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  • How Bitcoin Works

    How Bitcoin Works

    Bitcoin is a digital currency born on the Internet. There are no physical bitcoins, and none of it can ever leave the blockchain it’s coded into, but you can send it and spend it. So how does Bitcoin actually work?

    How Bitcoin Works

    Bitcoin makes transacting value as easy as sending an email or text. It is Internet money that can only be transacted within the Bitcoin network.

    At the core level of transacting, you type in somebody’s public address, type in the amount of bitcoins, or satoshis, and click send. The transaction will usually take a few minutes, and it will definitely go to the address you sent it to. In fact, it cannot not go to that address.

    At a basic level, Bitcoin is a ledger with account numbers and balances. If Bob sends Alice two bitcoins, his balance goes down by two and Alice’s will go up by two.

    There’s no government issued money, gold, or anything backing these numbers that represent Bitcoin’s ledger. It’s just people’s belief that the numbers on the ledger are worth something and in the system that prevents unfair changes.

    The Bitcoin network ensures no one can send any bitcoins from someone else’s account. Every time you send some, it’s broadcasted to the entire network, who then work together to verify it. And it’s only when the thousands of nodes and miners are in full agreement that the transaction will occur.

    Once done, it will change the ledger on both sender’s and receiver’s balance automatically.

    Keep Your Private Keys Private

    Every bitcoin balance is associated with a private key, and anyone who has this, technically has rights to the bitcoins within that address, so keeping your private keys private is essential.

    Not your keys not your bitcoin

    Although cryptography is designed to hide data, in Bitcoin’s case, it’s used to prove ownership. Each Bitcoin account number has the associated private key that only the account owner knows.

    The private key is used to create digital signature, and when the transaction is sent, the hash of your private key and the transaction data are what is the digital signature. A public key is used to verify the signature

    The signature serves the same purpose as a handwritten signature on a paper cheque, but rather than handwriting, it’s coded into maths and cryptography.

    These signatures are tested by others who also hash it, and if their hash matches that of the hash recovered with the signature, then it is definitely from the real senders address.


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    If successful, they know the signature was created by the sender, and the transaction will be verified and added to the blockchain.

    In addition to not relying on handwriting analysis, these digital signatures can’t be copied and reused on other transactions. Since the signatures are unique to each transaction. So these signatures keep unauthorized transactions from changing the ledger.

    Who Checks The Signatures and The Ledger?

    The short answer is anybody who wants to. It’s an open ledger and anybody can check it at anytime. And anybody can work on it to help hash and verify the signatures and transactions.

    Bitcoin is a decentralized network, that is owned by nobody but run by anybody who wants to help it.

    So basically, every time someone sends bitcoin, a message is passed around all the people who want to help maintain the ledger. These are what are known as miners and nodes, and they all have their version of the ledger, and it updates every time a transaction is made on the Bitcoin network.

    Bitcoin network

    The miners are the ones who pick up the transaction and check everything. They hash it into blocks and send the block to the nodes. Once most of the nodes are in agreement that everything is legitimate, the block is sent back to the miners, who then race against each other to work out the cryptographic puzzle, and ultimately be the one to discover the block.

    Whichever miner discovers the block first, gets the honour of adding it to the blockchain, and is rewarded with the BTC block reward. This reward is 12.5 BTC, but is due to be slashed in half in just three days time.

    This ‘Halvening’ event takes place every four years or so, and will continue until the last fraction of BTC is minted in around 2140.

    Once added to the blockchain, every node’s version is updated and if any node’s version is different it will be rejected. And if any fraudulent behaviour is spotted they will be banned from participating in the network.

    The nodes are not paid for their work, and it is completely voluntary, but they along with the miners are what secures the Bitcoin network. It is already the most secure network ever created, and as more nodes and miners jumped on board, it will get ever more secure.

    Conclusion

    Bitcoin sounds like a complicated tangle of decentralized data, and to create something like it can only come from a genius like Satoshi Nakamoto. Whoever, he/she/they might be.

    But stripped down, it’s basically an open ledger showing everybody’s value. Anybody who wants to can buy or mine some, and when they have it they are free to do what they like with it.

    It cannot be confiscated unless you give them your private keys, and to send any amount of value anywhere in the world requires no trusted third party and can be done in a matter of minutes.

    Author: Tommy Limpitlaw

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