Bitcoin in 3 minutes
Welcome back to our series on everything bitcoin! In this post, we’ll give you a 3 minute rundown on how bitcoin actually works. This is the post that will make you a hit at the workplace and with relatives that keep asking “what a crypto is.”
Bitcoin can seem intimidatingly complicated at first. Once you get down to it, it’s easy to get a grasp on the underlying concepts and mechanics. This explanation doesn’t cover everything, but it will hopefully give you the tools to learn more about the bits you find interesting.
First, some distinctions. Bitcoin is a peer-to-peer technology. All actions, from sending and receiving transactions to mining bitcoins are carried out collectively by a network. There’s no central bank or authority.
Bitcoin was designed to solve the double-spending problem for digital currency. With digital currency, it’s theoretically possible to spend the same money twice.
This is not really a problem with cash. If I have a $5 note and use it to buy a beer, I can’t then take the same $5 and use it to buy a shot of tequila. Not only would it be bad for my liver, but the money would be inaccessible to me since I no longer have that particular $5 note.
Before Bitcoin, the double-spending problem was usually solved by involving a central issuing body, like a bank or mint who would make and issue unique tokens.
Bitcoin solved the double-spend problem by creating a distributed ledger, the blockchain, that anyone can see and check.
The bitcoin blockchain contains a complete transaction history. People can set up computers that hold copies of the ledger, called nodes.
There are two types of nodes to be aware of: full nodes and light nodes. Full nodes contain a copy of the entire bitcoin blockchain and are constantly updated to reflect the mining of new blocks.
Light nodes, on the other hand, usually only download enough blockchain data to verify new transactions. Every time a computer is connected to the bitcoin network in order to send or receive a transaction, it is acting as a light node.
Every new bitcoin transaction is broadcast to the nodes. Bitcoin is a proof-of-work based protocol. This means that miners must expend electricity in the form of computational power in order to participate in bitcoin mining.
Miners compete to solve a complex computational problem embedded in the previous block. The first miner to solve the problem gets to choose the next block.
The successful miner then broadcasts the potential new block to the network. If the block is verified and added to the blockchain, the miner is rewarded with newly minted bitcoins and all the transaction fees in the block.
How do people prove that they own bitcoins? The Bitcoin protocol relies on something called public-key cryptography, which we’ll get into in a later post. For now, the important thing is that bitcoin users need a public key and a private key to send bitcoins.
A public key acts as a sort of address, similar to a bank account number. People can send money to public keys, and see what transactions public keys have been involved in.
A private key is needed to send any kind of transaction. You may have heard the phrase “not your keys, not your coins.” This refers to the private key. If anyone has access to it, they have full power over your bitcoins. It’s vital to make sure that your private key is kept secret.
Like we said, it’s a speedy one! Thanks for reading! If you’re interested in learning more about cryptography, follow us on Twitter @Coincub1 to get updates every time we post.