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How Bitcoin Operates
Bitcoin is a groundbreaking asset form where worth is not represented as a physical or digital entity, but as a record of ownership on the Bitcoin blockchain.
Overview
You might have heard bitcoin described as "digital gold" or "internet cash," but these terms don't explain much about it. If you want to grasp what bitcoin truly is and how it functions, you're in the right place.
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Bitcoin Basics
What's Bitcoin? Bitcoin is a decentralized digital currency established in 2009, enabling peer-to-peer transactions without the need for banks.
How to Acquire Bitcoin? Follow our brief instructions to buy Bitcoin using Gemini. Alternatively, you can purchase Bitcoin via exchanges, ATMs, or peer-to-peer platforms after setting up a digital wallet.
Understanding Bitcoin Mining and the Mining Reward Bitcoin mining involves solving intricate puzzles to earn new bitcoins, with the mining reward halving about every four years.
Legality and Security of Bitcoin Bitcoin is legal in the United States. The security of the Bitcoin network stems from its decentralized nature, but users must protect their wallets and private keys.
Bitcoin's Price The price fluctuates due to various factors such as supply and demand, market liquidity, technical aspects, and market sentiment. Real-time price changes can be tracked on the Bitcoin page.
Bitcoin's Attributes and Traits
Bitcoin isn't a physical or digital object; rather, it's a representation of value in the form of a record of ownership on the Bitcoin blockchain. While this concept may seem unfamiliar at first, you'll understand what bitcoin truly is and how it operates by the time you finish reading this page.
To grasp bitcoin's ownership record, you must first comprehend the Bitcoin network, which consists of three components:
- The Bitcoin blockchain,
- Bitcoin transactions, and
- The entities that validate and secure transactions.
The Bitcoin blockchain is a public ledger with unique attributes that make it highly secure and reliable. This ledger exists simultaneously on tens of thousands of computers worldwide, known as nodes, and is continuously updated. No single entity controls these nodes, ensuring Bitcoin's decentralization.
Bitcoin transactions are similar to other financial transactions, involving the transfer of value (e.g., dollars, real estate) from one person to another. However, instead of routing transactions through a bank or financial services provider, they are validated, recorded, and secured directly on the blockchain by all nodes in the Bitcoin network. This process ensures the security and verifiability of transactions on the Bitcoin blockchain.
Is Bitcoin Decentralized? How Are Bitcoin Transactions Validated?
Every bitcoin transaction is broadcasted by the originating node to all nodes in the Bitcoin network. These nodes validate the transaction by scanning the entire blockchain to confirm that the sender possesses the funds and is authorized to send them. If these conditions are met, the transaction is deemed valid.
Since Bitcoin is decentralized, thousands of Bitcoin nodes must agree that a transaction is valid. Even if a few nodes falsely validate a transaction, thousands of others would not, preventing the confirmation of the transaction. This high level of validation ensures that valid transactions are recorded with high probability, while false transactions are recorded with extremely low probability, making Bitcoin very secure to use.
Approximately every 10 minutes, all the latest valid transactions are compiled into a data block, which is then broadcasted to the entire network to be secured in the blockchain.
Let's recap briefly before explaining how blocks of transactions are sealed, secured, and added to the blockchain.
- Bitcoin transactions are broadcasted to all Bitcoin nodes.
- Transactions are validated and agreed upon by the network.
- All valid transactions are organized into a block of data approximately every 10 minutes.
- The unsecured block of data is broadcasted to the entire Bitcoin network to be added to the Bitcoin blockchain.
Are you following along? Great! Now, let's delve into the blockchain.
Bitcoin Mining: How Do Miners Validate Bitcoin Transactions?
A specialized subset of nodes called miners take unsecured blocks of data and perform several actions to secure that block in the Bitcoin blockchain.
First, they take each transaction in the block and use an algorithm to create a unique 64-letter and number signature called a hash for each transaction.
The transactions are then further compressed by pairing hashes and creating a new hash for the pair. This process continues until the entire block of transactions is represented by a single hash.
Next, the hash from the previous block is added to the current block.
Thus, the block now contains the hash representing all current transactions and the hash representing all transactions from the previous block, forming the "chain" in "blockchain." Any alteration to a single byte of data from a previous block would invalidate all future blocks, as every hash thereafter would change and disrupt the blockchain.
The final component of the block is a random number known as a nonce, where the miners focus their efforts.
The nonce and the two hashes in the block must create a hash that meets specific criteria set by the Bitcoin network's software. The only way to find a valid hash is by attempting random nonce numbers until the criteria are met.
Blockchain Security: How Is the Blockchain Secured?
Miners invest in specialized computers, develop algorithms, and expend significant energy in the form of electricity to find the nonce that meets the criteria. The first miner to find the nonce and create the hash that meets the criteria broadcasts the hash to the entire network.
While creating the block's hash is challenging, verifying that it meets the criteria is straightforward. Nodes confirm that the block's hash meets the criteria and add the block to their copy of the blockchain.
Every Bitcoin full node maintains a copy of the entire blockchain, so the only way an invalid block can be added is if 51% of all nodes agree to its inclusion. While this is theoretically possible, it's highly improbable, showcasing how decentralization ensures a secure and accurate transaction record on the blockchain. Valid blocks are added to copies of the blockchain worldwide, and Bitcoin miners begin working on the next block.
In return for their effort, known as Proof of Work (PoW), miners receive new bitcoin. This is the sole method by which bitcoin is created.
To recap:
- Transactions are converted into multiple hashes.
- These hashes are combined into a single hash.
- This hash is combined with the previous block's hash.
- The resulting hashes, along with a nonce, create a unique hash for the new block.
- The network verifies the new block's hash, adds it to all blockchain copies, and miners are compensated in bitcoin.
Miners receive their bitcoin when each mining team adds a transaction to their node's block stating that they receive the predetermined bitcoin for successfully mining that block. The team that accomplishes this receives the bitcoin because their block is added to their copy of the blockchain, and subsequently, to all copies of the blockchain globally. All other mining teams' blocks are discarded.
Now you understand that decentralization and cryptography establish and reinforce the security of data and trust in the Bitcoin blockchain. Bitcoin simply represents value as a record of ownership on the Bitcoin blockchain.
TIP
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