What is Bitcoin and how it works ? Easy explanation

Written by Sushanth Kumar Reddy Kura | Published 4 months ago | 10 min read

   


We will go through the following topics in this session:

  • Introduction of Bitcoin

  • How a Bitcoin works?

  • What is Bitcoin Mining and Who are Bitcoin Miners?

  • Bitcoin Transaction Verification

  • Longest Chain Rule

  • Future of Bitcoin

Introduction:


Bitcoin is a decentralized peer-to-peer electronic cash i.e. no authority has control over it. The smallest part of bitcoin is known as satoshi.

1 Bitcoin = 100,000,000 satoshi

You can buy Bitcoin cryptocurrency exchanges like Binance, Wazirx, etc. It is not necessary to buy the whole bitcoin, you can also buy parts of it. The price of bitcoin in live is available at top of our page. You can also change it from USD to your native currency.

Bitcoin is a cryptocurrency and hence uses cryptography to make the payments safe and secure.

The type of cryptography used by Bitcoin is Public-key cryptography. 


Bitcoin


Public Key cryptography is a cryptographic system that uses two kinds of keys to make the payments, one is a public key, and the other is a private key. Every Bitcoin wallet (used to store bitcoins) consists of these two keys.


Public Key :


Public Key is like our bank account number and is known to everyone. Suppose if a person wants to send us bitcoin, he can send it to our public key address.


Private Key :


The private key is like a password to our bank account. Whenever we want to send Bitcoin to others, we require a private key. We also need a public key here as the person who received the payment can know that we are the ones who actually made the payment to him/her.

The private key should be never shared with anyone. 

Whoever has the private key has the access to all bitcoins in the wallet.

Also, the private key must be kept safe because if you lose the private key, you literally lose all your bitcoins in the wallet.

So it is better to copy the private key and store it in two or three different safe places. It is better if you store them in cold storage offline wallets like a ledger,trezor, etc.

Cheaper alternatives include paper wallets like Metamask, MyEtherWallet, etc.


How does Bitcoin work?


Bitcoin is the first application based on Blockchain technology.


Bitcoin


Blockchain is a decentralized database made up of connected blocks that contain the transactions made with the bitcoins. It was invented by a person or a group of persons under the name Satoshi Nakamoto in the year 2008. Unlike fiat currencies, bitcoin supply is limited to 21 million and cannot be increased. 


Before bitcoin was invented, if you wanted to make some transactions across the countries the payment process had to go through centralized authority i.e. banks. This process is expensive and also time-consuming.

 Apart from this high transaction fees had to be paid to banks to process the payments. This is where the important application of Bitcoin comes in.

Bitcoin can be sent by anyone from anywhere in the world with internet connectivity without the help of any central authority by paying a minimal fee.

But as Bitcoin is decentralized the question arises who verifies the transactions?

This is where the concept of mining comes in.

Let us understand

Who are miners and what is mining?

What is Bitcoin Mining and Who are Miners?


What is mining?


Bitcoin Mining


Bitcoin Mining


Each block in the blockchain should be mined so as to use it. Block in the blockchain is mined by solving a computationally expensive problem through the help of machines (containing graphic cards). The person who mines these blocks is called a miner.


The miner will be rewarded with bitcoin for mining blocks. Reward (bitcoin) is based on the amount of work done by the miner. After the block is mined the transactions done by various users are added to it and that information becomes completely immutable, safe, and secure.

Now that we understood what is mining, let us know about bitcoin transaction verification.


Bitcoin Transaction verification:

Whenever a bitcoin transaction happens, the transaction gets stored in a transaction pool consisting of all-new unconfirmed transactions. 


Bitcoin Transaction


Bitcoin Transaction


Miners confirm and verify these transactions. After the transactions are confirmed by miners, the next step is to store them in the blockchain. For this miners have solved the computationally expensive problem called proof of work. Once this is completed miners will be ready with the block and the next step is to add this in the blockchain.

Suppose 3 miners solved the problem and submitted the same block of transactions to the blockchain. 

Then the question arises whose block should be added to the blockchain?  This conflict in the blockchain is resolved by the longest chain rule.


Longest Chain Rule :  


Now, suppose all nodes are at block 100

if three miners A, B, C are able to solve the computationally expensive problem and are ready with their blocks 101a, 101b, 101c

which block should be added first? How will you resolve this conflict?


Transaction Chain


This problem can be solved by the " longest chain rule "

In a public blockchain like the bitcoin blockchain conflicts are often resolved by the longest chain rule. Parallelly other miners (other than A, B, and C) who are trying to mine a new block will start mining on the top of the block that was first created.

In our case say 101B block was created first due to high processing speed of Miner B’s machine, then other miners will start building blocks on it like 102B, 103B etc.


Transaction Chain


The blocks 101A and 101C are discarded. Miner A and Miner C should create a proof of work again with a new set of transactions.


Bitcoin’s Future:


In recent times bitcoin is gaining a lot of attention with the kind of returns it has given to investors over the years. Many big investment companies like grayscale are investing tons of money in bitcoin.

With the banking ban lifted in India, crypto adoption in India is increasing massively and this can be huge for bitcoin and other cryptocurrencies as India is one the largest marketplace.

Also, bitcoin can be the solution for many countries where inflation is increasing rapidly as bitcoin cannot be printed in infinite amounts, unlike fiat currencies. As It has a fixed maximum supply of 21 million bitcoins that will ever be created.


So, this is all about bitcoin for now

If you want to read more about other cryptocurrencies like Ethereum, Wazirx, etc. 

Do check out our blogs ☺.

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