Bitcoin is the first and most popular decentralized cryptocurrency – it means that no one controls it. This tutorial will explain in detail how Bitcoin works and its technical aspects.
We will go through bitcoin mining, blockchain as a distributed ledger, Bitcoin transactions, and other technical details. We will keep this article as simple as possible, so even non-techies will be able to understand it.
This article aims not to teach you how to make money with Bitcoin but to explain basic technical aspects and describe the key ideas in easy-to-understand language. You already have a bit of knowledge about bitcoin. You should know the advantages and disadvantages of decentralized cryptocurrencies like Bitcoin.
What is Bitcoin?
Bitcoin is a decentralized electronic currency, meaning any government or bank does not control it. An electronic coin is essentially a string of data that holds information about the amount of money and the sender’s and receiver’s public keys (a public key is used to receive money, and a private key is used to send money).
It also stores information about transactions, network activity, etc. In other words – it contains all information that you need to perform transactions.
Bitcoin is a decentralized kind of digital currency designed to do away with the need for centralized institutions like banks and governments. Instead, Bitcoin relies on the distributed ledger technology known as blockchain to facilitate peer-to-peer transactions between users on its decentralized network.
The proof-of-work consensus mechanism of Bitcoin is responsible for the authentication of transactions. Miners of cryptocurrencies are rewarded for their labor in validating transactions.
Bitcoin (BTC), introduced in 2009 by an anonymous programmer named Satoshi Nakamoto, was the first and most valuable participant in the developing class of assets known as cryptocurrencies. Satoshi Nakamoto launched Bitcoin.
How does Bitcoin work?
The bitcoin network is a public network with no control over it. No central server manages the bitcoins – all operations are performed by a group of computers connected to the Internet.
The software on these computers is open source and freely available for anyone to review and use. To start using the network, you need to install the software on your computer and start it. The bitcoin software is distributed as binaries, which are small executable files.
Anyone can create a bitcoin address by providing their public key – this is how you prove that the person to whom you are sending money belongs to you. Once the transaction is done, your public key and the number of bitcoins can be verified (“hashed”) and added to a bitcoin transaction block. This block is linked to all other transaction blocks, enabling them to be verified.
Blockchain: Distributed Ledger Technology (DLT)
In simple words, blockchain technology is a way to record data securely and transparently. It makes use of cryptography to provide security. In other words – it’s a distributed ledger that maintains a continuously growing list of ordered records called blocks, secured from tampering and revision. Let’s see how it works in the example below.
Suppose there are three banks: Bank A, Bank B, and Bank C. A ledger of transactions in Bank A shows the amount of money deposited into Bank A’s account and the amount of money withdrawn from Bank A’s account. The ledger will record credits and debits.
However, if we want to keep track of all transactions, there are many possible solutions, such as a group of assistants who would log all transactions on paper. Or a book kept by the manager which is updated regularly. Or a third-party organization keeps a ledger where each entry can be verified.
Private and public keys:
Public and private keys are two different kinds of cryptographic keys. A pair of keys is one of the most important foundations of Bitcoin, as they are used to verify the ownership of bitcoins and enable a user to sign transactions.
The public key is derived from the private key but cannot be used to spend your bitcoins or even see your balance. Given a public key, you can verify a signature created by that public key and vice versa – given a signature; you can verify the public key that was used to create it.
Bitcoin mining:
Mining adds transaction records to Bitcoin’s public ledger of past transactions or blockchain. This ledger of past transactions is called the blockchain, as it is a chain of blocks.
The blockchain confirms transactions to the rest of the network as having taken place. Bitcoin nodes use the blockchain to distinguish legitimate transactions from attempts to re-spend coins that have already been spent elsewhere.
Is Bitcoin a good investment?
Bitcoin is a good investment if you want to buy bitcoins with a small amount of money. If you are willing to invest 5-10k, then it’s a good choice. It will be one of the best investments, and as you get familiar with Bitcoin, you will start to understand its advantages and see its advantages in everyday life.
You can use bitcoins to make payments or buy goods on the Internet without dealing with third parties (banks). In some countries, you can legally use them as currency. Bitcoin investments are not a pyramid scheme – the number of bitcoins you have today will be the same amount you will have tomorrow.
Bitcoin has some serious advantages. It’s fast and cheap to send money anywhere in the world. There are no institutional costs and no need to trust a third party with your money.
No single institution controls the bitcoin network. There is no possibility of taking your money away – you can use bitcoins to pay anyone, anywhere in the world, at any time. Bitcoin offers many benefits – speed and low transfer fees are just some of them.
