How Cryptocurrencies -and bitcoin- work
In this lesson, we will try to avoid complicated terms and do our best to explain the Bitcoin process as simply as possible without going into too much technical jargon.
It would be best if you could get yourself some bitcoins. You can either mine this yourself (in theory), receive some as payment (not so common), or buy at a Bitcoin exchange. There are different wallets for you to store your new bitcoins in.
You can use a desktop wallet, mobile app wallet, paper wallet, hardware wallet or an online wallet. There are pros and cons to each type of wallet.
However, most experts agree that online wallets, specifically those on exchange sites, are not so secure because both your private and public keys are saved online. This makes your wallet highly vulnerable to hackers.
When you’ve selected the most suitable wallet for your needs, you can then start making bitcoin transactions. To send bitcoin to another user, all you have to do is just get their email or bitcoin address, enter the amount you wish to send, write a quick note to tell them what the payment is for (this is optional), and hit the Send button!
Alternatively, if you’ve got the QR code to their bitcoin wallet, you can simply scan it and hit Send. The transaction will appear in the other person’s account in a short period of time, usually between 10-45 minutes. The reason for this ‘wait’ is explained more fully in the next section.
And that’s it! Bitcoin transactions are quick, safe, cheap and the perfect alternative to paying with bank-issued credit and debit cards, and even paying in cash.
The Technology Behind Bitcoin
On the surface, Bitcoin transactions appear to be fast and easy – and they truly are. However, behind the scenes, the technology that makes the Bitcoin network run seamlessly is a massive ledger known as the blockchain.
It’s massive because it contains a record of all bitcoin transactions that have ever taken place since Bitcoin was first released in 2009.
As more time passes by and more transactions occur, the size of the blockchain will continue to grow. So here is how the blockchain works:
When you send a payment, your wallet or app sends out a request to the entire Bitcoin network which is made up of computers or nodes. These nodes then validate your transaction using known algorithms.
Once your transaction is verified and confirmed, it is then combined with other transactions to create a new block of data for the blockchain.
This new block is then added to the end of the blockchain. When this happens, the transaction becomes complete and is now permanent.
This entire process takes about 10-45 minutes from start to finish (this is why Bitcoin transactions don’t happen instantly). Once the transaction is finalized, no one can undo or delete the transaction. The person you’ve sent the bitcoin payment to (the receiver) will now see your payment in his wallet.
So who verifies and confirms transactions if there’s no central body governing the network?
The answer is the miners. The miners are literally the lifeblood of the entire bitcoin network. Some have even compared miners to being hamsters in the wheel that keep the entire Bitcoin network going! And this is true.
Miners play such a huge role in the success of Bitcoin that they truly deserve getting rewarded in precious bitcoins. Without them, no new blocks would be created and added to the blockchain.
If nothing is added to the blockchain, no transactions are ever finalized. This means no bitcoins payments are sent and received by anyone on the network. No new bitcoins will be created.
Because miners are indispensable to the Bitcoin network, they are compensated for their hard work in terms of bitcoins (it would not make any sense to reward them in traditional paper currency). They are almost like employees of the network.
Since there are only a limited number of bitcoins (21 million), the number of bitcoins that miners are paid with will continue to dwindle until all bitcoins are exhausted by around 2140.
Now that you know what Bitcoin and cryptocurrency are all about, let’s go to the next chapter where you will learn how the value of bitcoin is determined.