What is Bitcoin and How it Works?

So, you’ve heard about Bitcoin. And now you know that it one of the most efficient ways to send/receive money as well as to make online transaction. Maybe your friend told you about it. But do you know anything about it? If not, then this is your lucky day because in this post, we will be discussing what Bitcoin is and how it works. Read up below and welcome to Bitcoin for Dummies!

But before anything else, let us first discuss what is Bitcoin.

What is Bitcoin? 

Bitcoin, much like any other cryptocurrency, is a decentralized currency used to transact over the internet. With decentralized, what we mean is that it is not regulated by a central bank,unlike other currencies like dollars. Instead, it is processed through an interconnected network of blocks, in an open source, online ledger where all Bitcoin transactions are written and kept called blockchain.

Bitcoin isn’t backed by any other  currencies too, so it differs from other online payments like PayPal. It uses the principles of cryptography in order to create transactions, literally out of mathematical equations. These equations are solved by volunteers in the blockchain to process a transaction. They earn from it too. For every block that they add to the chain, they earn 12.5 BTC. This is what you call, Bitcoin mining.

So if it’s unregulated, how do we know that it is secured? Well, think of it as a poker game where everyone did not bring physical money. In order to play the game, each player will record all the wins and the losses. And since there are a lot of people who records the wins and the losses, everyone is checking out if everyone records the right thing. No one can cheat because everyone has a copy of what has happened in the game. In principle, Bitcoin doesn’t need a regulatory body because everyone in the blockchain is policing each other.

All in all, there will only be a total of 21 million bitcoins to be made out of mining. The idea behind this is when bitcoin are made to be a limited resource, it will appreciate its value over time. Right now, bitcoin is valued at around $8,000 per BTC and many analysts are expecting its value to go higher.

How does Bitcoin works? 

The overview discussed in passing how Bitcoin works. In this section, will discuss further into details how Bitcoin works and how it processes transactions in the blockchain. There are several elements related to Bitcoin that you need to understand first before fully grasping the concept of Bitcoins.

Cryptography

Back during the Second World War, one key strategy that both forces used in order to fight against the other is the concept called cryptography. It is the process of writing messages into unique non-human readable codes and the process of decoding it so that someone else can understand what the message says. In order to read the coded message, you need to a key (or find way to derive one).

Bitcoin uses cryptography in a similar way. Instead of decoding spy messages from the Allied forces, Bitcoin is decoding financial transaction data through the blockchain; hence the name “cryptocurrency.” When a transaction data is decoded and verified, it will then be processed in the Blockchain to allow you to send or receive coins.

Blockchain

Blockchain technology is a form of decentralized network invented by the creator of Bitcoin, Satoshi Nakamoto (it’s just a pseudonym, no one really knows who he is). The block chain is an open source ledger where all transaction data are recorded and processed by members of the network called miners.

As a decentralized network, the database for Bitcoin is shared with everyone. This shared database is known as a distributed ledger and it is accessed using the blockchain. To send Bitcoin to someone, you need to digitally sign a message that says, “I am sending 10 Bitcoins to Mark”. The message would then be broadcasted to all computers that are connected to the network and will be processed per block (also known as nodes).

These blocks are connected to each other (hence, blockchain) and all transactions involving a specific coin will be recorded in the specific block and will be signed a unique code called the private key which signals the blockchain where the coins came from.

Private and Public Keys

Bitcoin is a pseudonymous system; which means that all transaction you make with Bitcoins are tagged to you not by your name or your real-life identities. Instead, they are tagged to you as codes called keys. They are a set of letters and numbers uniquely assigned to you and your transactions that serve like your username and password when using Bitcoin.

The public key is used by other people in order to send you money. In general your public key is what serves as your Bitcoin address where incoming transactions are being sent to. For the private key, it is your identity in the Blockchain and is used to access your Bitcoins. That is the reason why you should always keep your private keys private. Once someone else know what your private key is, he can have access to your coins and transfer them to his own wallet.

Final Thoughts

Bitcoin is a very technical topic. Understanding the ins and outs of Bitcoin and other cryptocurrency needs more than one article. There are a lot of concepts that are not thoroughly explained in this posts. However, we promise that we will publish more articles to help you fully understand this awesome technology. Read up our blog to learn more about Bitcoin, cryptocurrencies, safety and security, among other cool tutorials we have in store for you!

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