How does Bitcoin Works

Now unless you’re that lady fishing around in her gigantic purse for a cheque book in the grocery lineup, you’ve probably gotten used to the idea of a paperless, post cash economy by now. No one really wants to carry around a bunch of bills and coins when you can just tap a card or click few buttons on your smartphone and get the job done. Hence it’s not surprising that completely digitised forms of currency aka cryptocurrency are becoming more ubiquitous across the globe. This article will help you understand the how Bitcoin has suddenly become mainstream, and indeed why it’s considered the “daddy” of all cryptocurrencies.

Now, at first you may ask- “If we already have credit cards, why do we need Bitcoin or any other cryptocurrency at all?” or “How is shopping on Amazon with your master card different from a Bitcoin transaction?” Well to begin with, I suppose you already know that normal electronic transactions still involve conventional money, on the other hand Bitcoin is decentralised, which implies that it’s distribution and exchange is not regulated or controlled by a government or other authority. Technically speaking traditional currency always goes through a central payment processor like a credit card company or third party gateways but all Bitcoin transactions like purchasing goods or just sending Bitcoins to your friend by a large distributed network of computers running special software. So whenever a transaction occurs the network records the sender’s and reciever’s Bitcoin addresses and the amount transferred and enters this information onto the end off a ledger or record called a Blockchain. Now we have a separate article about Blockchain and its applications but for now, just assume it to be an online ledger to keep records of all the transactions. The blockchain is updated over a hundred times per day and is sent to every computer that processes Bitcoin. Now, because each transaction is encrypted and verified by multiple points in the network to ensure that every computer that processes Bitcoin is using identical, correct copies of the Blockchain it is virtually impossible to counterfeit. This verification process is performed by Bitcoin miners. Miners are individuals like you and me who use computers or other processing devices to connect with this large processing network. The mining software that runs works by grouping recent transactions into blocks which are only accepted by the rest of the network if the blocks is hashed correctly which requires the computer to find correct numeric value, a time consuming and computer intensive process.

So, what is in it for the miners for all the processing and verification they do ? The answer to that question is what this article is all about, Bitcoin. Once a computer successfully process a block its added to the blockchain and the system generates a new Bitcoin that goes into the miner’s digital wallet as a reward. So you see how this system depends only on the community using it and no other agency/authority that is outside this ecosystem. Now you might feel if that’s that simple why can’t I go out there with my laptop and start mining bitcoins for a living. You see it’s a bit more complicated than that, it takes a lot of computing/processing power to generate an appreciable amount of Bitcoin TODAY. Yes, you read that right, Today is the keyword here. In early days of the Bitcoin revolution, you could have easily mined a bitcoin with the normal computer you had (that was mainly used for accessing the internet or playing counter strike), because there were very few Bitcoin transactions those days, so verification and validation processes were easier. As the number of transactions soared and more number of nodes join the network it becomes more complex to mine a Bitcoin. This doesn’t mean that Bitcoin can’t be profitably mined, but more on that later. For now, let’s concentrate on how long does this mining process can go on. For a matter of fact there are only 21 million Bitcoins that can ever exist. What after that ? Well, at that point all the people exchanging/transacting bitcoins for goods and services would be a part of the network and wouldn’t need any more Bitcoin or for that matter any other currency and we will have the good old barter system where the potter gave 2 pots to the farmer in return of one pot full of rice and in the end both had one pot of rice. Till then you probably have to fetch your wallet at the farmer’s market.

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