Bitcoin operates on a decentralized peer-to-peer network known as the blockchain. Here’s a simplified explanation of how Bitcoin works:
- Blockchain: Bitcoin transactions are recorded on a public ledger called the blockchain. The blockchain consists of a series of blocks, each containing a list of transactions. These blocks are linked together in a chronological order, forming a chain.
- Transactions: When someone wants to send Bitcoin to another person, they create a transaction. This transaction includes the sender’s address, the recipient’s address, and the amount of Bitcoin being transferred. Transactions are broadcast to the network of Bitcoin nodes (computers running Bitcoin software).
- Verification: Bitcoin transactions need to be verified and added to the blockchain to be considered valid. This process is performed by miners, who use powerful computers to solve complex mathematical puzzles. By solving these puzzles, miners validate and confirm transactions, adding them to a new block on the blockchain.
- Consensus: For a transaction to be confirmed and added to the blockchain, it needs to be included in a block that is accepted by the majority of the network. This decentralized consensus mechanism ensures the integrity and security of the Bitcoin network.
- Mining Rewards: Miners are incentivized to validate transactions and secure the network through block rewards and transaction fees. When a miner successfully adds a new block to the blockchain, they are rewarded with newly created bitcoins, along with any transaction fees associated with the transactions in that block.
- Limited Supply: Bitcoin has a limited and predetermined supply. There will only ever be 21 million bitcoins in existence. This scarcity is built into the Bitcoin protocol and is enforced by the halving mechanism, which reduces the block reward in half approximately every four years.
- Wallets: Bitcoin users store their bitcoins in digital wallets, which can be software-based (such as mobile apps or desktop clients) or hardware-based (physical devices). Each wallet has a unique address, which is used to send and receive bitcoins.
Overall, Bitcoin operates as a decentralized digital currency system, allowing for secure, peer-to-peer transactions without the need for intermediaries like banks or governments. Its decentralized nature, limited supply, and cryptographic security make it a unique and innovative form of digital money.