Understanding how bitcoin works

Understanding How Bitcoin Works

Bitcoin is a digital currency that became popular in 2013. This currency is not controlled by the Bank or any other institution. This decentralized currency is designed to keep our money from those who want to take profits. But how does a digital currency work? How can this currency apply if no one can say they save it.

Bitcoin consists of three parts: block chain, mining network, and wallet. In order to understand how Bitcoin works, we must understand how each part works. Make a coffee / tea and enjoy this article.

Block Chain

Block chain is a list of every Bitcoin transaction that ever happened. Before the transaction goes into the block chain, then the transaction has not been completed. As the name implies, block chain is a series of blocks. The block contains a set of new transactions and is connected to the previous block. Everyone can validate the block chain by following all records that record every transaction up to the first transaction when Satoshi Nakamoto makes Bitcoin.

Up here, you might think hard, who's in charge of managing this block chain. The answer is: no. No single organization or individual holds a block copy of its own. Bitcoin is made to be well distributed, so there is no fault point that can damage the block chain either intentionally or unintentionally. Block chain is held by every computer that mines Bitcoin.

Mining Bitcoin

The people who mine Bitcoing (miner), are the ones who keep the old deals and make sure the new transactions are recorded. Their task is to create (or mine) new blocks. These blocks keep new transactions going. As compensation has mine these new blocks, they are given some Bitcoin. Such incentives ensure that there are enough people to do the mining so that Bitcoin's networking system keeps on going.

Wallet

Wallet is a part of Bitcoin that is often seen by users. The term wallet (wallet) itself is not quite right because the wallet actually does not save Bitcoin. Wallet only keeps a private key that allows the owner to add transactions to the block chain in a public key address. Bitcoin is stored as a transaction record in the block chain.

The preceding paragraphs outline how Bitcoin works and we can start mining or using Bitcoin. However, you may not trust this currency because of the rather strange way it works.

The greatness of this currency is a cryptographic technique that protects the user. Let's look more closely at how this technique works.

Bitcoin security comes mostly from hashing, and this hash is used to link blocks to one another in the block chain. Each block holds the previous block hash, and the hash value can not be changed without changing the current hash value of the block (which also needs to be changed in the next block, etc.). Everyone can check that no transactions ever change the hash value because, if it is done then the next hash value will be affected and no longer linked.

Block chain is a record of every transaction that can be verified publicly. Every transaction detail will be disseminated to all miner in bitcoin network with request to put into next block.

In order for a miner to be paid for his work to add a block, there are two things that must happen: they must make sure the hash is valid and the block is recorded in the block chain. The first requirement is purely a technical challenge, while the second condition will force them to examine all possibilities. If a block chain contains invalid transactions (eg, someone transacts with a coin they do not own), the next miner who gets the item from the miner will refuse it so he will not get paid. Therefore the miner will check each transaction to ensure its validity before being added to a block.