Bitcoin, everything you need to know
What is Bitcoin?
Bitcoin is a cryptocurrency and worldwide payment system, It is the first decentralized digital currency the system works without a central repository or single administrator. Bitcoins are created as a reward for a process known as mining. Bitcoin is a digital currency which operates free of any central central or the oversight of banks or governments. Instead it relies on peer-to-peer software and cryptography.
Bitcoin is a digital currency also called cryptocurrency that can be traded for goods or services with vendors that accept Bitcoin as payment. With Bitcoin, holders can buy, sell and exchange goods or services without a central authority or bank as an intermediary.
Bitcoin is one of the most well-known virtual currencies today, with its value rising dramatically since its launch in 2009. Satoshi Nakamoto, the pseudonym of Bitcoin's creator, stated the purpose of Bitcoin is as an electronic payment system that is based on cryptocratic proof, instead of trust. Some holders buy bitcoin as an investment, wanting it to increase in value, while individuals and businesses use or accept payments as currency. PayPal, for example, currently supports Bitcoin transactions, and the country of El Salvador has accepted Bitcoin as a currency.
A public ledger records all bitcoin transactions and copies are held on servers around the world. Anyone with a spare computer can set up one of these servers, known as a node. Consensus on who owns which coins is reached cryptographically across these nodes rather than relying on a central source of trust like a bank.
Every transaction is publicly broadcast to the network and shared from node to node. Every ten minutes or so these transactions are collected together by miners into a group called a block and added permanently to the blockchain. This is the definitive account book of bitcoin.
In much the same way you would keep traditional coin of a physical wallet, virtual currencies are held in digital wallets and can be accessed from client software or a range of online and hardware tools.
Bitcoin's Blockchain Technology
Bitcoin as a form of digital currency isn't hard to understand. For example, if you own a bitcoin, you can use your cryptocurrency wallet to send smaller portions of that bitcoin as payment for goods or services. By contrast, the way Bitcoin actually works is very complex.
Blockchain
A blockchain is a distributed ledger, a shared database of information that is chained together via cryptographic techniques. "Distributed" means that it is stored on many computers rather than on a centralized server, as is typical of data storage.
A network of automated programs installed on these computers maintains the blockchain and performs the functions necessary for it to operate.
A block on a blockchain is a file that contains a block header, transaction counter, and the transactions recorded in the block. The transaction counter lists how many transactions are in the block, while the block header is made up of several elements:
- Software version: Which version the blockchain is running (sometimes called the magic number)
- Previous block hash: The encrypted information from the previous block
- Merkle root: A single hash (encrypted information) that contains all the hashed information from previous transactions
- Timestamp: The date and time the block was opened
- Difficulty target: The current network difficulty problem miners are attempting to solve for
- Nonce: Short for "number used once," which is used to solve the mining problem and open the block.
As noted, each block contains the hashed information of the previous block. This creates a chain of encrypted blocks (files) that contain information from all previous blocks, going back to the first block of the blockchain.
How does Bitcoin work?
It’s important to understand there are three separate components to Bitcoin, all of which combine together to create a decentralized payment system:
- The Bitcoin network
- The native cryptocurrency of the Bitcoin network, called bitcoin (BTC)
- The Bitcoin blockchain
Bitcoin runs on a peer-to-peer network where users typically individuals or entities who want to exchange bitcoin with others on the network do not require the help of intermediaries to execute and validate transactions. Users can choose to connect their computer directly to this network and download its public ledger in which all the historical bitcoin transactions are recorded.
This public ledger uses a technology known as “blockchain,” also referred to as “distributed ledger technology.” Blockchain technology is what allows cryptocurrency transactions to be verified, stored and ordered in an immutable, transparent way. Immutability and transparency are vitally important credentials for a payment system that relies on zero trust.
Whenever new transactions are confirmed and added to the ledger, the network updates every user’s copy of the ledger to reflect the latest changes. Think of it as an open Google document that updates automatically when anyone with access edits its content.
As its name implies, the Bitcoin blockchain is a digital string of chronologically ordered “blocks” chunks of code that contain bitcoin transaction data. However, it is important to mention that validating transactions and bitcoin mining are separate processes. Mining can still occur whether transactions are added to the blockchain or not. Likewise, an explosion in Bitcoin transactions does not necessarily increase the rate at which miners find new blocks.
Irrespective of the volume of transactions waiting to be confirmed, the Bitcoin is programmed to allow new blocks to be added to the blockchain approximately once every 10 minutes.
Due to the public nature of the blockchain, all network participants can track and assess bitcoin transactions in real-time. This infrastructure reduces the possibility of an online payment issue known as double-spending. Double spending occurs when a user tries to spend the same cryptocurrency twice.
Bob, who has 1 bitcoin, might try to send it to both Rishi and Eliza at the same time and hope the system doesn’t spot it.
Double spending is prevented in the traditional banking system because reconciliation is performed by a central authority. It also isn’t a problem with physical cash because you can’t hand two people the same single dollar bill.