Bitcoin is volatile, but still, the most popular digital coin is interesting for both experienced crypto owners and ordinary people. So what is Bitcoin and how does it work?
What Is Bitcoin?
Bitcoin is a decentralized currency, no government or banks have control over it. It’s encrypted and relies on peer-to-peer software.
To understand how does Bitcoin work, we need to talk about the Blockchain first. How does Bitcoin use Blockchain? Blockchain is some kind of public ledger, that records all the transactions and store them on servers all around the world. Every transaction is publicly broadcast to the network. Regularly the transaction data is pulled together by miners into blocks, which are added to the blockchain later. Blocks contain information about each and every transaction, including date and time, total value, buyer and seller, and a unique identifying code for each exchange. Once the block is added to the blockchain, it becomes available to view for everyone. Blockchain is decentralized too, meaning that there’s no central figure like a bank or government to control it – nobody owns it but everybody could use it.
To store Bitcoin we use digital wallets. There are software and hardware wallets. Software wallets are special websites or apps designed for storing crypto, while cold wallets are separate devices requiring to be connected to another device to manage funds. You could also need exchanges and crypto payment providers to have all the necessary tools.
In reality, there is no such thing as Bitcoin or a wallet in the physical world. Basically, it’s all just an agreement between users about coin ownership. To prove coin ownership you need to use a private key.
How To Use Bitcoin
Now, that we found out how does Bitcoin work, let’s get to know more about its use. Bitcoin is designed for peer-to-peer payments, but its use cases vary because of the growing competition.
Payments
To use bitcoins as a payment, you need a cryptocurrency wallet. The wallet holds your keys and it proves that you own your coins. Use crypto assets to pay for goods and services as many business owners nowadays allow crypto as a means of payment. Even brick-and-mortar stores sometimes allow paying with BTC. Usually, if crypto is accepted at the place you’ll see a special sign. To make a transaction, a terminal or a QR code is needed.
Investing and Speculating
As prices began to rise, more and more people get interested in investing in Bitcoin. The market took off when people started to buy BTC to hold and trade.
Economic Maintenance
In some countries with rather unstable economies, people use crypto instead of a local currency. It gives people an option to hedge for a worst-case scenario.
How do bitcoin transactions work?
For Bitcoin owners to make a transaction worth only entering a needed amount and pressing send. But let’s find out how it works.
The integrity is provided by the cryptography of the keys every wallet user owns. The key is a series of numbers and letters that you need to share when sending a public key to accept crypto. However, the other key – private – should be kept secret as it gives whoever holds it access to funds.
So, you use your private key to confirm your ownership and sign a message with the transaction details. Then, the transaction data is included in the blockchain.
Now, a message with the transaction details has three main parts:
Inputs: The bitcoin address where the crypto funds are located.
Outputs: Recipient’s public key or bitcoin address.
Amounts: The amount of crypto the sender wants to transfer.
Then, the transaction is broadcasted to the whole Bitcoin network, where every node verifies that the sender’s private key is able to access the funds. After that, the transaction reaches a mining node. Miners create a blueprint for the block and attempt to add it to the blockchain. If a miner finds the next block in the chain, it becomes an immutable block on the chain. Finally, this block is broadcasted to the network’s nodes who will include it in their copy of the chain.
Bitcoin Transaction Fees
The higher the fee rate, the faster the transaction will be processed, so Bitcoin owners can control the speed of the process.
The space on the block is limited and because of this, a limited number of transactions could be included in the block. Miners obviously prioritize the transactions with the highest fees as they receive the fee and the newly minted coin at the same time.
Summing everything up
In this article, we tried to discuss all the Bitcoin topics in great detail. Hope the article answered your “how does bitcoin work?” and “how do bitcoin transactions work?” questions.
