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How does Bitcoin work

You may have already heard of a cryptocurrency called Bitcoin. It celebrated its boom last year. Cryptocurrencies work quite complicated. Still, you can start with them without any technical knowledge.

Oh! What’s that flying in the sky? Is it a plane? Oh, no! It’s falling, it’s falling! And it’s rising again! What is it? Bitcoin!

You may have already heard of a cryptocurrency called Bitcoin. It celebrated its boom last year. Cryptocurrencies work quite complicated. Still, you can start with them without any technical knowledge.

They are actually really similar to real currencies. However, they also differ from them at the same time. In contrast to dollars, or pounds, Bitcoin is not supported by any government. It’s a completely decentralized form of money. Bitcoin is not associated with any kind of central banking system and that’s also one of the reasons for its popularity. Instead of falling into a system that is often manipulated, this currency exists in an online world driven by mathematics and various encryption protocols.

How do they work?

Bitcoin is actually a network that runs on a protocol known as “blockchain“. The basics of blockchain technology are simple. Each given blockchain is stored in a chain of discrete blocks of information arranged chronologically. Basically, it’s a string of ones and zeroes – e-mails, contracts, marital certificates – in the case of bitcoins it’s usually information about transactions.

Bitcoin is actually just a sheet. Person A sent X Bitcoins to person B who sent Y Bitcoins to person C. By collecting these transactions, we can know where individual users stand. Bitcoin Blockchain is public. Everyone can download and explore it in all its glory.

For example, here we can see that person A sent 194.993 BTC to person B on 2. November 2013 at 17:39.

Mining?

Mining is a peer-to-peer process that serves to secure and validate Bitcoin transactions – payments of one user to another in a decentralized network. Mining involves adding transaction data to the global public blockchain of Bitcoin.

The primary purpose of mining is to enable Bitcoin nodes to achieve a secure, manipulation-resistant consensus.

Mining is also a mechanism that is used to introduce bitcoin into the system. Miners are paid transaction fees called Block Rewards. This serves both to spread new coins in a decentralized way and to motivate people to ensure the security of the system through mining.

Wallets? public keys? private keys? I’m sorry.

Ownership of Bitcoins is divided into two numbers, a public key and a private key. A rough analogy is a username (public key) and password (private key).

A hash of the public key, called an address, is the one displayed on the blockchain. To receive bitcoins, it is enough for the sender to know your address. The public key is derived from the private key, which you need to send bitcoin to another address. The system makes it easy for you to receive money but requires you to verify your identity to send it.

When you want to access your bitcoins, you use your wallet, which is a set of keys. These can have different forms.

Wallets are also divided into “hot” wallets, which are connected to the Internet and are therefore vulnerable to hackers, and “cold” wallets (eg. Hardware wallets, such as encrypted USB flash disks, which are not connected to the Internet, and therefore are difficult to hack and steal.