In recent years, the word “bitcoin” has become a controversial topic around the world. It has become widely popular in the cyber world when this virtual currency’s price-per-coin went over $13,000 at the beginning of 2018. As privacy policies, banking regulations, and technological advancements have been made and introduced to govern this cryptocurrency, more and more retailers have accepted it as a monetary form.
There is no way of understanding the technicalities of how bitcoin works without first delving into the true definition of this cryptocurrency.
But first, let’s define what a cryptocurrency is.
Cryptocurrency or digital currency is a line of computer code that has a monetary value. This line of code is made by high-powered computers called ‘miners’ that create complex mathematical computations. This means that physically, you don’t have money on your hands.
Bitcoin, on the other hand, was the first-ever cryptocoin. Since most cryptocurrencies were created for maximum anonymity, no one knows who created Bitcoin. But the first known bitcoin to appear online was developed by Satoshi Nakamoto in 2009.
The first-ever bitcoin transaction was made on January 12, 2009, when Nakamoto sent a friend named Hal Finney 10 bitcoin. That same year, the value of this cryptocoin quickly grew to $27 per coin.
All other digital currencies created after bitcoin are called ‘altcoins’ or alternative coins. These include Litecoin, etherium, coinbase, namecoin, and many others.
Understanding how Bitcoin works:
Bitcoin was created to eliminate the need for a middleman, like a traditional bank, when making monetary transactions. Banks usually take a huge portion of the payment, making buying or paying for products and service more expensive.
Aside from avoiding hefty amounts as payment for handling fees, commissions, and such, bitcoin can also address issues of fraud.
Here’s how bitcoin actually works:
All bitcoin transactions are recorded and monitored in the blockchain, known as a shared public ledger. It is also where the entire network is.
The blockchain allows bitcoin wallets to compute spendable balances to ensure that all transactions are verified. Cryptography is used to maintain the integrity and chronological order of all transactions.
Bitcoin wallets hold an encrypted piece of data called a private key or seed. It is a mathematical data that is used to sign transactions to prove that it has come from the owner of the wallet. In a way, it helps maintain security in every exchange made in the network.
Pending transactions are confirmed using a distributed consensus system called mining. This process enforces a chronological order in the block and informs other users of the state of the system. This is done by encoding transactions into a block, making sure that they fit rigid cryptographic rules verified by the network. This prevents other blocks from being altered.
Mining also protects the network’s neutrality by verifying transactions through a series of mathematical problems. The first miners to solve the problem get more bitcoins.
Some final words:
Although bitcoin is the most popular cryptocurrency, it’s not the easiest to use.
For one, it has higher fees because there are more people using it. For another, non-techy people might find it hard to use.
Since transactions use electricity, using bitcoin as real money could pose grave threats to the environment.