Wednesday, September 15, 2021

What is Bitcoin? How does it work?

What is Bitcoin?

Bitcoin is basically a peer-to-peer currency that we can buy, sell and exchange directly, without an intermediary like a bank. Peer-to-peer means that no central authority issues new money or tracks transactions. It was launched in 2009 and is regarded as the first cryptocurrency. Bitcoin has all the desirable properties of a money-like good. Bitcoins are portable, durable, divisible, recognizable, fungible, scarce and difficult to copy.
To understand how the Bitcoin works, let us have a look at some of the terms that will be used in the explanation.


Blockchain is a shared public ledger on which the entire Bitcoin network relies. Basically blockchain is a linked body of data, made up of units called blocks that contain information about each and every transaction, including date and time, total value, buyer and seller, and a unique identifying code for each exchange.

Any given block chain consists of a single chain of discrete blocks of information, arranged chronologically. In principle this information can be any string of 1 and 0, while in theory, any type of contract between two parties can be established on a block chain as long as both parties agree on the contract. This takes away any need for a third party to be involved in any contract.

All confirmed transactions are included in the block chain. It allows Bitcoin wallets to calculate their spendable balance so that new transactions can be verified and thus ensuring they’re actually owned by the spender.


A bitcoin wallet contains a public key and a private key, which work together to allow the owner to initiate and digitally sign transactions, providing proof of authorization. This signature also prevents the transaction from being altered by anybody once it has been issued.

All transactions are broadcasted to the network and usually begin to be confirmed within 10-20 minutes, through a process called mining which we will discuss next.

Bitcoin mining

Bitcoin mining is the process of adding new transactions to the Bitcoin blockchain. It is used to confirm pending transactions by including them in the block chain. To be confirmed, transactions must be packed in a block that fits very strict cryptographic rules that is verified by the network. These rules prevent previous blocks from being modified because doing so would invalidate all the subsequent blocks.

Bitcoin miners use a process called proof of work, by deploying computers in a race to solve mathematical puzzles that verifies transactions. To motivate miners to keep racing to solve the puzzles and support the overall system, Bitcoin code rewards miners with new Bitcoins and this is how new coins are created and new transactions are added to the blockchain.

Mining also creates the equivalent of a competitive lottery that helps in preventing any individual from easily adding new blocks consecutively to the block chain. This way, no group or individuals can control what is included in the block chain or replace parts of the block chain to roll back their own spends.

How does Bitcoin work?

Each Bitcoin is basically a computer file stored in a digital wallet on a smartphone or computer. Anyone can send Bitcoins to our digital wallet, and we can send Bitcoins to other people.

Every single transaction is recorded in a public list called the blockchain. Blockchain is decentralized, which means it’s not controlled by any one organization like any bank. This makes it possible to trace the history of Bitcoins to stop people from spending coins they do not own, making copies of transactions.

Once a block is added to the blockchain, it becomes accessible to anyone who wants to view it, acting as a public ledger of cryptocurrency transactions. In order for a transaction block to be added to the Bitcoin blockchain, it must be verified by the majority of all Bitcoin holders, and the unique codes used to recognize users’ wallets and transactions must conform to the right encryption pattern. These codes are long and some random numbers, which makes them incredibly difficult to fraudulently produce.

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