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What is Bitcoin and How does Bitcoin work?
Bitcoin is a form of digital currency, created and held electronically. No one controls it. Bitcoins aren’t printed, like dollars or euros – they’re produced by people, and increasingly businesses, running computers all around the world, using software that solves mathematical problems.
Bitcoin is a type of digital asset, most commonly defined as a virtual, digital or crypto- currency.
Bitcoin was invented by Satoshi Nakamoto, who published the payment system in a whitepaper in 2008. Released as open-source software in 2009, the bitcoin system is peer-to-peer which means that transactions take place without the need for a third-party. These transactions or payments are then recorded in a public distributed ledger called the blockchain, which uses bitcoin as its unit of account.
The blockchain is the backbone of bitcoin, serving as a financial ledger without any trusted central authority – this means that it is decentralized and no single person or institution owns the currency.With every new transaction, recordings are added as ‘blocks’, which each block added in a linear, chronological order. Described in simple traditional banking terms – the blockchain is the full history of banking transactions, while the blocks are like individual bank statements. Bitcoins do not physically exist, instead there are only these records of transactions and balances.
The unit of currency in the bitcoin system is, simply, bitcoin. There are three symbols used to express bitcoin – BTC, XBT and ?. Bitcoins can be split down into alternative units such as millibitcoin (mBTC), microbitcoin (µBTC) and satoshi. Satoshi, named in honour of the bitcoin founder, is one hundred millionth of a bitcoin – the smallest amount possible.
You can acquire bitcoins as payment for a service or goods or through purchase at bitcoin exchanges.
Bitcoins, however, can be created by anyone – all you have to do is help process payments into the distributed ledger. By offering your own compute power to verify and record payments, bitcoins are created as a reward or payment for your services. This activity is widely known as bitcoin mining.
Bitcoin is an anonymous digital currency
Bitcoin is not real money. It’s an online “currency”—virtual tokens that can be exchanged for goods and services at places that accept it, the same way you’d give someone a dollar for a cookie. But unlike a dollar, a Bitcoin has no serial number or any possible mechanism that could be used to trace it back to a buyer or seller. This makes it attractive to drug dealers and/or privacy advocates.
itcoin is a digital currency (also called crypto-currency) that is not backed by any country’s central bank or government. Bitcoins can be traded for goods or services with vendors who accept Bitcoins as payment.
Bitcoin-to-Bitcoin transactions are made by digitally exchanging anonymous, heavily encrypted hash codes across a peer-to-peer (P2P) network. The P2P network monitors and verifies the transfer of Bitcoins
The basics for a new user
As a new user, you can get started with Bitcoin without understanding the technical details. Once you have installed a Bitcoin wallet on your computer or mobile phone, it will generate your first Bitcoin address and you can create more whenever you need one. You can disclose your addresses to your friends so that they can pay you or vice versa. In fact, this is pretty similar to how email works, except that Bitcoin addresses should only be used once.
Balances – Block chain
The block chain is a shared public ledger on which the entire Bitcoin network relies. All confirmed transactions are included in the block chain. This way, Bitcoin wallets can calculate their spendable balance and new transactions can be verified to be spending bitcoins that are actually owned by the spender. The integrity and the chronological order of the block chain are enforced with cryptography.
Transactions – private keys
A transaction is a transfer of value between Bitcoin wallets that gets included in the block chain. Bitcoin wallets keep a secret piece of data called a private key or seed, which is used to sign transactions, providing a mathematical proof that they have come from the owner of the wallet. The signature also prevents the transaction from being altered by anybody once it has been issued. All transactions are broadcast between users and usually begin to be confirmed by the network in the following 10 minutes, through a process called mining.
Processing – mining
Mining is a distributed consensus system that is used to confirm waiting transactions by including them in the block chain. It enforces a chronological order in the block chain, protects the neutrality of the network, and allows different computers to agree on the state of the system. To be confirmed, transactions must be packed in a block that fits very strict cryptographic rules that will be verified by the network. These rules prevent previous blocks from being modified because doing so would invalidate all following blocks. Mining also creates the equivalent of a competitive lottery that prevents any individual from easily adding new blocks consecutively in the block chain. This way, no individuals can control what is included in the block chain or replace parts of the block chain to roll back their own spends.
Going down the rabbit hole
This is only a very short and concise summary of the system. If you want to get into the details, you can read the original paper that describes the system’s design, read the developer documentation, and explore the Bitcoin wiki.