How Bitcoin Works

Bitcoin with a capital “B” is a network, much like the internet itself is a network, while bitcoin with a lowercase “b” is a currency that is passed through this network.

At its core, the Bitcoin network is a ledger that keeps track of the flows of bitcoin — the currency — being sent from one user to another. This ledger is often referred to as the “blockchain”.

In order for someone to interact with this network, they have to connect via a computing device, like a desktop computer, smartphone, tablet, etc. In its simplest sense, a “node”, which is a broadly used term, is a connection point to the network.

However, there are several types of “nodes” that connect to the Bitcoin network. Some nodes are users connecting via their personal device to send and receive bitcoin transactions. Some nodes are connected purely in an effort to maintain a copy of the ledger. And a final type of node is connected in order to maintain the network, which consists of securing the network itself, as well as enabling transactions to effectively be sent and received. This final type of node is called a bitcoin miner.

Every individual node on the network has their own incentives to participate. Users participate because they find value in sending and receiving payments, or simply holding bitcoin as a speculative asset.

Nodes that maintain a copy of the ledger are referred to as “full nodes”. By keeping a full copy of the ledger, full nodes validate the fact that all participants are sending valid transactions to and from each other. These nodes participate because they have incentive to make sure that the network rules are being followed. By ensuring the rules are followed, they are able to maintain their ability, as well as the ability of the network at large, to send, receive, and hold bitcoin as a user. As an example, many businesses that send, receive, and store bitcoin as a part of their operations run full nodes.

The final type of node — a bitcoin miner — also keeps track of the entire ledger. On top of this, bitcoin miners are the source of security for this ledger. Security is provided through computational energy expenditure. While the network itself is a ledger that contains the record of all transactions, the bitcoin miners are responsible for adding new pages to this ledger; pages which contain these individual transactions. These pages are often referred to as “blocks”. This energy is expended by high powered computers continuously guessing random numbers. The probability of an individual miner guessing the correct number, and thus earning the right to append the ledger, is roughly one in 7.9 million at the time of writing. In order for an alteration to be made to this ledger of any sort, an attacker would need to try and replace a block in the ledger with their own variation of this block, a task equally as difficult as was first adding this block to the ledger.

On top of this, new blocks are added to the ledger roughly every ten minutes. This means that not only does the attacker need to expend a massive amount of energy in order to alter the ledger for an individual block, they also would need to do so within a ten minute time frame of the original block having been added. If a new block is added on top of the block that the attacker would like to alter, then they will also need to expend the necessary energy to undo all subsequent blocks that are appended.

By expending the necessary computational power to add new blocks to the network, the miners are compensated with newly created bitcoin. This is how bitcoin is minted, that is, brought into existence. Bitcoin mining is a business in and of itself.

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