Bitcoin is the world’s first cryptocurrency and remains the most well-known to this day. Created in 2009 by an author (or group) under the pseudonym Satoshi Nakamoto, it revolutionized the way we handle money and digital transactions. But how does Bitcoin actually work? To understand this, we need to discuss three key concepts: blockchain, transactions, and mining.
Blockchain: Bitcoin’s Ledger
At the heart of Bitcoin is blockchain technology, a digital ledger that records all transactions. Unlike traditional banking systems, where an institution controls all movements, the blockchain is decentralized and immutable. This means that anyone can verify transactions, but no one can alter them once they are confirmed.
Bitcoin transactions are grouped into blocks, which are linked sequentially, forming the so-called “chain of blocks” (or blockchain). This system ensures security and transparency since the data remains publicly accessible for verification.
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Each block contains:
- Transaction details (who sent, who received, and the amount of Bitcoin).
- The hash of the previous block, a kind of digital signature that links the blocks.
- A new hash, a unique code that authenticates the current block.
Bitcoin’s decentralization happens because its network is maintained by thousands of computers worldwide, called “nodes.” These nodes validate transactions and ensure the network operates without relying on banks or central authorities.
How Do Bitcoin Transactions Work?
If someone wants to send Bitcoin to another person, they need to create a digital transaction. This transaction includes three essential pieces of information:
- The sender’s address (public key).
- The recipient’s address.
- The amount of Bitcoin to be transferred.
To ensure authenticity, the sender digitally signs the transaction using their private key. This signature proves that they have the right to spend those Bitcoins.
Once the transaction is created, it is sent to the Bitcoin network and must be confirmed by miners—a process we will explain next. This step prevents someone from trying to spend the same Bitcoin twice (known as “double spending”).
The confirmation speed depends on the transaction fee paid. If there are many pending transactions in the network, those who pay higher fees get priority in the queue.
Mining: The Engine of Bitcoin
Mining is what keeps the Bitcoin network running securely. Miners are responsible for validating transactions and recording them on the blockchain. But why do they do this? Simply put: because they are rewarded with new Bitcoins and with the fees paid by users.
How Does Mining Work?
Miners use powerful computers to solve complex mathematical challenges—a system known as Proof of Work (PoW). Solving these problems is like a trial-and-error game to find a specific number (the block’s hash). The first miner to find the correct answer adds the block to the blockchain and receives a Bitcoin reward.
This process consumes a lot of energy and requires specialized computers. Over time, mining has become so competitive that it is now dominated by large companies operating massive mining farms, with thousands of machines running 24/7.
Additionally, every four years, the miners’ rewards are cut in half in an event called halving. This reduces the number of new Bitcoins being generated and helps maintain the limited supply, which influences the coin’s value.
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