HomeCryptoHow Bitcoin works: Everything you need to know about cryptocurrency and the...

How Bitcoin works: Everything you need to know about cryptocurrency and the blockchain

In 2017, many of us did our banking online, but there’s a digital currency called bitcoin that’s becoming increasingly popular. To confuse things, the “coins” are called bitcoins, but the currency is also called Bitcoin. This month, a change in how bitcoin works called a “fork” made Bitcoin Cash a new type of cryptocurrency. Still around?

Bitcoin isn’t like other currencies because it doesn’t exist in the real world. Instead, it only exists on the internet. Bitcoin works a little differently. Instead of a central authority, it uses an encrypted peer-to-peer network to keep track of your balance and confirm and verify any transactions or purchases. This platform is called the blockchain, and it can also be considered a long list of every bitcoin transaction that has ever happened.

It is kept on every computer (called a “node”) in the bitcoin network and shows the sender, recipient, amount, and approximate time of every Bitcoin transfer. All of this information is verified and kept anonymous. So, what exactly is a blockchain, and how does Bitcoin work? Here’s all the information you need.

What is Bitcoin?

Bitcoin is a “peer-to-peer electronic cash system” or “cryptocurrency.” Its beauty and appeal come from the fact that a single authority or country does not run it. So that money can be sent without anyone knowing who sent it (this is also seen as one of its most significant downsides, and critics claim it encourages illegal behavior). A programmer named Satoshi Nakamoto was the first to put the idea of Bitcoin in a paper in 2008. A year after that, the system and network were built. Due to its complexity, it was only used by tech-savvy people for a long time. However, as knowledge and computer power have grown, it has become more and more popular.

Google’s 2018 Year in Search shows that “What is Bitcoin?” was the most searched question. This indicates that Bitcoin is becoming a part of the global zeitgeist increasingly. The question came in at number one, followed by “What is GDPR?” and, intriguingly, “What is an ibex?”

How Bitcoin works

Bitcoin works. The best way to understand how the bitcoin register blockchain works is to watch how it is added step by step, starting with transactions. When a user wants to send bitcoins to someone else, they tell a network of interconnected nodes about the transaction by sending their public key, the public key of the person they are sending bitcoins to, and the number of bitcoins they are sending.

This transfer information is checked by other computers in the network, just like when you sign a contract in front of witnesses. These other nodes use a “digital signature” to prove that a transaction is confirmed.

This long, complicated string of letters and numbers comprises the user’s private and public keys and the transaction message. Each transfer has a unique alphanumeric pattern that can’t be used twice. This is another way to prevent fraud.

Once proven that the transaction message is accurate, the transaction data must be added to the blockchain for it to be considered “confirmed.” Nodes put together sets of “unconfirmed transactions,” verified as accurate but not yet added to the blockchain. They then send these sets to the network as a possible new block.

Bitcoin works

These blocks comprise a group of transactions that have all been judged to take place roughly simultaneously. Each new block added to the chain must reference the block before it. This way, the blockchain creates a timeline that can be followed back to the first bitcoin transaction.

The blockchain: Mining

Anyone can install the software needed to mine Bitcoin, which uses a computer’s processing power to do the math required for transactions. The goal of bitcoin mining is to find a group of data called a “block.” When the Bitcoin “hash” algorithm is run on the data, this creates a pattern, and whoever’s the computer does this first “wins” bitcoins.
There is a limit on how many bitcoins will be made, which is 21 million, and a plan for how quickly they will be available until 2040.

The strength of the blockchain is based on how many people check it. Every node in the network has a copy of the blockchain, and if a node sends information that doesn’t match the rest of the network’s blockchain information, that information will be rejected.

Therefore, all network nodes must operate from identical blockchain information. Before a node can add a block to the chain, it must solve a challenging cryptographic puzzle. This is to avoid conflicts if two different nodes propose different blocks simultaneously.

The puzzle has a lot of complicated math and algorithms, but in the end, each node has to guess random numbers. Trying to guess the code for a combination lock or the weight of a cake at a church fair would be the best analogy.

From a statistical point of view, it would take a single computer year to find the correct answer. Multiple computers on the network are guessing simultaneously; however, it takes about ten minutes on average to find the answer. If a node solves the puzzle first, their suggestion for a block is added to the chain.

Nodes that do this are called “miners,” and each node that solves a block puzzle successfully is rewarded with bitcoins. This is to encourage nodes to keep the blockchain and the system running.

Bitcoin works

But there are only so many bitcoins; every four years, the number of coins made per solved block is cut in half. This is done to keep the currency from losing value.
Even so, some experts have said that Bitcoin can’t only last in the short run because private keys are lost slowly and can’t be found again.

The blockchain: Privacy

Bitcoin is anonymous, one of its main advantages over traditional money-making methods. Bitcoin is called a “crypto-currency” because Bitcoin and the transfers of Bitcoin can’t be linked to specific users.

How the system does, this has to do with how transactions are handled. Even though the network keeps a public record of every transaction, the blockchain doesn’t keep track of how much money each user has.

Instead, the blockchain uses a reference system to ensure users have enough money to cover any bitcoin transfers. When you send money to another user, this transaction, called an “output,” must be validated by looking at the information in the blockchain about one or more payments you received in the past (also called inputs).

Users can’t use the same input in multiple transactions, which is called “double spending.” Each piece of information can only be used once before the system considers it “spent.” The network checks these references for every transaction against their copy of the existing blockchain data.

This is another part of how blockchain verifies people, along with the digital signature we discussed earlier. The signature ensures that the transfer is authorized by the account holder, while the input references provide they have sufficient bitcoins to send.

The fact that you can keep your real identity utterly separate from bitcoin transfers is another reason why criminals on the dark web like it so much.

Bitcoin works

Users who care about their privacy can use services like TOR to hide their identities, but this isn’t necessary. The public keys that bitcoin owners use to get paid are random sequences that your wallet software can make at any time. There are almost an infinite number of ways to make a public key.

The blockchain: Other uses

The great thing about the blockchain system is that other peer-to-peer authentication networks can use it as a model. This method can get access codes to secure clouds, send encrypted files, and track what was said.

Even though the blockchain is most often linked to bitcoins, it will likely be an essential part of the technology network for the rest of this century.

Most Popular