how Bitcoin donor’s identity no longer needs to be verified by an outside signature-granting authority

Bitcoin is a peer-to-peer computer network made up of its users’ machines

New Bitcoins are minted, or “mined”, as the computers in this network execute hard number-crunching tasks

The entire network is then used to monitor and verify both the creation of new Bitcoins through mining and the transfer of Bitcoins between users

Every new transaction is broadcast across the Bitcoin network and appended to a collective log, called a block chain, of all previous transactions in the system

The machines in the Bitcoin network communicate to create and agree on updates to the block chain

Roughly every 10 minutes a user whose updates to the log have been accepted by the network is awarded a fixed number (currently 25) of new Bitcoins.

The system makes it computationally difficult to create a doctored block—one containing illicit transactions such as sending the same Bitcoins twice to two people, say, or reversing a Bitcoin transfer to a vendor after he had dispatched the purchased product

That is because having such forged transactions validated and attached to the globally accepted block chain would require outpacing the network’s combined computing power.

Only a fraudster who controls more than half of the network’s total number-crunching capacity—a tall order—could achieve such a feat, and only for transactions less than about an hour old

secure-ID scheme similarly relies on a block chain and on rewarding miners who keep it up to date

An identity would be established by performing a transaction in which no Bitcoins are transfered from the owner to another named party. Instead, the owner would donate a sum—say, $200 worth of Bitcoins—that the first miner to approve a block with this transaction in it would get as his mining fee

Since the winning miner is always revealed at random, the owner cannot simply redirect the virtual cash back into his account

The donor thus possesses a receipt of the transaction that can always be verified against the public Bitcoin ledger

Stealing someone’s identity would require swiping his private key

It comes in the form of a unique private cryptographic key mathematically matched to a public key embedded in the donation record

the holder’s digital signatures uses a combination of private and public keys to verify his identity.

Bitcoin’s anonymity ensures that the donor’s identity would no longer need to be verified by an outside, signature-granting authority

It could, in other words, be confirmed without ever being revealed to anyone

Serious Bitcoin users anyway keep their private keys in “cold” storage on unpowered hard drives that are never linked up directly to internet-connected computers

source: http://www.economist.com/blogs/babbage/2013/11/internet-security?fsrc=scn/tw/te/bl/buyinganewidentity

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