The first thing that comes to mind when we think about Bitcoin is money! You can use bitcoins to pay for goods and services or exchange them for currencies (USD, EUR). Bitcoin does not depend on any country or government, so it’s not subject to political risks.
Technical Aspects of BTC
Block time and Difficulty Adjustments:
Bitcoin has a block time of 10 minutes, meaning it takes 10 minutes for a new transaction block to mature. Block difficulty is adjusted every 2016 block, which is approximately 2 weeks.
Every 2,016 blocks (approximately 14 days at roughly 10 min per block), the difficulty target is updated based on the network’s recent performance to keep the average time between new blocks at ten minutes. In this way, the system automatically adapts to the network’s total amount of mining power.
Hash Rates:
The number of hash operations performed in a specific amount of time is meant to be measured by the hash rate. This may be different based on the hardware that is being used. For instance, if a miner possesses a device capable of generating a hash rate of 30 MHz, then the amount of hashes that occur in a single second is 30 million.
Mining rewards:
When miners successfully solve a “proof-of-work” puzzle, they are awarded some bitcoins. Currently, the reward is 50 bitcoins per block mined. Once all bitcoin transactions are processed, the reward drops to 25 bitcoins per block mined. Currently, there is a total of 12,586,000 BTC in circulation among miners.
Mining rewards are a kind of remuneration (in the form of freshly produced currencies) generated by the system to pay for the effort done by miners when they have successfully solved the cryptographic puzzle required for mining a new block. This puzzle is necessary for mining a new block.
Currently, the incentive for mining Bitcoin is 6.25 Bitcoin per block. Miners have to compete against one another within the network to get the reward for being the first to solve the block. If they do, they will get the reward.
Therefore, the higher the hash rate, the greater the likelihood one will obtain the mining rewards. Companies that mine cryptocurrency and individuals who mine on their own often need to spend significant money on mining hardware and electricity at the outset to improve their returns on investment.
However, when the total hash rate of the Bitcoin network continues to expand dramatically, it becomes nearly difficult for a single person to mine bitcoin due to the restricted resources available. Individuals can collaborate on their outsourced mining through mining pools, which facilitate the pooling of their resources.
Individual miners can split the rewards by their hash rate, which helps lessen the volatility they may suffer when mining alone. Mining pools can gather additional resources to compete with one another in this way.
Transaction Fees:
The mining incentives for Bitcoin and other coins that use the PoW technique are designed to drop gradually. As a result, there is another type of incentive for miners to verify transactions, and it is referred to as a network fee. Users of coins that operate according to the PoW consensus are required to make a payment to the miners in the form of a network fee for each transaction they do.
The charge associated with this transaction could change depending on the traffic volume and the coin being used. The amount of the input that was not spent entirely constitutes the transaction fee. The calculation is typically done in satoshi, the smallest unit used for bitcoin, per byte.
The incentive for miners to validate your transaction comes from transaction fees. You also can pay no or very low transaction fees, but doing so will drastically reduce the likelihood that your transaction will be included in the subsequent block.
Certain coins have a low or nonexistent transaction cost, and they typically employ a different consensus (such as DPoS or PBFT) or technology (such as DAG). XRP, EOS, and IOTA are three coins that fall into this category.
Conclusion:
Bitcoin is the largest, most popular, and first-ever cryptocurrency. It has several advantages over fiat currencies. However, we must consider some drawbacks associated with using Bitcoin before using it as a form of payment.
The volatility of BTC is a concern in terms of how it can affect the cost of goods and services. Additionally, Bitcoin mining requires a significant amount of electricity, which is also an issue worth addressing when considering the sustainability benefits of BTC in an increasingly environmentally conscious society.
Bitcoin is a decentralized digital currency. This means that no one controls or issues the crypto coins, and the transactions are carried out collectively by the system’s users. Bitcoin can be used to purchase goods and services or exchanged for other currencies (USD, EUR). BTC does not depend on any country or government, so it’s not subject to political risks.
As explained earlier, Bitcoin is a digital currency that can be transferred electronically. Various assets can be stored in BTC, such as gold, stocks, bonds, and other financial assets. Bitcoin was the first decentralized digital currency, allowing individuals and institutions to purchase goods and services.
In addition, it simplifies the relationship with international financial institutions, which need to have legal contracts signed into standard formats. This means they also do not have to worry about operating or storing an account at any particular bank or institution.
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