Do you know what Bitcoin truly represents? It's a revolutionary digital currency, the first of its kind, operating on a decentralized network of computers using blockchain technology for secure peer-to-peer transactions. Bitcoin symbolizes the inception of cryptocurrency, introducing a new era of financial independence and digital innovation. Let us understand more!
In late 2008, a whitepaper came up named “Bitcoin: Peer-to-Peer E-cash system” by anonymous Satoshi Nakamoto. He used a hash cash Proof of Work (PoW) algorithm with software-based computing functions. It’s a cashless way to transact a currency without involving intermediate parties. They are mined (adding transactions in the blockchain) for a reward using the PoW algorithm by external miners. Later, it is verified by the other decentralized nodes in the chain network.
On Jan 3, 2009, the foundation of bitcoin was established when Satoshi Nakamoto mined the first block with a reward of 50 bitcoins. Moreover, it’s the first mined block, which we call the “Genesis block of Bitcoin” today.
Now, let’s begin with understanding Bitcoin step by step.
Table of Content
What is Bitcoin?
Bitcoin is a blockchain and a cryptocurrency named BTC. It is a decentralized digital currency that enables transactions without depending on intermediaries like banks. Bitcoin as a blockchain is a decentralized distributed ledger that records each transaction in a block. Moreover, each block is linearly connected using a previous hash. Blocks are secured using cryptographic hash functions and public-key cryptography.
At the network level, each node or network participant carries the exact same copy of transactional records, making it verifiable and transparent. The network obeys the consensus mechanism and other protocols to synchronise and secure nodes. In addition, it utilizes the Proof of Work (PoW) consensus mechanism to update and flood the upcoming changes in the network.
Let’s understand the working of the BTC blockchain.
How does Bitcoin Work?
The bitcoin blockchain is exclusively used for financial transactions, unlike Ethereum. Let’s take an example to understand Bitcoin transactions in the network. Radha wants to send 20 Bitcoins to Jay.
- First, Radha sends a transaction request (signed by a private key) with Jay’s account details and the number of coins she wants to send.
- The transaction goes to the transaction pool, and Miners pick and validate the transaction from it. Check out the BTC transaction pool.
- Miners create a block with a set of transactions and try to find the correct block hash by continuously changing the nonce value (according to Proof of Work).
- The first miner who calculates the right hash gets the chance to add his block.
- The computation work done by the miner to find the correct hash proves the validity of the block.
- Hence, the block adds to the blockchain, and the miner wins the reward.
- The transaction gets permanently stored in the blockchain's distributed ledger, and Jay receives the Money.
- Later, the added block of transactions is broadcasted to each network participant to validate and append the new transactions to their records.
What is Bitcoin Mining?
Mining is the process of generating new coins and verifying new transactions. It involves vast, decentralized networks of computers worldwide that verify and secure the blockchain. In return, miners get rewarded with new coins for spending computation power and effort.
- Bitcoin Mining is essential to keep the network running and active.
- Transactions are verified and added by miners.
- As a reward, miners win minted units of Bitcoins.
- Miners compete against each other to find the correct block hash with mathematical calculations.
- Mining is an energy-intensive and high-power activity.
- High computational hardware is required for mining to win the rewards.
Bitcoin utilizes the Proof of Work (PoW) consensus mechanism where miners have to calculate the correct block hash by rigorously changing the nonce in order to prove their block valid.
Bitcoin vs Ethereum
|A Blockchain network and cryptocurrency (BTC).
|Blockchain + Cryptocurrency (ETC) + Smart Contract deployment.
|Consensus mechanism: Proof of Work (PoW)
|Currently using PoW but planning to move to Proof of Stake (PoS)
|Release Method: Genesis block mined by Satoshi
|Release Method: Presale
|Block Time: 9-10 minutes
|Block Time: 12-15 seconds
|Hashing Algorithm: SHA-256
|Hashing Algorithm: Ethash
|Supply Cap: 21 Million in Total (Limited)
|Supply Cap: 18 Million added every year
|Market Cap: $870B (Rank 1) – 41% of entire crypto market
|Market Cap: $320B (Rank 2)
|Application: Payment tech
|Applications: Payment, Supply chain, Banks, Healthcare, and many more.
This article doesn’t promote any investment ideas or advice. It’s purely for knowledge and awareness purposes. It covers the gore details of Bitcoin transactions and their working.
What is Consensus Mechanism?
A consensus mechanism helps to keep the network synchronized. Itu2019s a state of agreement where all the network participants decide together.
What is Proof of Work (PoW)?
It is a consensus mechanism that lets miners add a new block to the network based on the computation work done to find the correct hash.u00a0
How can I buy Bitcoin?
There are several platforms to buy and invest in bitcoins, such as Coinbase, CoinDCX, WazirX, etc.