How Does Bitcoin Work? A Detailed Review of the Most Popular Coin

bitcoin works

2017 can be surely called the year of cryptocurrency. It was last year when their existence became known to the general public. At the moment there are more than a thousand different coins. Most of the credit, of course, belongs to Bitcoin. Demand for Bitcoin is quite large, even if we take into account the current drop of the course. In this article we will explain how cryptocurrency is arranged, how it is mined, and we need it in general. We will take the most popular coin – Bitcoin – as an example.

Contents:
(please click the topic to scroll down to it)

  1. What are cryptocurrencies and why do we need them?
  2. What is Bitcoin transaction or how is Bitcoin transferred?
  3. How does a Bitcoin farm work or where do new coins come from?
  4. How to use Bitcoins?
  5. Conclusion

1. What are cryptocurrencies and why do we need them?

Cryptocurrencies are digital money, the main feature of which is absolute decentralization. Unlike Qiwi, Webmoney, Yandex Money, etc., there is no single server for cryptocurrency, blocking which you can “stop” the whole network.

In simple words, cryptocurrencies are absolutely independent of any systems (public, banking, financial, etc.). A similar “superpower” is given to the coins by the technology, based on which they are created – blockchain. With this technology, you can consistently encrypt any data, not necessarily financial transactions. This data register (if we are talking about cryptocurrencies, the transaction list) is stored on tens of thousands of computers all over the world simultaneously. The interaction between the participants is built on absolute equality. Each user is both a user and a server, similar to the peer-to-peer system used in uTorrent.

At this point in time, there is no such technology that could compromise, replace or block blockchain (in case of a large community). You will simply need a titanic amount of processing power to carry out such an action.

Another feature of Bitcoin (BTC) and other coins is their absolute autonomy. Intermediaries are not required for the correct operation of cryptocurrency, so there are pretty much no fees when making transactions

2. What is Bitcoin transaction or how is Bitcoin transferred?

Daily transactions in the Bitcoin (BTC) network only amount to about $4 billion. If you want to sell more than buyers want to bue, the rate of Bitcoin rate, in the opposite case it increases. This mechanism is understandable to the vast majority of people, but not many people understand how the Bitcoin transaction is carried out from a technical point of view. Let us try to explain this issue in simple words.

When transferring Bitcoin from one wallet to another, a section of data confirmed by a unique signature is collected in blocks. Each transaction is unique and there can not be two identical ones. The information stored in the section is mostly information about previous transactions that are encrypted into a special code (hash). Blocks are connected in chains, which are necessary both for checking the implementation of the payment itself and for physically implementing special transaction parameters. Generally speaking, each new transaction stores data about all previous payments from the chain of blocks

3. How does a Bitcoin farm work or where do new coins come from?

Fiat (paper) money is printed on the currency court, precious metals (including gold) are extracted from the depths of our wonderful planet, but where do bitcoins or other digital coins come from?

As we said above, cryptocurrency does not have any single centers and it is logical to assume that coins are produced by the forces of the entire community. Mining (extraction) of cryptocoins is carried out by providing the platform with computing power of the equipment. People who want to start mining bitcoins should install special farms, which consist of video cards or special network equipment for mining (ASIC-miners). Using its computing power, equipment solves complex equations and collects data into blocks. For this, the Bitcoin algorithm awards the miners with a certain number of coins. It was possible to receive 50 BTC for calculating the first block, after 210 thousand blocks are extracted, the reward reduces by half. At the moment it is 12.5 BTC per block.

The emission of Bitcoin is limited to 21 million coins. Despite the fact that more than 17 million coins have already been mined, the last piece will be mined not earlier than in May of 2140. Satoshi Nakamoto (pseudonym of the Bitcoin creator) did this intentionally in order to prevent the inflation of the coin.

4. How to use Bitcoins?

Anyone with access to Internet can use the most popular cryptocurrency. In order to pay with Bitcoins in the Internet, it is enough to have a virtual wallet (such as Blockchain.info). However, it is not practical to store all your savings on such services. If you want to buy Bitcoins and leave them be for several years until the rate grows, then it’s better to use a cold wallet. You can read more about the classification of cryptocurrency wallets in this article.

If you want to get free coins, you can use bitcoin faucets – these are special services that pay tine shares of BTC for performing certain actions (viewing advertisements, clicking, registering in services, etc.)

5. Conclusion

Cryptocurrencies have recently been attracting more and more attention of the public. Bitcoin is considered the leader of the industry. Its operations are based on the technology of blockchain. For this reason, Bitcoin does not need a single center, regulators or intermediaries. All transactions are made directly from wallet A to wallet B. Data on financial transactions are stored in blocks. The work of the system is supported by the miners who provide the computing power of their own network equipment. For this, the system rewards them with a certain number of coins.

There is no need for deep knowledge in the field of cryptography for common use of Bitcoin. You just need to create a wallet and have access to the Internet to carry out transactions.

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