What is Bitcoin?
Bitcoin is a digital or virtual currency and a worldwide payment system. It was set to be the first decentralized digital currency because the system works without a central bank or single administrator. It has a peer-to-peer network, and transactions happen between users directly without an intermediary.
Through this new technology, Bitcoin has achieved new independence and reliance on complicated mathematical proof known as cryptography. Since no single administrator is responsible for the upkeep or backing of Bitcoin, transactions made in Bitcoin are verified and recorded on a public distributed ledger. This public ledger is called Blockchain.
How does it work?
A blockchain, as first outlined by the anonymous author Satoshi Nakamoto, is actually a public ledger distributed and maintained by computers worldwide through the internet. The blockchain is a shared public ledger that the whole Bitcoin network depends on. Instead of being kept by a bank, it’s shared between Bitcoin “miners” and “nodes” around the world. All network nodes (computers running Bitcoin software) have the potential to access the Blockchain and perform authenticated transactions without barriers that prevent access (such as a bank charging for its services in maintaining a transaction history).
Blockchain relies on cryptography (the act of writing in code or cipher) as its proof, rather than depending on a third party to authenticate and verify all pending transactions before they happen. The method of authenticating pending transactions and collecting them into a block to incorporate within the blockchain is known as “mining”. This process is performed by members of the Bitcoin community called “miners.”
Miners are computer users with incredibly powerful hardware that solves complex mathematical problems to cryptographically verify a block of transactions, then connects them to all or any previous transactions within the Bitcoin network. Miners serve the Bitcoin community by securing the network. The method of solving the cryptographic proof for a block is extremely resource-intensive.
By winning the race to mine 1-megabyte “blocks” of transactions, miners receive a ‘bounty’ or ‘reward’ in Bitcoin. This is often how new Bitcoins are allocated and enter the system. When transacting in Bitcoin, parties leverage what’s called a “Bitcoin Wallet” to exchange denominations in Bitcoin (BTC). Bitcoin Wallets provide their users with both a public key (the address from which one sends or receives Bitcoin) and a personal key. A private key is an incredibly important “signature” for Bitcoin users, which is employed to verify pending transactions by proving that they originated from the wallet owner in question.
When a user wishes to transact in Bitcoin, their intention is signaled on the blockchain by submitting a transaction signed with the user’s private key. The Bitcoin network then validates the transaction by checking that the to and from addresses are valid, that the private key is valid, and that there is access to enough funds to perform the transaction. The transaction is typically confirmed on the network within the subsequent ten minutes. Bitcoin, as an economic system, is meant to self-regulate. A malicious transaction requires so much computation (and thus, electricity) that, in most cases, it’s more profitable to use that same compute power to secure the network instead, and collect the block reward. This is often what prevents actors from attacking the network and preserves the blockchain from recording malicious or fraudulent entries. Users around the world can either obtain Bitcoin as a gift for mining and securing the network, receive the cryptocurrency as a present or as tender for services rendered, or can purchase Bitcoin from a web currency exchange of their choice.