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How does Bitcoin Work?

On this page, together, we will go through the process of how does bitcoin works. We will try to explain it in the easiest possible way, showing you relevant images and the real process of what’s happening under the surface of a bitcoin transaction. This is the perfect way to understand and get started with our Bitcoin guide.

If you still don’t know what is bitcoin, we suggest clicking on the link and find out more about it before getting started with the upcoming content.

What do you need to get started?

To get started with Bitcoin, first of all, you need Bitcoin wallets (click on the link to find out more about it). A wallet is a software that holds Bitcoins in its virtual form. To send Bitcoins, you need to give the public address of your wallet to the sender who will use your address to send Bitcoins. Once the transaction is completed, Bitcoins will be added to your digital wallet.

The following is an example of Bitcoin address to receive payments: 

16NHZHmBfSBdQCFqaqGiso2kq3RZVGHuGA

All of this process is done on the Blockchain Network that is responsible for recording the transactions and maintaining the ledger. Blockchain verifies transactions using safe and secure cryptographic techniques.

Perfect, now that you have a better understanding of what’s going on we can take a deeper look on how it works.

Trust, Transactions, Blocks, Mining and the Blockchain

In order to properly understand how does bitcoin work, we need to introduce some important concepts.

Trust

One of the central, foundation ideas of bitcoin is Trust. The cardinal shift with bitcoin protocol, technology, and overall paradigm is basically the opposite way on how the central banking system operates and gains trust.

The trust in the bitcoin is achieved by the decentralization of power, unlike the traditional banking system where they have the power within a single entity, such as the FED (Federal Reserve System). With Bitcoin, trust is achieved by the interaction of several participants in the whole system – as you may know, the bitcoin protocol is based on different thousands of nodes (find out more in the Bitcoin glossary) – between the nodes that constitute the system. The image below shows you in a nutshell how this works.

an illustration with the bitcoin system
Bitcoin system

Transactions

To continue, we need to take another step and visualize the whole process from another angle. Transactions and so the confirmations of each one of them will make the Trust possible in the whole system. If all the nodes in the blockchain will confirm and accept the transaction we can move forward and accept the next transaction, and so on.

Each transaction is then registered and publicly available on the ledger, also known as the blockchain.

What really happens is that the owner of a wallet wants to send some of his bitcoins to another party, so the network is notified by the transfer. The nodes are accepting the transfer, therefore the transaction starts and when more nodes are confirming the transfer between A to B the bitcoins shall be sent encrypted to the final party. The new owner can now use and spend their bitcoins.

To better illustrate this process, take the bitcoin address present at the beginning of this page and go to blockchain.com and paste it in the search bar. You will be able to see the transaction that occurred with that specific address.

blockchain.com bitcoin transaction

We can say that Transaction move value from one wallet to another.

Blocks

As we saw in the previous image, each transaction is shared and registered on the bitcoin ledger. Each transaction will be added within a block. A block is constituted of information or transactions.

When a transaction is then accepted and verified across the whole network, it will automatically be available on the blockchain and recorded in a single block. More confirmations and more transactions will be included in the next block and so on.. creating a chain of blocks. The last block mined contains all the previous blocks with the entire record of the transactions that occurred since the beginning.

Mining Transactions

In this section, we will go through mining transactions, meanwhile if you want to learn more about what is Bitcoin Mining or how to mine Bitcoin click on the relative pages.

Every ten minutes, miners are generating a new block that contains all the transaction since the previous block – as we said before.

The process of mining transactions is simple: new transactions are added to a pool of non-verified transfers that each node has to validate. As miners need to create a new block, at the same time they add the unverified transactions in it. To be verified and confirmed the computer, the miners throughout Proof-of-Work, are solving difficult mathematical problems – once the problem is solved the process of mining a block is completed.

The transactions are added to the blockchain and to the newest block created. Of course, miners are prioritizing transactions that pay the highest fee – once they solve the problem – the miners are rewarded with bitcoins. But we are going deeper into this on the specific page of mining bitcoins.

Finally, the process is repeated over and over again as more transactions are happening across the internet and world.

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