What is Bitcoin?

What Is Bitcoin?

Bitcoin was created by Satoshi Nakamoto, a pseudonymous person or team who outlined the technology in a 2008 white paper. It’s an appealingly simple concept: bitcoin is digital money that allows for secure peer-to-peer transactions on the Internet. 

Bitcoin (BTC) is a cryptocurrency (a virtual currency) designed to act as money and a form of payment outside the control of any person, group, or entity. This removes the need for trusted third-party involvement (e.g., a mint or bank) in financial transactions.

Bitcoin

Bitcoin, a decentralized digital currency, operates on a blockchain with a capped supply of 21 million. Bitcoin relies on cryptographic principles, economic incentives, and a global network of users to maintain its value and security

Bitcoin-to-bitcoin transactions are made by digitally exchanging anonymous, heavily encrypted hash codes across a peer-to-peer (P2P) network. The P2P network monitors and verifies the transfer of Bitcoin between users. Each user's bitcoin is stored in a digital wallet, which holds each address from which the user sends and receives bitcoin, as well as a private key known only to the user.

  • A blockchain is a secured distributed ledger, a database disseminated between multiple users who can make changes.
  • Mining is the process of validating transactions, which requires miners, who are rewarded in Bitcoin.
  • You access your Bitcoin using a wallet and private keys.
  • Bitcoin users pay transaction fees in Bitcoin to miners to process the transactions.
Bitcoin's weaknesses are in key storage methods and user interfaces—its blockchain has reportedly never been compromised.

How does Bitcoin work?

Bitcoin was built with a distributed digital record in mind called a blockchain. Blockchain is a type of public ledger -- a digital system for recording transactions and related data in multiple places at one time. Blocks in a blockchain are units that contain data about every transaction, including the date, time, value, buyer and seller, and an identifying code for each exchange.

Blocks

When a block on the blockchain is opened, the blockchain creates the block hash, a 256-bit number that encodes the following information:

  • The current software version: The Bitcoin client version
  • The previous block's hash: The hash of the block before the current one
  • The coinbase transaction: The first transaction in the block, where the Bitcoin reward for opening the block was issued
  • The block height number: How far away numerically the block is from the first block
  • Merkelroot: A 256-bit number that stores information regarding the transactions in the block
  • Timestamp: The time and date the block was opened
  • The target in bits: The network target
  • The nonce: A 32-bit number that is added to the block hash

Bitcoin Mining

Mining is the process of validating transactions and creating a new block on the blockchain. Mining is conducted by software applications that run on computers or machines designed specifically for mining called Application Specific Integrated Circuits.

The hash is the focus of the mining programs and machines. A hash is the result of sending block data through a hashing algorithm, which outputs a fixed-length sequence of numbers and letters no matter the size of the data sent through it. These hashes are in hexadecimal format, which means they can be converted to a numerical value.

The programs repeatedly generate hashes to try and create a number equal to or less than the numerical value of the network target, adjusting a variable called the nonce with each guess. The nonce begins at a value of one and is increased by a value of one every time a guess is made. The number of hashes a miner can produce per second is its hash rate.

Mining programs across the network generate these hashes, competing to see which one will solve the hash first—the one that does receives the Bitcoin reward, a new block is created, and the process repeats for the next group of transactions.

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