If you’re new to the cryptocurrency world and want to learn more, the first step is to properly understand Bitcoin.
That’s because Bitcoin was the first decentralized digital currency, and newer iterations, from Ethereum to Iota, all stem from the cryptographic technology that bitcoin pioneered.
Let’s take a brief look at what Bitcoin really is, and the technology it uses.
What is Bitcoin?
Bitcoin is a peer-to-peer digital currency. It is a decentralized system, meaning that users are able to store, send and receive funds all without the need for a central authority, such as a bank. It uses a distributed public ledger, called a blockchain – imagine a shared, open document, that everyone can see at all times. All transactions are recorded here, available for everybody, and the ledger is immutable (once a block is added, it can never be edited, modified or removed). The ledger is divided into blocks, each filled with transaction details. Nice and simple, but how does the network update as new transactions are made?
Well, blocks are added to the chain one-by-one through a process called mining.
Miners are people who set their computers to perform hash functions – complex mathematical calculations that require computational work and electricity. In simpler terms, the computer guesses millions of numbers every second, checking to find a solution to the hash. The only way to solve the problem is to guess every possible number. If a miner discovers a correct hash, they can broadcast it to the network, be assigned a transaction, and write it into the ledger. They are then rewarded for their work with Bitcoin – that’s how new BTC are created.
This process is fundamental, for a very simple reason. It ensures that all transactions written to the blockchain are real transactions, and not just me writing Bob pays Will 100,000 Bitcoin again and again. In order to lie or cheat, a malicious actor would have to expend vast amounts of computational power (and costly energy).
Hopefully this article shed some light on the true nature of Bitcoin: a decentralized digital currency that uses mathematics for security, without the need for a central authority.
This post is the first in a series, watch this space for Understanding Ethereum.
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