It’s all started when in 2008, a mysterious programmer Satoshi Nakamoto, brought to life his child — Bitcoin (BTC). It was an explosion of a decentralized cryptocurrency and a new payment system.
Bitcoin can act in different ways — as a “satoshi” (the smallest piece of bitcoin, equivalent to 100 millionth of a bitcoin) that a person can use to pay for goods and services or as a store of value. Bitcoin made fantastic progress starting from less than a cent to thousands of dollars. What does it mean that it’s decentralized, just that it’s widely distributed without having any controlling place or person, it’s free from the control of centralized organizations like banks and government.
Bitcoin was designed for people to exchange money or make transactions directly using a peer-to-peer (P2P) network. This is a kind of network where people have the same power and are connected to each other without any central company or organization in the middle. It empowers people to send and store their currencies without anybody’s help, simply say – directly from one person to another.
The Bitcoin network is entirely public, which means any person who has an internet connection and a device that can connect to it can participate without limitation. It’s also open-source, so anyone can see or share Bitcoin’s source code.
To put it in a nutshell, bitcoin is purely digital, no person owns or controls it, it’s borderless — once a person has electricity and a device, they can connect to it —, it runs 24/7, and people who use it can easily share data between one another. Bitcoin is for having money operations without interfering from aside parties, staying secure and anonymous.
How does it work?
A decentralized system consists of three essential components that define Bitcoin's nature:
- The Bitcoin network
- The native cryptocurrency called bitcoin (BTC)
- The Bitcoin blockchain
Bitcoin goes on a P2P network where people execute and validate transactions. They can choose to connect their computer directly to this network and download its public ledger, where all the bitcoin transactions are saved.
The public ledger uses a technology known as "blockchain". Blockchain technology allows cryptocurrency transactions to be verified, stored, and ordered transparently. Transparency is a crucial feature for a payment system that depends on zero trust. It’s the point of the whole Bitcoin idea.
All new transactions are confirmed and stored on the ledger; the network updates every user’s copy of the ledger to show the freshest changes.
The Bitcoin blockchain is a digital line of chronologically ordered “blocks” — bits of code that consist of bitcoin transaction data. The Bitcoin is programmed the way allowing new blocks to be added to the blockchain once about every 10 minutes.
All the network participants can track and assess bitcoin transactions in real-time, that’s because of the blockchain’s public nature. Interesting that this helps to reduce the possibility of a double-spending payment when a person tries to spend the same cryptocurrency twice. It’s when you want to cheat the system trying to send 1 BTC you have to different people. The system can see it and doesn’t allow you to do that. Due to the fact that there is no centralized organization to recognize the deception, the system defends itself.
As Bitcoin has thousands of copies of the same ledger and it needs all people using the network to agree on the validity of each and every bitcoin transaction, there is a special agreement between all parties called “consensus.”
Everyone that has the Bitcoin ledger's copy takes responsibility for confirming and updating the balances of all bitcoin holders. How does the Bitcoin network guarantees that consensus is achieved when there are numerous copies of the public ledger stored worldwide? The answer is — a “proof-of-work” (P2P) process.
Proof-of-work is the “consensus mechanism” in the Bitcoin blockchain. It’s the first and the most usual type, but there are others, for instance, so-called proof-of-stake (PoS), that consumes less computing power, so less energy.
Proof-of-work has “validators” known as “miners” who dedicate a vast amount of computing power to discover new blocks — that is usually a 10 minutes process.
When a new block is discovered, the miner who found it gets to fill it with 1 megabyte’s worth of validated transactions. Then a new block is attached to the chain, and everyone’s copy of the ledger is updated to show the new data. The miner keeps any fees for the transactions they add to the blockchain, and they’re given an amount of freshly minted bitcoin. It’s called a “block reward.”
All people using the Bitcoin network have to pay a fee each time they make a transaction. Why? The aim is to reward miners that have to pay for their own electricity and maintenance costs when running their equipment for the whole day to validate the bitcoin network. That’s the reason why miners first choose the transactions with the highest fees to make the most money possible when they fill and add new blocks.
Where can you check the average fees? There is the Bitcoin mempool, in which a person can be likened to a waiting room with unconfirmed transactions.
What is a bitcoin wallet?
A bitcoin wallet doesn’t store coins in a wallet. Instead, the wallet protects the cryptographic keys that prove the ownership of a definite amount of bitcoin on the Bitcoin network.
Bitcoin operates on a system called public-key cryptography (PKC) used on blockchains to protect transactions. The system allows only people with the appropriate set of keys to access their coins.
There are two sorts of keys that are needed to own and make bitcoin transactions: A private key and a public key. Both types are strings of randomly generated symbols used to encrypt and decrypt transactions. On the bitcoin network, PKC applies mathematical functions that are easy to solve in one way and almost impossible to do it backward.
The Bitcoin blockchain uses the one-way mathematical algorithm to generate a public key from the private key. That's impossible to regenerate the private key from the public key, so it's better not lose or forget the keys. A person also will get a public address, which is a shorter form of a person’s public key.
To make transactions, a person is required to use their private and public keys. Also, you have to add the public address of the receiver. Only that person who has the right private key can unlock or claim the transferred bitcoin.
There are different types of crypto wallets — hot, cold, online/web, paper, mobile, and desktop. Please, read our guide on wallets to go deeper into the topic.
Can bitcoin be converted to cash?
Yes, bitcoin (BTC) acts just like any asset, so it can be exchanged. There are different cryptocurrency exchanges online like Binance.US, Coinbase, Kraken, Gemini, and alike where people can do this. The exchange takes a fee for the transaction, and it differs from one to another. You need to create an account that allows you to sell bitcoins and withdraw cash.
There is another way to cash out your bitcoins, it is a P2P exchange that could be sometimes faster and cheaper. Such platforms also allow you to stay anonymous. You can use a VPN to secure your connection and choose different payment methods: web money or gift vouchers.
So, you send your bitcoins, and the exchange holds the seller’s bitcoins. Then the seller confirms (or disputes) that you sent the money, and only after that, the exchange releases the bitcoin.
Bitcoin made it possible to be an independent person once we are talking about managing one’s money holdings — decentralized, digital, fast, anonymous, secure, and transparent. Thanks to Bitcoin, there appeared many other coins and tokens showing a new revolutionary way of digital economy; the whole system is developing and growing, getting better, and working on disadvantages the system can have. It’s a great step into the future that simply can’t be questioned.