How Bitcoin Works: A Definitive Guide
How bitcoin works final

How Bitcoin Works: A Definitive Guide

Updated on – 03 Jan 2021

Transfering bitcoins is as similar and easier as sending or receiving money through a PayPal account. You just need a Bitcoin wallet on your smartphone or computer, you can receive or send bitcoins immediately after setting up your wallet.

A wallet address is generated each time you initiate a transaction, you have to send that address to someone from whom you wanna receive payment.

It works similar to an email transfer with a new email address each time.

I have written everything you need to know about bitcoins in a layman’s language. Keep reading till the end if you really want to understand how this technology works in actual.

What is Bitcoin

Bitcoin is a decentralized digital currency that allows you to send or receive payments instantly worldwide. To understand decentralized currency, you first know what centralized currency is. 

Centralized currency is a currency controlled by any single entity like a government or central bank. For instance, USD is the currency controlled by the Federal Reserve Bank.

On the other hand, decentralized currency has no single entity to control. Everyone controls his own currency. 

In a decentralized system, instead, a single record is maintained by a single person or computer, thousands of copies of the same record are saved on different computers in the network all over the world.

This makes it tamper-proof because you can alter one entry, not all the thousands of copies spread all over the world. The backbone of bitcoin is blockchain technology. 

Blockchain Technology

The blockchain is basically a shared public ledger on which the whole bitcoin network works. Blockchain includes all confirmed transactions.

Just like an accounting ledger that has different pages, blockchain consists of blocks. In simple words, a block in the blockchain is similar to a page in any ledger. 

A ledger page contains a list of transactions and related information like the amount of money sent. 

In a similar context, a block also includes information like the no. of transactions in the block and the time when that transaction happened.

Also check – How to mine bitcoin

How Bitcoin Transaction Happens

In blockchain, each block stores a special link pointing back to the previous block. This link is called a hash. 

Bitcoin wallets use ‘hash’ to sign transactions, providing a mathematical proof that they are coming from the wallet owner. 

Hash prevents anyone to alter the transaction because that will invalid previous entries (stored in the hash) making it impossible to alter.

Blockchain reduces the vulnerability to violate, theft or fraud. This allows unknown parties or individuals to interact with monetary transactions without any fear of fraud.

What is Bitcoin Mining

You have heard everywhere about mining bitcoins or similar stuff. Let’s understand this jargon in simple language that even a caveman can understand.

You can resemble bitcoin mining with gold mining, in which some bitcoins exist in the network but never been shown in the system yet, similar to the gold that exists in the earth but still hasn’t been dug up. 

There are 21 million bitcoins exist in the world. What miners do is, they bring some bitcoins into the light at some time.

They do this as a reward by solving a complex mathematical puzzle to create blocks of accurate transactions and include them in the blockchain.

Also check – How to use bitcoin ATM

Bottom Line

Bitcoin is going to be the future currency because people are losing faith in centralized financial institutions. 

But before going ahead to dirty you hands in the bitcoins, it is important to learn the concept completely. 

I have tried to show you the ‘bitcoin’ concept and its working in the simplest manner. Let me know if you still find any difficulties in understanding how bitcoin works.

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