Understand bitcoin & How Its Transactions Works

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Bitcoin Explained

How popular is bitcoin, a term that pops up in Google’s top search results every year?

And if I ask you that, is your money safe in the banks? So, your answer may be “yes” or maybe “no”. 

If we look at the history of the money or transaction then we can understand.

Somebody in the whole world gives you money only when you give some work in return, whether it is office or business.

A shopkeeper also earns money when he gives something in return.

In the beginning, people used to give one thing to get another. Like grain, gold, crops, etc.

So we can say, money = value

After that, paper money was used for getting anything and now we use paper money. In this technology world, we can do transactions digitally with the use of UPI, NEFT, Net banking, etc. 

When we do transactions digitally, the government and banks can track our every transaction and history. 

But our money is also not safe in centralized banks, because they invest with our money in the stock market. So, our money is at risk in banks.

So we can say that nowadays, some centralized system or organization or government control over money. 

Here, bitcoin and other cryptocurrencies solve this problem. Because they work on decentralized systems and are safer than banks. Here, you are the owner of your money. No third party is involved here. 

Before we move on, you need to know about blockchain technology if you don’t know.

Also, different types of blockchain networks are available with different features.

So, let’s understand “what is bitcoin and how does it work?”

What is Bitcoin?

Bitcoin is a Digital Format of currency that has no physical value. When you buy a bitcoin it means you buy a specific bitcoin address through which you do transactions on another specific bitcoin address without any intermediaries. Bitcoin uses cryptography technology to keep it secure. 

All the transactions in bitcoin are verified by Consensus Mechanism algorithms that need massive amounts of computational power. It is called “mining”.

Bitcoin is an automatic structure that does not require programming or coding. Its algorithm also runs on autorun, but the system or computer is required to run the algorithm. 

Bitcoin is an open-source cryptocurrency.

Bitcoin cryptocurrency is based on blockchain technology. It is not controlled by any organization or government.

A bitcoin network is basically a collection of computers called “nodes” or “miners”. These miners run the bitcoin code, ensuring a secure transaction. 

Bitcoin works as an online payment gateway like PayPal, UPI. It means no need for intermediate.

How Does Bitcoin Transaction Work?

Bitcoin works in a peer-to-peer network. When a person sends crypto to another person. Now miners work on propagating and validating this transaction. After it, Miners solve the proof of work propagation and they create a new block in the network once the transaction is verified. And the transaction is done.

A Bitcoin transaction happen in three steps

  1. Singing
  2. Broadcasting
  3. Confirming

Singing: 

How does a transaction work

When I send a bitcoin to my friend’s bitcoin address in the blockchain. This transaction message contains information about the sender, receiver, and the amount being sent. 

This transaction is secured by a digital signature and my private key that is mixed with the algorithm. 

My digital signature and my private key prove that this is my bitcoin. And every time a digital signature is different that makes it more secure. 

All of these transaction messages are contained in a small txt file.

Broadcasting: 

How does a transaction work (1)

This txt file is sent to all computers in the network that called as “Node”. 

Nodes basically verify my signature and look I have enough funds that I want to spend. 

Once this file is successfully verified then it is passed to the next node and this process repeats again. 

This file keeps it in a holding area called the mempool. The mempool is a space dedicated for valid but still unconfirmed transactions. 

once this transaction is verified by the mempool that it is legit. 

Then it moves to the last step. 

Here, we use the Block Explorer tool to track our transactions. 

With this tool you can check the balances of different Bitcoin addresses, track transactions and get a wide variety of statistics about the network.  

Confirmation:

How does a transaction work (2)

As we already know that all transaction files are verified by the group of miners that are also called mempool. 

They group all files together and create a block of transactions. There is

 a limit of information that is inserted in each block. 

Therefore miners will usually pick the transactions and they compete with each other. 

The miners’ competition is based on a mathematical calculation and the minor with the most computational power will have the best chance of winning. 

Once the miner wins the competition, it means a transaction block is added to the blockchain network. 

Finally, the transaction is confirmed.

History of bitcoin

Back in 2008, a document was published by Satoshi Nakamoto. But who is Satoshi Nakamoto? it is not known to date. In this document, they talk about bitcoin and how bitcoin replaced the current transaction system.

This currency is begun to use in 2009  and its implementation was released as open-source software

In 2009 it started from 0$ but now its value is very high. Look the value of bitcoin from 2009 to till now…

bitcoin price

Blockchain and bitcoin fundamental

Blockchain technology is all about disintermediation, privacy, and security. 

In other words, blockchain could be used to create secure banking services that don’t require trust in any central authority (e.g., banks). Cryptocurrencies like bitcoin are a type of digital currency that rely on blockchain technology to function securely. 

Cryptocurrencies use encryption techniques to generate monetary units (for example, bitcoins) that are then stored in a publicly accessible ledger called a blockchain.

This system allows for pseudonymous transactions between users without revealing their identities or requiring any intermediary for validation. 

What does that mean? It means you can be your own bank—or at least eliminate your reliance on big institutions.

Final Thought

After understanding bitcoin you need to learn more about bitcoin. Lots of interesting things available about bitcoin. 

You can comment below what you want to learn next?

 

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