Bitcoin (BTC) is a digital currency that operates without the assistance of a central authority or intermediaries, such as banks. Rather, transactions are verified by distributed nodes throughout the Bitcoin network and subsequently recorded on a public ledger known as the blockchain. The underlying technology of Bitcoin may appear complicated at first look, but everyone can use and comprehend it in its most basic form.
In this blog from BurjX Academy, we’ll break down the mechanics behind Bitcoin, including its blockchain technology, mining process, and how transactions are processed.
What is Blockchain Technology?
Blockchain technology is the foundation of Bitcoin, a decentralized digital ledger that maintains a record of each transaction conducted on the network. The blockchain functions on a peer-to-peer network of computers (or nodes) rather than being regulated by a single governing body. These nodes guarantee security and transparency by verifying and storing transactions.
Each block in the blockchain includes a collection of transactions. Upon verification, a block is incorporated into the preceding blocks, establishing a chronological and irreversible record. The decentralized structure guarantees that no single entity governs the network, making Bitcoin impervious to manipulation or fraud.
How is Bitcoin (BTC) Created?
Bitcoin is created through the process of mining, in which the most powerful computers solve sophisticated mathematical problems in order to generate new BTC. This computational exercise not only generates new Bitcoin but also assists in the verification and security of blockchain transactions. Miners are compensated with Bitcoin for their efforts, providing a motivation to preserve the network's security and authenticity.
What is Bitcoin Mining?
Mining Bitcoin is not like traditional mining for precious metals, but it requires significant energy and specialized equipment.
Here's how it works:
"Mining" a Bitcoin means verifying a transaction and adding it to the blockchain. Miners employ sophisticated computers to solve challenging cryptographic puzzles, often known as Proof of Work. This procedure checks the legitimacy of all transactions and prohibits the possibility of double spending, where the same Bitcoin could be spent twice.
When a miner successfully solves a puzzle, they add a new block of transactions to the blockchain and are rewarded with newly minted Bitcoin. This is also how new Bitcoin is introduced into circulation. However, mining has become highly competitive, requiring specialized hardware like ASIC miners (Application-Specific Integrated Circuits).
How Do Bitcoin Transactions Work?
When you send Bitcoin, the transaction is broadcasted to the entire network for verification. Here's how a typical Bitcoin transaction works:
Initiating a Transaction: When a user wants to send Bitcoin, they create a transaction request, including the recipient's wallet address and the amount of Bitcoin being sent.
Verification by Miners: Miners validate the transaction by solving cryptographic puzzles. Once the transaction is verified, it is added to the next block on the blockchain.
Transaction Confirmation: After the transaction is confirmed, it becomes part of the permanent ledger, making it irreversible. This process ensures that no unauthorized changes can be made to the record.
The decentralized nature of Bitcoin ensures that transactions are secure, tamper-proof, and transparent.
What is Bitcoin Halving?
In order to regulate the supply of Bitcoin and avoid inflation, the network adjusts the amount that BTC miners can earn over time. This is accomplished through an event known as the Bitcoin halving, which happens every four years. The reward for mining a new block is reduced by half during a halving. For instance, the mining reward was decreased from 6.25 BTC to 3.125 BTC in April 2024.
These halvings will likely continue until all 21 million Bitcoins are mined, which will likely happen about the year 2140. The limited supply is one of the elements that drives Bitcoin's value, as scarcity frequently drives demand.
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