BITCOIN AND HOW DOES IT WORK?
CRYPTOCURRENCY

BITCOIN AND HOW DOES IT WORK?

If you have not already heard about bitcoin and cryptocurrency, then you must be living on another planet in the universe. It has now become one of the most discussed topics amongst people across the world. Although Bitcoin exists from 2008, since 2016 it came into limelight when its prices suddenly started to grow. The chart below very well captures the flashing rise of bitcoin prices (as of date of writing this blog)

bitcoin chart
source: -bitcoincharts.com

The chart above uses the scale in 2000 and shows, that from almost zero values, 8 years back the bitcoin is now worth more than 15000 USD. The exponential increase in price started just towards the end of the year 2017 and it is no surprise that it caught everybody attentions towards it.

To understand fully, it is important to start from the beginning and know the basics of this magical coin.

SO, WHAT IS EXACTLY IS BITCOIN?

Bitcoin is the first global, decentralized currency that allows you to send money from one person to another without involving any third-party broker, such as a bank. Instead, activities and balances are stored in public shared ledger called the blockchain, which is verified thousands of computers (nodes Computer) maintaining the network across the globe.

Transactions are made with no middleman so anyone who can access the internet can transfer the money to anyone anywhere in the world

Bitcoin is a peer-to-peer version of electronic cash that allows payments to be sent directly from one party to another without going through a financial institution. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work.”

So, bitcoin, as it has been conceptualized, is a method of doing transactions between people. It plays the same role as that of money but it does differently. Instead of giving any money in return of product or service like it happens in our currency, in bitcoin only the recording of giving money is maintained.

The unit for recording the transaction is bitcoin. So, under bitcoin system a transaction is recorded as how many bitcoins were sent from one account to another account, and what are the updated balances in those accounts.

Thus, for transaction one can send the required bitcoins from his/her account to another account (we call it as bitcoin wallet) and it gets recorded and updated in the shared public ledger.

The place where all the transactions are recorded and maintained is called as blockchain, which is nothing but a carefully designed list of all the transactions that has ever happened since the beginning of bitcoin. And even all the records of transactions in blockchain is publicly available to be viewed (https://block-chain.info/)

These features of bitcoin i.e. transactions of all the records are maintained and recorded in blockchain which is openly available to view, is what as referred to as decentralized mechanism of exchange of money.

HOW WAS THE FIRST BITCOIN CREATED?

Most of you must be aware that bitcoin was created by a mysterious person or group with the name Satoshi Nakamoto.Satoshi described about his idea of bitcoin through a published research paper “BITCOIN – A PEER TO PEER ELECTRONIC CASH SYSTEM”.

In his research paper, he explained how people can exchange the value with each other without involving any financial institution or bank. His bitcoin system speaks about the programme based on blockchain technology that will generate some prefixed bitcoins based upon certain conditions.

The programme uses an algorithm to determine when, how much and where bitcoins will be generated. Immediately after the research paper, he launched an open source platform, where anyone willing, can download the software on his/her computer and starts getting bitcoin transaction-related information.

Few People who initially installed the software are the people who pioneered this technological method which is a subsequent year to come was poised to become the costliest currency of the world.

The people who initially joined software found some number of bitcoins in their wallet. These Bitcoins can now be sent or received from others who have installed bitcoin wallet.

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HOW ARE THE BITCOINS GENERATED NOW?

Bitcoins are generated through an algorithm after a certain type of task related to transactions and recording is done by someone. People who does this work are called as miners who use their computers for this purpose. These miners install the bitcoin software on their computer and make their computer as node computer for managing the transactions.

Whenever somebody attempt to make a transaction from their wallet and send the bitcoin from one wallet to another wallet that transaction is broadcasted to every node computers in the network.

These nodes computer through their inbuilt programme verifies the transactions whether the transactions are legitimate or not. In simple terms, the computer verifies whether the wallet from which bitcoin is being sent has the required number of bitcoins in it or not.

After successful verifications, the transactions are recorded. All the successful transaction that happened within the duration of about 10 minutes, after verifications are grouped in the form of a block of transactions. Once the block gets formed the node computer Hashes it and links it to the previous block to form a chain-like structure.

Now as there are many nodes computer and all of them get the transaction information at the same time, every node tries to do the above steps. The node that completes the task first becomes eligible for receiving a certain number of bitcoins in its wallet. These bitcoins are created automatically by the algorithm and issued to the node computer who wins the race. So, in this way, new bitcoins becomes available for the use of transactions.

WHERE DO PEOPLE KEEP BITCOINS?

Bitcoins is nothing but the number, which is kept in the block-chain, which anyone can see, so there is no question of storing bitcoins as all the bitcoins are recorded in the blockchain under various wallet id.

The actual question is how do people own bitcoin. The answer is that ownership of bitcoins is through the wallets for which you have the private key (Like password).

So, if you have the private key for a wallet, you own all the bitcoins that are there in that wallet and you can transact those bitcoins, whenever you want.

So, own to bitcoins it is necessary to generate a wallet and have a private key of that wallet. The wallet can receive the bitcoins and you know the private key of that wallet so you are the owners of those bitcoins.

WHERE ALL THE TRANSACTIONS OF BITCOINS DATA STORED?

The data of all the transactions of bitcoins is in the form of block-chain and it is distributed to all the miners who perform the job of verifications of transactions.

Every time when transaction broadcasted to these miners (in their node computer) and they verify or link the block with their primary block in the blockchain, data automatically updated in all the nodes computer. So, the miners keep updating their data by linking the newly created block to the existing blocks in their computer storage.

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