What Is Bitcoin And How Does It Work??

Let’s say there’s a coin ( Bitcoin ) that’s currently worth hundreds of US dollars but, it is not made of gold or platinum or any precious metal. In fact, it’s not the kind of coin you can hold in your hand or stick in a piggy bank. It’s a digital currency, which means that it only exists electronically.

There are so many coins which exist electronically, but we all know that recently there is one such coin which was trending. Which is “Bitcoin”. Bitcoin doesn’t work like most of the money in the world. It is not attached to a State or Government so, it doesn’t have a Central Issuing Authority or Regulatory body. Basically what this means is that there’s nobody to –

  • Decide “when to make more Bitcoins”
  • Figuring out “how many Bitcoins need to be produced”
  • Keeping track of “Where they are”
  • Investigate any “kind of fraud”

Also Read: How To Add Best Android P Features To Your Smartphone

How does Bitcoin work as a currency? And does it have any value at all?

A network is an important part of Bitcoin, without network bitcoin would not exist. Not only the network there are many people who actually work hard and operate this network of Bitcoin. But, the most important thing is the “Cryptography”.

Hence, Bitcoin is considered the world’s first “Cryptocurrency”.

So Cryptography and Cryptocurrencies are a few technical terms. But, just for understanding, we can say that Cryptography is nothing but the technique for securing our network communication by using the encryption techniques. And the currencies which are created using Cryptography are known as Cryptocurrencies. As Bitcoin is a fully digital currency, it can be exchanged between different computers and Peer-to-Peer networks.

What is Peer-to-Peer (P2P) Network?

P2P network is used to share things between computers directly. For example, sharing legitimate music, songs, and movies by making copies of them from one place to another so that it can be downloaded on different computers.

Now the question arises that if Bitcoin is the digital currency than why don’t we get rich by just copying the Bitcoin? Well, unlike any music, song, and movie, Bitcoin is not a string of data that can be duplicated in the network.

Digital currency Bitcoin is just an entry on a huge ledger called “The Blockchain”. The blockchain is like a container which records all the Bitcoin transactions that have ever happened in the world. So if you send the bitcoins to someone it is not like you are sending files from one place to another it is like you are writing the exchange on a ledger. For example, “Anurag sends 5 Bitcoins to Vaibhav”. Now you might get confused because I stated earlier that Bitcoin doesn’t have a regulator or central authority. Even though Blockchain is a central group authority to keep track of everything, there is no official group of people who update the ledger and keeps track of everybody’s money like a bank. This means Bitcoin is decentralized.

Anybody can volunteer to keep track of Blockchain and there are many people who keep track of the same thing to make sure all the transaction are accurate and perfect. Imagine that you are playing a game of poker with your friends. Most of your friends are not having cash or chips to play the game so then you decide to play by making a scoresheet. So, there few members who keep the track of how much one bets how much and who wins the most hands. Most of them try to cheat while playing a game and hence none of them trusts each other. Hence, everyone starts tracking their own scoresheet/ledger individually. When the game is completed each member of the game compares the scoresheet/ledger. If anybody has cheated, he/she will get caught.

After many hands you might fill up the page of your notebook and the page will contain no. of hands one everyone played during the complete game. In our bitcoin world consider that every page of the notebook is one transaction and hence a notebook which we call ledger contains details of transactions. Each page of your notebook will be called “Block of Transactions”. Each book will have pages and pages of information about every transaction that has been performed. This will form a structure like a “chain” of ‘Blocks of transactions’. Hence the name, “Blockchain”.

Consider now thousands of people are maintaining a Blockchain, then how do you think they are all kept in sync?

Sticking to our cards analogy, think of the entire Bitcoin P2P network as a really huge table on which the cards game is played with millions of people, many people are at the same time maintaining the ledger. Some are just exchanging money while some are volunteering for maintaining the ledger. Some of you now want to send or receive money then you just have to declare the transaction to everyone at the table. This makes it possible for the people at the table to maintain the ledger. So, for every transaction, you’re declaring two things on the Bitcoin network –

  • Your and sender’s account number
  • Number of bitcoins you want to send

Once you declare the transaction, the people maintaining the blockchain at the table will add your transaction to the current block. As there are many people to maintain the blockchain it seems like security to transactions. If a transaction only requires an account number to send or receive the bitcoins then there is a security risk. With our regular money, we see frauds and thefts with just our account numbers. At the same time, in the case of bitcoin, there is no central bank to notice anything weird going on to shut down the fraud. Then suddenly your whole life savings are gone!!

