How does Bitcoin work?

Bitcoin, the first and most widely recognized cryptocurrency, operates on a complex system of cryptography and decentralized networks. Understanding how Bitcoin works, particularly the technical proce

At the heart of Bitcoin lies the blockchain, a distributed ledger system that records every transaction ever made. This public ledger ensures transparency and immutability, preventing fraudulent activity. Transactions are initiated by users with digital signatures, verified by miners, and then added to the blockchain in blocks.

Securing and Validating the Network

Mining is the process of verifying and adding new transactions to the blockchain. It also serves the essential role of securing the network through a computational puzzle called proof-of-work (PoW).

Mempool

New transactions are broadcast to the network by users. These transactions can involve sending Bitcoin, creating new contracts, or changing existing ones. The transactions are temporarily stored in a distributed memory pool, accessible by all nodes on the network. Fees act as a digital tipping system, guiding miners towards transactions that promise greater rewards.

Block Creation

Miners compete to collect and group unconfirmed transactions into blocks. Each block has a limited capacity, so miners choose transactions that maximize their potential reward. Miners add a "coinbase" transaction to each block, which is essentially a reward for themselves for successfully creating the block.

Hashing

Hashing is a cryptographic function that takes any data as input and generates a unique, fixed-length output. In the context of Bitcoin mining, the input consists of the block header, including the previous block's hash, timestamp, and Merkle root. Miners use specialized hardware called ASICs to perform billions of calculations per second, attempting to find a hash that starts with a certain number of zeros. It is often described as "solving a complex mathematical puzzle". This difficulty is adjusted automatically to maintain the average block creation time at approximately 10 minutes.

Block Validation

Once a miner finds a valid hash, they broadcast the new block to the network. Other nodes on the network verify the block by:

• Recalculating the hash and ensuring it meets the difficulty requirements.

• Validating all transactions within the block.

• Checking the block header information for accuracy and consistency.

If the block is valid, it is added to the blockchain, and the successful miner receives their reward in Bitcoin. Blocks are considered confirmed after a certain number of subsequent blocks have been added to the chain. This typically requires six confirmations, making it very difficult to alter or tamper with previously confirmed blocks.