You’ve heard about the legendary cryptocurrency and how it’s taking the world by storm. But what is Bitcoin? And how does it work exactly? We’re revealing all in this insightful piece, part of an insightful series, set to turn you into an expert in no time. Ready to become the most clued up crypto enthusiast at the table? We’re ready for you, let’s dive in.
What Is Bitcoin?
A great place to start and a fundamental question when it comes to reaching expert status. Bitcoin is a digital form of currency that allows users to exchange value and store value from anywhere in the world, provided that both parties have an active internet connection (at the very least just one party, but we’ll get to that in the next chapter).
The digital currency is operated by a decentralized network of computers (known as nodes) who work in unison to maintain the network and process transactions. Being decentralized is a key component of Bitcoin’s nature, and many other cryptocurrencies for that matter. This means that Bitcoin is not controlled by any one single entity – not by a government, not by a bank, and not by a financial institution.
The cryptocurrency is rather run off blockchain technology, which provides a “trustless” backbone that allows for many nodes to perfectly execute operations in unison. Should a bad actor do something unsavoury on the network (like hold back or provide false transactional information), the rest of the network would immediately pick this up and the unsavoury activity will be rejected. Having said that, no one has ever been successful in trying to trick the system, nor has Bitcoin ever been hacked.
In essence, Bitcoin is a digital form of currency that can be used as a medium of exchange or a store of value.
What Is Blockchain?
In understanding what is Bitcoin, one should have a vague idea of what is blockchain. As briefly mentioned earlier, we’ve covered that blockchain forms the technological backbone to the digital currency. Taking it one step further, blockchain is a set of blocks which hold transactional history in chronological order. Each block is given a unique “stamp” (known as a hash), and carries the stamp of the previous block to ensure that they are always kept in the correct order.
No one can tamper with records on a blockchain, meaning that no one can ever go back and change what has already been shared. As blockchain technology is open for everyone to view, the public ledger provides a clear and unchangeable record of every transaction that has taken place on the network. We’ll go into further detail in how Bitcoin works shortly.
Blockchain is an immutable, transparent public ledger that holds transactional history and allows for the execution of new transactions.
History Of Bitcoin
Before we dive too deep into understanding how the cryptocurrency works, let’s first touch on the history to get a better understanding of where this all came from. Someone at the dinner party is bound to ask, best to be prepared.
Bitcoin was introduced to the world in 2008 by an anonymous entity, Satoshi Nakamoto. To this day no one knows who this is, or even whether it was one person or a group of people. Nevertheless, Nakamoto presented their idea of this new digital payment system to the world in a whitepaper. Within a few months, the first block was mined and Bitcoin was live.
Side note: the first block of Bitcoin’s blockchain is referred to as the Genesis block. 9 January 2009 marks the date of Bitcoin’s Genesis block.
As explained in the whitepaper, Bitcoin was created as a direct result of the Global Financial Crisis that took hold of the world from 2007 – 2009. Nakamoto wanted to empower people with financial freedom from the entities that control the fiat currencies. Bitcoin provided a peer to peer electronic cash system that no longer needed a middleman to facilitate the transaction.
With the Bitcoin network, any one person can send however much Bitcoin as they choose (Bitcoin can be broken down into 8 decimal places) to another user, without the need for a middleman or bank to verify any information. As it operates off of the internet, the two people can be anywhere in the world, incurring no cost for the distance or time it takes. Bitcoin provides a much cheaper and faster alternative to sending fiat currencies across borders.
How Do Bitcoin Transactions Work?
So we’ve covered that Bitcoin is a digital currency that is operated by a decentralized network on blockchain technology, but how do Bitcoin transactions work exactly? Each time a user sends money to another user, they will provide the wallet address of the recipient, as well as how much they would like to send.
The transaction will then enter a “pool” of waiting transactions, and once the next block (on the blockchain) is mined, these transactions will be verified. A new block is mined roughly every 10 minutes, and involves a miner or mining pool being the first to solve a complicated cryptographic problem. Once the problem is solved, the transactions are verified by checking that the correct amount of funds are available in the sender’s wallet and the transaction is executed. These transactions are then added to a new block, along with the hash of the previous block.
The funds will then be taken from the sender’s account and added to the recipient’s account, and usually need to follow a few confirmations before “clearing”. Some platforms require a transaction to go through three confirmations before becoming available, others require six. Each new block on the blockchain represents one confirmation.
Congratulations, you’re taken the first step in understanding what is Bitcoin and how does it work. Stay tuned for the next installments and you’ll be an expert in no time.