BITCOIN: How cryptocurrency work?

BITCOIN is a digital currency which only exists electronically. It is considered as world’s first cryptocurrency. It doesn’t have a Central Issuing Authority or Regulatory Body. It means there is no organization deciding when to make more Bitcoins, figuring out how many to produce, and also keeping track of where they are or investigating fraud.

There are many other cryptocurrencies like Litecoin, Ethereum, Zcash, Dash, Ripple, Monero, and many more.  

Now let’s find out how it actually works.

How BITCOIN work as a currency?

Or

Does BITCOIN have any value at all?

BITCOIN exists with whole network of people and cryptography. It is a fully digital currency and you can exchange it between computers and worldwide by peer-to-peer network.

A bitcoin is not a string of data that can be duplicated. It is actually an entry on huge global ledger called BLOCKCHAIN.

The Blockchain records every bitcoin transaction that has ever happened.

As of late 2016, the complete ledger is about 107GBs of data.

As I mentioned earlier, Bitcoin doesn’t have a central authority to keep track of everything. Even though the Blockchain is a Central Record, there is no official group of people who update the ledger and keep track of everybody’s money like a bank does. It is completely decentralized.

It all works because there are lots of people keeping track of the same thing to make sure that all the transactions are accurate.

For every transaction you enter into, you are announcing a couple of things to the Bitcoin network:

1. Your Account Number

2. The Account Number of the person you are sending Bitcoins to, and

3. How many Bitcoins you want to send.

And all of the users keeping copies of blockchain will add your transaction to the current block.

Now, the problem is that if user sends a couple of account numbers, it seems that it might be a Security problem.

So, the solution is Bitcoins are pretty safe because of Cryptography which is basically information that can be used to make mathematical guarantees about messages.

There are basically 2 keys:

A Private key and a Public key

For Instance, I SEND 5 BITCOINS TO X.

Then I signed the message using my private key which only I have access to and nobody else. If the public key works, it proofs that the message was signed by my private key and is something that I wanted to send.

Suppose, I only have money to pay either person X or Y. And I am trying to pay both, then there is a CHECK Built into the Bitcoin system. Both the Bitcoin network and my wallet automatically check my previous transactions to make sure that I have enough bitcoins to send in the first place.

Another problem is Network delays because of lots of people keeping copies of blockchain all over the world. It means that you won’t always receive the transaction requests in the same order.

The solution of this problem is Hash Function, that Bitcoin uses is called SHA256. It stands for SECURE HASH ALGORITHM 256-BIT. And it was originally developed by the United States National Security Agency. Computers were specifically designed to solve SHA256 Hash problems and takes on average about 10 minutes to guess the solution.

These volunteers spend thousands of dollars on special computers built to solve SHA256 problems. Why they are maintaining the blockchain? Is it just to provide community service?

Well, Bitcoin actually has a Built-in-system to REWARD them. Bitcoin ledger keepers are also called as Miners. When Bitcoins were first created in 2009, they didn’t have any perceived value. And the current value of bitcoin in July 2018 is Rs. 5,43,940 approximately (7,930 US$).

Every single bitcoin that exists was created to reward a bitcoin miner. Miners are also tipped a very small amount for each transaction they add to the ledger.

It is also worth noting that every 2,10,000 Blocks the number of coins generated when a new block is added goes down by half.

Is investing in Bitcoin a good idea?

Bitcoin is experimental and it is not illegal to invest in bitcoin. Lots of people really love investing in bitcoin and also lots of people think it deems to fail.

Thank You

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