How does Bitcoin work | Mine Digital

How does Bitcoin work?

Posted on: July 19, 2019

Mine Digital


Bitcoin, and some other cryptocurrencies use a technological innovation called Blockchain to perform trust-less transactions on a de-centralised network, as per the Bitcoin whitepaper.

Bitcoin (and most other cryptocurrencies) use a technological innovation called Blockchain to perform trust-less transactions on a de-centralised network, as per the Bitcoin whitepaper. Satoshi Nakamoto’s whitepaper described several novel concepts that make up Bitcoins open system.

The Blockchain is fundamental to Bitcoin. It is a permanent, immutable and digital ledger that contains the full transactional history of a Bitcoin. Each buyer and seller leave a digital signature on transactions to contribute to a ‘block’ of information about the Bitcoin. The most recent transaction/block is kept as the last of the set of transactions/blocks on the ledger, creating a chain of transactions held in blocks, or, the Blockchain.  

It is the permanence of the transactions on the ledger, and the length of the blockchain that are the basis of the integrity of the system.  The Bitcoin system validates a transaction with the greatest amount of supporting evidence that it is the ‘right’ Blockchain. This is the transaction with the longest ‘blockchain’ history – a history going back to that Bitcoins origin, or, its ‘Genesis block’.   

Where older digital currencies rely on a centralised authority to validate transactions the Bitcoin protocol uses a de-centralised network of computing power to perform the transaction.   That network checks a new Bitcoin transaction against the Blockchain to perform transactions. The new transaction joins the history of transactions on the public Blockchain.  This method of transaction removes the risk of ‘double-spend’, where a digital asset is ‘spent’ twice with two parties. Previously, a central (and trusted) authority/entity was required to register and validate a transaction to avoid this problem.  In the Bitcoin Protocol the digital asset requires no trusted third party, making it a trust-less transaction.

Each computer performing hash calculations on the de-centralised network, (also known as ‘Bitcoin Miners’) is rewarded in Bitcoin for performing the transactions by checking the blockchain, making it an active participant in Bitcoin and giving the ‘Miners’ an active interest in the success of the system.

So to summarise, a bitcoin exists in an account (or Bitcoin Wallet) as the last recipient in a series of transactions that go back to the Bitcoins origin, its Genesis Block.  The chain of transactions are kept in blocks, forming a Block-chain of transactions held in digital form.  They are processed by a de-centralised computing network, avoiding the need to trust an authority or institution to register the transactions.  This method also overcomes the problem of ‘double-spend’ in performing trust-less transactions.

In fact, the authority of Bitcoin is the authority that is behind the Bitcoin Protocol. That authority is the quality of the protocol as a systematic idea.  This system was designed by an entity known as ‘Satoshi Nakamoto’ in the Bitcoin Whitepaper.  There has been significant speculation about ‘Who is Satoshi Nakamoto’.

Given the new language used to describe these things, it is natural to feel overwhelmed by the mechanics of the Bitcoin Protocol.  Familiarity with the concepts utilised and hearing various sources discuss them can help in understanding the whole system.

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