How does Bitcoin work?

Learn, how does bitcoin work in details?
Submitted by Vaishnavi Srivastava, on January 19, 2022

Bitcoin is a consensus network that allows for the creation of a new payment system and a purely digital currency. It is the first decentralized peer-to-peer payment network, with no central authority or middlemen that is driven by its users. Bitcoin is essentially currency for the Internet from the user's perspective.

Bitcoin, like traditional cash, is created and has mechanisms and safeguards in place to prevent fraud and maintain its value. Bitcoin's core components are blockchain, wallets, keys, hashes, and mining. Let us understand them one by one.

The blockchain is a decentralized public ledger that underpins the entire Bitcoin network. The blockchain contains all confirmed transactions.

A Bitcoin wallet is hardware or software that allows you to store and send Bitcoins. The private keys required to sign Bitcoin transactions are stored in Bitcoin wallets. Anyone with access to the private key can manage the coins linked to that address.

Blockchain enables Bitcoin wallets to calculate their spendable balance, allowing new transactions to be confirmed and ensured to be owned by the spender. Cryptography is used to ensure the blockchain’s integrity and chronological order.

A transaction is a value transfer that is recorded in the blockchain between Bitcoin wallets. Bitcoin wallets store a private key, also known as a seed, which is used to sign transactions and provide mathematical proof that they came from the wallet's owner. This mathematical proof is generated whenever a block of information is added to the blockchain, it contains a unique reference of numbers and letters, which is called a hash.

The signature also stops anyone from altering the transaction once it has been issued. All transactions are broadcast to the network and, through a process known as mining. Bitcoin mining is a critical part of the network's system for reaching consensus on the ledger's current state. Users need to be able to perform secure Bitcoin transactions.

It keeps the blockchain in chronological order, protects the network's neutrality, and allows multiple computers to agree on the status of the system. Transactions must be packed in a block that adheres to very tight cryptographic requirements that will be validated by the network to be confirmed. These restrictions make it impossible to change prior blocks because doing so would invalidate all subsequent blocks.

Mining also provides a competitive lottery, preventing anyone from readily adding new blocks to the blockchain in sequential order. No group or individual can control what is included in the blockchain, nor can they replace parts of the blockchain to roll back their spending in this way.

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