What Is Bitcoin in 5 Minutes


Bitcoin is a revolutionary asset class in which value is represented by a record of ownership on the Bitcoin blockchain rather than a physical or digital thing.

Summary

You may have heard bitcoin referred to as “digital gold” or “internet cash,” but those terms don’t really tell you anything about it. You’ve come to the right place if you want to learn more about bitcoin and how it works.

This is your Bitcoin

Bitcoin is neither a tangible nor a virtual currency. Rather, bitcoin is a record of ownership on the Bitcoin blockchain that serves as a symbol of value. While this may appear to be a strange concept to you, by the time you reach the bottom of this page, you will have a better understanding of what bitcoin is and how it operates.

To comprehend bitcoin’s ownership record, you must first comprehend Bitcoin’s network, which is made up of three components:

  1. the Bitcoin blockchain,
  2. bitcoin transactions, and
  3. the entities that verify and secure transactions.

The Bitcoin blockchain is only a public record with certain very distinct characteristics that make it extremely safe and reliable. This public record is updated in real-time on tens of thousands of computers throughout the world, referred to as nodes. Bitcoin is decentralized because no single person or company owns these nodes.

No one person or business controls these nodes, making Bitcoin decentralized.

Bitcoin transactions are similar to any other financial transaction you’re familiar with: they involve the transfer of value (such as money or real estate) from one person to another. Instead than going via a bank or other financial services provider, the transaction is authenticated, recorded, and safeguarded directly on the blockchain by all of the Bitcoin network’s nodes.

Transactions on the Bitcoin blockchain are now secure and verifiable thanks to this method.

Every bitcoin transaction is broadcast to all nodes in the Bitcoin network by the node from which it originated. These nodes ensure that the transaction is genuine by scanning the full blockchain to ensure that the individual transferring money has the funds and is authorized to do so. The transaction is considered valid if those two conditions are met.

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Remember that Bitcoin is decentralized, which means that thousands of Bitcoin nodes must agree that a transaction is valid in order for it to be accepted.

Even if a few malicious actors incorrectly validated a transaction, the transaction would not be confirmed because hundreds of other nodes would not. As a result, the chances of a legal transaction being recorded are extremely high, while the chances of a fraudulent transaction being recorded are extremely low, making Bitcoin exceptionally safe and secure to use.

Every 10 minutes or so, all of the most recent valid transactions are compiled into a block of data, which is subsequently distributed to the whole network and safeguarded in the blockchain.

Every 10 minutes or so, all the latest valid transactions are organized into a block

So, before we go any further, let’s go through how blocks of transactions are sealed, protected, and added to the blockchain.

  1. Bitcoin transactions are broadcast to all Bitcoin nodes.
  2. Transactions are validated and agreed upon by the network.
  3. All valid transactions are organized into a block of data approximately every 10 minutes.
  4. The unsecured block of data is sent out to the entire Bitcoin network to be added to the Bitcoin blockchain.

With us so far? Good. Now, on to the blockchain.

Miners are a subset of nodes that take unsecured blocks of data and secure them on the Bitcoin blockchain by doing a few things.

First, they run every transaction in the block through an algorithm that creates a unique identifying signature of 64 letters and numbers called a hash for each transaction.

64 letters and numbers called a hash.

As a result, we now have a block of transactions compacted into hashes. They’re compressed even further by combining hashes and generating a new hash for the pair. This is repeated until a single hash represents the entire block of transactions.

This is done until the entire block of transactions is represented by a single hash.
Then, the hash from the previous block is added to the block.

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As a result, our block now contains the hash that represents all of the current transactions in the block as well as the hash that represents all of the prior block’s transactions.

This is how the word “blockchain” gets its name. If a single byte of data from a previous block were to change, it would invalidate all future blocks since every hash after that would change, causing the blockchain to fail.

The final portion of the block is a nonce, which is a random number, and this is where the miners put in the most effort.

The nonce and the two hashes in the block must combine to form a hash that matches a set of criteria provided by the Bitcoin network’s software. The only way to find a valid hash is to experiment with different nonce numbers until the hash conditions are met.

The only way to find a valid hash is by trying random nonce numbers until the hash criteria is met.

Miners spend a lot of time and energy in the form of electricity to find the nonce that fulfills these conditions, therefore they buy or build special computers, design algorithms, and spend a lot of time and energy in the form of electricity. The first miner to find the nonce and creates the hash that meets the criteria broadcasts the hash to the entire network.

While producing the hash for the block is difficult, verifying that it fulfills the conditions is trivial. Nodes check that the hash of the block fits the criteria before adding it to their copy of the blockchain.

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then add that block to their copy of the blockchain.

Because every Bitcoin full node maintains a copy of the whole blockchain, an invalid block can only be added to the blockchain if 51 percent of all nodes agree to it.

While this is theoretically feasible, it is exceedingly unlikely, indicating yet another way in which decentralization provides a secure and accurate record of blockchain transactions. Bitcoin miners start working on the next block after valid blocks are added to copies of the blockchain all across the world.

Miners are paid with fresh bitcoin in exchange for their labor, which is known as proof-of-work. Bitcoin can only be created in this manner.

So, another quick recap.

  1. Transactions are turned into multiple hashes.
  2. Those hashes are turned into a single hash.
  3. That hash is combined with the hash from the previous block.
  4. Those two hashes are combined with a nonce to create a unique hash for the new block.
  5. The new block’s hash is verified by the network, added to all copies of the blockchain, and miners get paid in bitcoin.

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Miners receive bitcoin by adding a transaction to the block in their node stating that they would receive a predetermined amount of bitcoin for successfully mining that block.

Because their block is added to their copy of the blockchain, and thus all copies of the blockchain throughout the world, the team that really executes it receives the bitcoin. The blocks of the other mining teams are discarded.

So now you know that decentralization and encryption are the methods that develop and sustain data security and trust in the Bitcoin network. And that bitcoin is nothing more than a digital representation of value stored on the Bitcoin blockchain as a record of ownership.