How Does Bitcoin Work?

01 - 08 - 2019
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There are literally hundreds of different cryptocurrencies.available, and all have different values. Think of them as a type of unregulated digital money although most are not particularly easy to spend, and all carry a high level of risk. Here’s an overview of what you need to know.

What is Bitcoin?

Released as an open-source software in 2009, Bitcoin is oftencredited as the world’s first cryptocurrency  and is best defined as a digital currency that only exists electronically.

Bitcoin is decentralized, meaning it doesn’t have a central issuing authority or political institution that controls the amount of bitcoin in circulation. But the Bitcoin platform is far from anarchy.

The whole process is pretty simple and organized: Bitcoinholders are able to transfer bitcoins via a peer-to-peer network. These transfers are tracked on the “blockchain,” commonly referred to as a giant ledger. This ledger records every bitcoin transaction ever made. Each “block” in the blockchain is built up of a data structure based on encrypted Merkle Trees. This is particularly useful for detecting fraud or corrupted files. If a single file in a chain is corrupt or fraudulent, the blockchain  prevents it from damaging the rest of the ledger.

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Instead of relying on a government to print newcurrency, Bitcoin’s blockchain programming handles when bitcoins are made and how many are produced. It also keeps track of where bitcoins are and ensures the transactions are accurate.

There are currently about 17 million bitcoins in circulation.There isn’t a central regulatory agency or government controlling the supply of bitcoins, meaning the supply is controlled by design. The total supply to ever be created is capped at 21 million bitcoins.

This cap raises an argument that Bitcoin could have problemsscaling. However, since Bitcoin is essentially infinitesimally divisible (meaning users can transfer as little as 0.00000001 bitcoins), this doesn’t really create a scaling issue. The magic number of 21 million is arbitrary.

It’s believed that Bitcoin was designed to become a deflationarycurrency to combat the government’s use of inflation as a hidden taxation to redistribute earned wealth. Many people praise Bitcoin for empowering the people by overthrowing the currency printing powers of transient politicians.

How Does Bitcoin Work?

One of Bitcoin’s most appealing features is its ruthlessverification process, which greatly minimizes the risk of fraud. Since Bitcoin is decentralized, volunteers — referred to as “miners” — constantly verify and update the blockchain. Once a specific amount of transactions are verified, another block is added to the blockchain and business continues per usual.

What is “Mining”?

Instead of a single central server verifying every transaction,essentially every other person on the network verifies each transaction.

Cue the “miners.”

Let me simplify the process so we all understand: Miners arepresented with a complicated math problem and the first one to solve the math problem adds the verified block of transactions to the ledger. The calculations are based on a Proof of Work (POW), or the proof that a minimum amount of energy was spent to get a correct answer.

There aren’t actual human beings hunched over computers withscraps of notebook paper and calculators doing pre-calculus homework; hardware is used to perform Bitcoin mining.

Bitcoin’s built-in reward system compensates successful minerswith a chunk of bitcoins. The reward changes over time per Bitcoin’s programming, and the block reward halves about every four years. The current reward for each new block of verified transactions is about 12.5 bitcoins.

The mining processes have become increasingly sophisticated.The most popular method uses ASICS–Application-Specific Integrated Circuits. ASICS are hardware systems similar to CPU computers that are built for the sole reason of mining bitcoins.

Bitcoin mining operations take a lot of effort and power, and the sheer amount of competition makes it difficult for newcomers to enter the race and profit. A new miner would not only need to have the adequate computing power and the knowledge to use it to outcompete the competition but would also need the extensive amount of capital necessary to fund the operations.

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