How Does Bitcoin Work?
To anyone first getting into Bitcoin, it can seem daunting. But to work with Bitcoin, you don’t have to know all the intricate details.
Bitcoin is a software program that allows users to send value to one another, a bit like the way we send emails.
To use it, you should get yourself a Bitcoin wallet. This can either be a software wallet or hardware wallet. They’re both very secure, but I would recommend the hardware wallets as they’re more secure as they don’t ever connect to the Internet.
Your wallet will generate a private and public address for you and your public address is shared with the person who intends to send you some Bitcoin.
It’s advisable to only use your public address once, as this will help you remain as private as possible.
Although if you whitelist an address to send Bitcoin to, and it makes it awkward to renew your address after every transaction, it will be fine. It’s just advisable to renew it as much as you can.
The Bitcoin Ledger
Every transaction you send and receive is stored on the Bitcoin blockchain, which is a public ledger.
The Bitcoin network relies on this and every transaction in Bitcoin’s history is on there, which anybody can check at any time.
All confirmed transactions are included on the ledger, which automatically recalculates every address balance.
If somebody sends you a transaction the ledger will calculate the sender’s address to determine they have enough Bitcoin to send. Once it’s determined, the transaction will take place and both yours and the sender’s Bitcoin wallets will automatically re-balance once it is all complete.
Everything verified on the blockchain is stored in chronological order and every block is connected to the previous once and secured with cryptography.
A Bitcoin transaction is a transfer of value between two parties. Your Bitcoin wallet generates and stores your private key. And as the name ‘private address’ suggests, it should remain private.
Your private address is used to sign transactions. It is all coded into the Bitcoin protocol, and it provides mathematical proof that the value sent has come from the owner of the wallet.
Your private key signature also prevents the transaction from being edited by anybody else once it has been issued.
A transaction will usually take up to 20 minutes to complete, although in times of heavy congestion it can take longer.
All transactions are carried out through a process called mining.
Bitcoin Mining is a distributed consensus system that works to verify transactions and add new blocks onto the Bitcoin network.
Bitcoin mining relies on hundreds of thousands of specialized hardware devices, and they all work together to add transactions to the network, and then work against each other to win the Bitcoin block reward that comes with every new block.
Bitcoin mining ensures the Bitcoin ledger is stored chronologically, and the distributed consensus mechanism protects the neutrality of the network by ensuring no central authority can control the system.
Transactions that have been broadcast to the network, are picked up by miners, who hash them into a block that are cryptographically secured to the previous blocks (the blockchain).
This cryptography that connects the blocks prevents previous blocks from being modified, thus securing them a bit more after every block is added.
Bitcoin miners are rewarded for their work. They will earn BTC from the transaction fee, and also compete with each other to win the Bitcoin block reward.
The Bitcoin block reward is the only way new bitcoins are added to the circulating supply, and at present there are 6.25 BTC minted with every new block.
Miners will send full blocks to Bitcoin nodes, every 10 minutes or so. The nodes work together until they agree that the block is full of legitimate transactions.
Once the nodes reach consensus, they send the block back to the miners who then race to win the new Bitcoin up for grabs.
The miners compete against each other to win the block reward, and to do so the winning mining device will have beaten every other device in working out the extremely complex puzzle the Bitcoin protocol has asked.
A winning mining device has roughly a 13-trillion-to-one chance of winning the race to discover the cryptography, so working together in a mining pool is necessary for a solo miner.
A Summary of How Bitcoin Works
Bitcoin is a software program, downloaded and distributed on hundreds of thousands of devices, which are both miners and nodes.
They make up the security of the Bitcoin network, and ensure everything runs smoothly. Everything is coded, and all you have to do as a Bitcoin user is keep your private keys secure and private, and send and receive bitcoins.
This is a quick summary of how Bitcoin works, check out our Bitcoin for Beginners library for many other guides that explain other aspects of the most exciting innovation in our lifetimes.
Welcome to Bitcoin, it’s a deep, deep rabbit hole.
Author: Tommy Limpitlaw