With the recent hype of Bitcoin, and everyone wanting a piece of the pie, the question that comes to most minds is; what in the hell is Bitcoin in the first place? If you were one of the more tech-savvy individuals roaming this earth, then you probably must have heard of bitcoin in the earlier 2010s, but for the average joe; 2017 was the year when it exploded worldwide. Bitcoin was created in early 2008 as an open source software, acting as a peer-to-peer network where transactions could occur between users without the need of a bank or any other sort of intermediary. This meant that people could exchange money between one another without the hassle and delays of banks, making Bitcoin the first currency in history that enjoyed complete decentralization, requiring no central bank or administrating function. On top of that, the added feature of anonymity provided by Bitcoin meant that no one had to know who was selling what to who, and this increased Bitcoin’s notoriety in the underground, more specifically what is known as the Dark Web.
So how does Bitcoin actually work? Blockchain? What is that?
When you ask one of these so-called ‘crypto-millionaires’ that have jumped on the bandwagon in 2017 how Bitcoin actually works, they tend to throw hundreds of technical jargon they have picked up from Google at you, and the most recurring term if you have noticed is ‘Blockchain’.
As we mentioned before, Bitcoin enables people to send money to one another without the help of an intermediary (e.g. a bank), so how does the transfer occur? Who actually oversees it? The blockchain is where all these transactions are kept. The blockchain acts as a public ledger recording every bitcoin transaction made to date. Each new transaction is recorded in the form of a block, which is then added to the existing list of records, the blockchain.
This list or ‘Public Ledger’ is maintained by a network of communicating ‘nodes’ that run bitcoin software with servers and computers possessing high processing powers. This is where the ‘Bitcoin Miners’ come in, making a fee off of the validation process of these transactions.
Let’s say buyer A wants to send bitcoins to seller X. When the transaction is requested, a new block is created containing the details of this transaction. This block is validated by one or a group of Bitcoin Miners around the world, who then add it to the blockchain in chronological order and publish it to the world-wide network so that the public records can be updated across all networks, preventing double payments. Each transaction directs bitcoins from one unique address to a newly generated unique address. While the transactions are kept public to everyone around the world, the owners of these addresses are anonymous.
So why is Bitcoin called a Crypto-Currency?
Cryptography is the mathematical process of encrypting and decrypting messages to ensure the message reaches only the person it is intended for.
So what does this have to do with Bitcoin? Bitcoins being a digital currency, have no physical form. To make sure that no one can just steal anyone’s bitcoins, or even know the owner’s details, there has to be some form of encryption when exchanging them.
So how does one exchange his bitcoins for goods? When a bitcoin has been bought, it is deposited in your digital wallet. This wallet is a collection of cryptographic keys. These cryptographic keys can be used to hold and transfer the bitcoins.
The entire process is named public-key cryptography. The keys consist of a public key and a private key. The public key is used for encryption and the private key is used for decryption. Each contains factors unique to the owner of the bitcoin, such as the wallet’s address and a digital signature. These keys ensure that the receiver has gotten the transfer from the right sender and mitigate the verification and decryption process the bitcoin miners undergo when using hash functions while keeping the sender anonymous.