Bitcoin: What is it and how does it work? We will explain in detail what bitcoin is, how it works and what its components are.
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Bitcoin: What is it?
Bitcoin is a digital currency that is rapidly gaining popularity worldwide, which is why crypto miners solve many of the problems of other forms of currency. Bitcoin is the first decentralized payment network (peer-to-peer) where users manage the system, without the need for an intermediary or central authority.
When you send bitcoin to someone or use bitcoin to buy anything, you don’t need to use a bank credit card or any other type of third party intermediary.
Bitcoin is the first global and fully decentralized online payment system.
Blockchain is one of the main technologies behind Bitcoin because it keeps a decentralized record of all transactions that have occurred on the Bitcoin network.
All information is safely preserved by using math and cryptography to protect it and the data is stored and verified across the entire computer network.
In other words, instead of having a centralized database at a third-party agent such as a bank to certify that a transfer has taken place, Bitcoin uses blockchain technology across a large, decentralized computer network to securely certify, confirm and record every transaction.
Because the information is recorded decentrally through a wide computer network rather than a centralized database, there is no single point of failure.
The role of Bitcoin miners
On the Bitcoin Network, there is a group of people called miners, and the role of the miners is to process and confirm transactions on the Bitcoin Network.
Anyone can be a miner and if you want you can download the software and start mining Bitcoin.
However, these miners typically have very powerful computers that are focused on mining Bitcoin.
What these computers typically do is solve puzzles and cryptographic problems and they do this to secure the bitcoin network while confirming and processing all network transactions and for doing this work the miners are rewarded in bitcoin.
A miner’s role in Bitcoin is to create the chain of transaction blocks that make up the Bitcoin general ledger.
In other words, what miners do is take the different transactions that are processed in Bitcoin, confirm them, and create the different blocks that are put together to create the blockchain. And for doing that work, they are rewarded in Bitcoin, and that’s how new Bitcoins are created.
The transactions in Bitcoin are grouped into blocks, and as new transactions are created in Bitcoin, these transactions are grouped together and new blocks of transactions are created and these are connected chronologically.
As we build a block of transactions, we create a new block or a new next block and these are built chronologically.
We start at block zero, then comes block one, block two, block three, block four, block five and so on.
A new block is added to the Bitcoin Blockchain approximately every 10 minutes with new transactions.
As new transactions are processed in Bitcoin, the miners group them together and when they create a new block they add it to the blockchain.
The Bitcoin blockchain contains a permanent record of all the transactions that have occurred in Bitcoin since its inception, and it all started with block zero which was created on January 3, 2009, and this block is known as the genesis block.
The four components of Bitcoin
Now that we know better what a chain of blocks is, who the miners are, and you know how a chain of blocks is created, let’s put it all together into four components that represent the Bitcoin vision:
The first component is cryptography. The blockchain uses cryptography and assembles each of the blocks, one with the other.
Every transaction and every block is protected by advanced cryptography.
The second component is software because, in order to develop Bitcoin, you have to have the software.
If you are a miner you have to have the bitcoin client, where you can be mining the bitcoins but also if you are using a digital wallet, that is software too.
You need software to be able to operate bitcoin.
Bitcoin also has to operate in hardware, which is the third component. There are thousands of computers around the world that are used to mine Bitcoin, but in addition, Bitcoin is developed on millions of different devices every time you use a mobile device or your computer to send Bitcoin to someone, you’re using your hardware.
Therefore, Bitcoin works by using cryptography, using software that operates on hardware, and the last component which is very important is game theory.
The fourth component of Bitcoin is a game theory because the miners are constantly in a competition to win a reward which is to receive Bitcoins.
When they receive that reward, new Bitcoins are created for the Bitcoin Network.
How the four Bitcoin components work
In the beginning, the Bitcoin software, which does so every time a new block of transactions is created, which are created every 10 minutes, presents a cryptographic challenge.
That is, the Bitcoin software approximately every 10 minutes presents the opportunity for miners to create a new transaction block.
In order to create the new transaction block, the miners have to find nodes that, when the information in the block is added, can create the cryptographic hash that has a certain number of zeros at the beginning, and this is extremely difficult.
This is achieved by processing millions and millions of attempts trying to see when they finally find nodes that will create the cryptographic hash, that has that number of zeros required.
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What happens at that point is that the entire global mining community starts off in a game and here what happens is that the miners who are competing for the chance to create the new block for the Bitcoin blockchain.
That’s where the element of the game theory comes in. What’s happening is that the miners have already received the cryptographic challenge from the Bitcoin software and are using its hardware.
That is, these powerful mining supercomputers to try to win this game and the goal of the game is to be able to collect the transactions that are needed in a new block to add to the blockchain and find the cryptographic hash that has the required number of zeros at the start.
It is an extremely difficult competition but, at some point one of the miners will manage to solve the challenge, will manage to create a new block and additionally will be able to find the hash that has the required number of zeros at the beginning and at that time that miner declares that he has found a new block.
When that happens the rest of the miners instead of being in competition join to verify that the new block that has been created is correct, that is to say, that it has a certain size that has valid transactions that there is nothing that is not correct.
If they agree and validate that that block is created correctly, the block is added to the blockchain and then the transactions in that block are confirmed.
When that happens, the miner who managed to create the new block receives a reward, and currently, those rewards are 12.5 Bitcoins.
When this happens, the competition starts again and everyone globally starts trying to find the next new block in the Bitcoin blockchain.