Additionally, centralized exchanges hold your bitcoin for you, which means you are not in control of your money until you withdraw your funds.

To add to these concerns, centralized exchanges can misappropriate user's funds or sell more bitcoin than they have in reserves until they collapse — Yes, just like banks! Except that, in the Bitcoin world, there is no central bank to bail out fraudulent banks by printing more currency, because you can't print more bitcoin!

6.2 Introduction to Wallets

Unlike physical money, bitcoin are not actually contained in a Bitcoin wallet. Instead, they live on the distributed ledger that the Bitcoin network constantly verifies and secures. So, how can you own bitcoin?

You have ownership of your bitcoin only if you control the private keys allowing you to sign transactions and transfer ownership of your bitcoin to someone else. This is the act of sending bitcoin.

Let’s take a look at two concepts we refer to when using the term wallet:

• A master private key (like a password) from which your public keys (like email addresses) are generated [m dash] you can share your public address with others to receive and send bitcoin, but you must never share your private key!
• The mobile or desktop interface from which you can interact with the Bitcoin network to retrieve your bitcoin balance, send and receive transactions, and broadcast them to the network. Different types of wallets, along with their benefits and tradeoffs, will be described in the next sections.

Self-Custodial vs Custodial Wallets

Before detailing the different types of Bitcoin wallets and their characteristics, let’s make an important distinction between self-custodial and custodial wallets. Each type has its own benefits, risks, and level of control over the bitcoin. Self-custodial means the user holds the private keys and truly controls their bitcoin; with custodial wallets, a third party holds the bitcoin for the user.

In a self-custodial wallet (also called non-custodial wallet), you are the only one with the keys to the wallet and you have full control over what goes in and out. On the other hand, in a custodial wallet someone else holds the private key, giving them full access to move any bitcoin that provider controls on your behalf.

• Self-custody is like being your own bank. Transactions are not subject to the scrutiny and control
• Self-custody ensures that third parties cannot confiscate your bitcoin.
• Self-custody gives peace of mind in times of uncertainty, because you know your bitcoin is secure.

It’s important to choose the right type of wallet for each individual’s needs. Sometimes, people find it hard to distinguish whether they are installing a self-custodial or a custodial wallet. This table shows the differences in the installation process.

“Not your keys, not your coins” is a popular saying among bitcoin holders. It refers to the idea that if you don’t have direct control over the private keys associated with your Bitcoin wallet, you don’t have true ownership of the coins.

Whoever accesses your private keys has ownership of your bitcoin. This is why it is of the utmost importance to protect them by keeping them away from prying eyes! We’ll see a few ways you can do that later in the book.

For what follows, we’ll be talking about self-custodial wallets only, where the user owns their keys and has complete control over their bitcoin.

Don’t worry if it seems complicated or you don’t understand everything — this is a journey, and you will understand better the more you start using Bitcoin!

Different Types of Bitcoin Wallets

Where your private key is created and stored determines how we describe Bitcoin wallets. If keys are on your smartphone, it’s a mobile wallet. If they’re stored securely on a dedicated device, it’s a hardware wallet.

Because keys can be moved from one device to another, the “status” of your Bitcoin wallet is not fixed. For example, if I create my wallet keys on a computer and later move them to my phone, the “desktop wallet” becomes a “mobile wallet.”

When it comes to storing your bitcoin, it’s not just about who has control over the keys — there are many other risks to consider. That’s why it’s important to find a storage solution that is both secure and convenient. When you analyze the trade-offs of the various types of wallets, you will learn that there is no ideal wallet to satisfy all needs.

What to consider when choosing a wallet

• Security: Make sure the wallet has strong security measures in place.
• Privacy: Consider whether the wallet requires personal information.
• Ease of use: Choose a wallet that is easy to use and navigate.
• Compatibility: Make sure the wallet is compatible with your device.
• Fees: Compare the fees charged by different wallets.
• Reputation: Check the developers’ reputation to ensure they are trustworthy.
• Control: Some wallets give you more control over your private keys.

Open Source vs Closed Source

Another important factor to keep in mind when choosing a Bitcoin wallet is knowing if the application or software is open-source. This is important because open-source projects let the community review the code and continue the project if the team stops working on it. Just as Bitcoin’s code is completely open for everyone to review, use, and modify, so should the code of the wallet you use to manage your bitcoin be.

Activity: Discussion and evaluation of Bitcoin wallets

https://bitcoin.org/en/choose-your-wallet

Go to the following website: https://bitcoin.org/en/choose-your-wallet

Use your new knowledge of Bitcoin wallets to select the one best suited to your needs based on the criteria we discussed today.

6.3 Setting Up a Mobile Wallet

Activity: Setting Up & Recovering a Wallet

Now that we have a better understanding of Bitcoin wallets and the differences between them, we’ll see how to use one in practice. For this example, we’ll create a mobile wallet directly on our smartphone.

If students do not have smartphones, the educator will provide one for students to borrow. There are two options for this activity.

Note – Option 1 — Download a new wallet

How to create and use a Bitcoin wallet:

1. Search for the app in the App Store (iOS) or Google Play Store (Android)

1. Open the app and select "Create a new wallet". Your private key is automatically created by your app.

1. You will be prompted to write down a list of 12 to 24 words and keep it in a safe place. This is your recovery phrase (also called a seed phrase): it allows you to recover full access to your funds if needed. Remember that if you lose or forget this sequence of words, you will not be able to access your bitcoin if you lose access to your wallet. Also, if anyone else finds your recovery phrase they will gain access to your bitcoin!

1. You must then confirm that you have saved your recovery phrase. To do this, you must enter, in the same order, the words of your seed phrase.

1. As an additional measure of security, some wallets allow you to choose a secure password.

1. Once you have backed up your recovery phrase, enter the wallet. Look for the "Receive" option: your wallet will generate a public key to receive bitcoin.

1. Transfer bitcoin to your wallet. With a self-custodial wallet, you cannot always buy bitcoin directly with fiat, so you might need to purchase and transfer them from an exchange first.

Think of your public key as your email address: you share this with others so that they can send you bitcoin (or, in the case of an email address, an email).

Think of your private key as the password to your email: you wouldn’t share this with anyone, as it would give them access to your email.

Note – Option 2 — Restore a wallet

Download a Bitcoin wallet and add some satoshis for each student.

Give each student a sheet with a seed phrase to retrieve a wallet.

Guide students step-by-step:

1. When you first start your wallet, you will see three methods of wallet creation, tap [Import an existing wallet]. You will see an introduction screen, tap [Restore with recovery phrase].

1. Enter your 12 — 24-word recovery phrase one by one, in the correct order.

1. You will see a confirmation message once your wallet has been successfully imported. Your recovered funds are ready to use!

6.5 Don’t Trust, Verify

Whatever you do in Bitcoin, remember this: “Don’t Trust, Verify.” There are no rulers in Bitcoin. You should never blindly follow someone’s claims; rather, you should always question what you’re being told and verify it for yourself. By following this mantra, you’ll protect yourself from losing your bitcoin. This goes for claims such as “the next Bitcoin” just like it does for “investment opportunities” or promises of “quick and easy profits.” This is why open-source projects should be favored. If you can't verify the code yourself, you will have to trust the community who will do it for you; but it's better to trust a decentralized and independent group of verifiers than the leader or group behind the project.