So how will Vaibhav know that I am sending bitcoins to him?

Cryptography is the solution, yes, by using cryptography Bitcoins are kept safe. Cryptography uses unique keys which confirms that the transaction is acknowledged by the receiver to which you are sending money with a message like “this is really Anurag”.

When an account is created on the Bitcoin Network, which is called “Wallet”. The wallet will have unique keys “Private” and “Public”. In this case, the private key can take some data and basically mark it or you can also say “sign it” so that other people can verify later if they want.

So let’s say I want to send a message to the network that says Anurag sends 5 bitcoins to Vaibhav, I signed that message with the private key which only I have access to and nobody else can replicate. Then I send that signed message out to the network and everyone can use my public key to make sure my signature checks out. That way everyone keeping track of all the Bitcoin trading knows to add my transaction to their copy of the Blockchain. In other words “If the Public Key assigned to wallet works, that it is guaranteed that my message was signed by a Private key and which is something I wanted to send. Unlike a handwritten signature or a credit card number this proof of identity isn’t something that can be faked by a scam artist.

“Who” Part of each transaction is obviously important to make sure the right people are swapping bitcoins. But the “WHEN” matters as a well. Suppose you have 1000 bucks in the bank account, and you are trying to buy 2 things for 1000 bucks each. The bank will honour the first purchase and deny the second one. If the bank didn’t do that, you will be able to use the same money multiple times, which might sound awesome but is actually terrible. Financial systems do not work like that because then no one will get paid. So if I only have enough money to pay Vaibhav or John but I try to pay them both, there’s a check in the Bitcoin system. In short, “Both Bitcoin network and wallet automatically check your previous transactions to make sure that you have enough Bitcoins to send in the first place”.

Some people keep copies of Blockchain all over the world. There can be some network delays because of which everyone won’t always receive the transaction request in the same order. Consider the below example:

Block A

A sends V 5 BTC

A sends J 2 BTC

J sends V 2 BTC

Block B

A sends J 5 BTC

A sends V 2 BTC

J sends V 2 BTC

Block C

J sends V 2 BTC

A sends J 5 BTC

A sends V 2 BTC

Different people have the same record but in a different order but none of them is necessarily wrong. Now, how does Bitcoin will solve this problem?

The cryptographic hash function is a mathematical problem. This mathematical problem needs to be solved by every person who holds a record. That mathematical problem is an algorithm which has the input of any size but has an output of a fixed size which is a feature of a hash function. To understand it better let’s consider an example. So in this case, we have a string of input as 5 2 2 and our hash functions say to add all the numbers i.e. 5+2+2 which will output 9. Here it is easy to figure out output based on the input whereas, it is difficult to figure out Input based on the output. The Hash Function which Bitcoin uses is algorithm i.e. SHA256. It stands for Secure Hash Algorithm 256-bit. The hash function was originally developed by US Security Agency. Whoever solves the hash first gets to add the Block to the Blockchain. The bitcoin network chooses one hash and becomes the longest and trusted chain if multiple people solve the block at the around same time.

These volunteers spend a huge amount of money to solve the SHA256 problems and to maintain the blockchain. Here the question is, Why?

Bitcoin has a predefined system that will reward the miners. Today every time you keep the track of the blockchain and add the blockchain to the ledger, bitcoin system will reward you with some bitcoins. In other words, these people are called “Miners” and are famous for “Bitcoin Mining”.

In coming future the value of Bitcoin is increasing and Miners are doing a great job by keeping the track of ledger, the question arises that if all the miners stop mining or maintaining ledger will bitcoin theft will increase?? I suppose it wouldn’t as Bitcoin system rewards miners for every transaction they manage and maintain if the bitcoin miners are less the rewards will be more to the miners with that state of mind there will not be a shortfall of miners to maintain the bitcoins. The idea is to keep the supply of the Bitcoin limited, which will certainly raise their value over time. Does Bitcoin investment seem to be a good idea? Comment down below what you think about the article and to share and like.

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Vaibhav Kulkarni
I am Vaibhav Kulkarni, Blogger By Passion, Civil Engineer By Profession. I am Tech Enthusiast and Travel Lover. I started my journey 3 years back with some ideas and no coding experience. I was always fascinated with technology and its credibility. I firmly believe in "Creating jobs rather than asking for one".