Last Updated: Monday, February 14th | Cryptostotle #5 | By: Brad Lathrop
Introduction
Alright, alright, you get it. Bitcoin is a digital currency that can be used as a form of payment…and it also can be used as a store of value, like gold.
But just how does Bitcoin work? This is a great question! And one I’m fascinated by.
In this post, I provide a high-level explanation of how the prominent cryptocurrency works. Let’s dig in.
Crypto Wallets
To start understanding how Bitcoin works, we need to understand what a “wallet” means in the crypto world. A crypto wallet is a place where you can store cryptocurrencies and digital assets like Bitcoin.
If you have a Bitcoin wallet, you have a wallet that sits on the Bitcoin network. You can use this wallet to send and receive Bitcoin.
When you create a wallet, you are given an address that is unique to your wallet. You can share this address with others in order to receive Bitcoin.
When you create a wallet, you are also given private keys. A private key is a secret number that only you possess, and it enables you to send Bitcoin from your wallet.
Now, something very interesting about a cryptocurrency wallet is that anyone can deposit cryptocurrency into it if it is a public wallet (meaning the address is known to others). However, no one can take crypto from a wallet unless one is given the private keys.
A funny situation actually became publicly known last year when the founder of the immensely popular Ethereum blockchain Vitalik Buterin was given a huge amount of Shiba Inc coin (SHIB). According to Coindesk, the donation was most likely a “marketing stunt” and Buterin “burned” 90% of the coins and donated the rest!
Building the Blockchain
Moving on…you’ve almost certainly heard of the blockchain. All transactions on the Bitcoin network are recorded on the Bitcoin blockchain – a public ledger that anyone can have access to. (Bitcoin has its own blockchain just like Ethereum does and so on…)
The utilization of blockchain technology is what gives Bitcoin transactions the characteristic of being very transparent, particularly compared to transactions involving fiat currencies.
Now, when someone sends Bitcoin to another person, the transaction is recorded on the blockchain. As noted earlier, anyone can see the transaction on the blockchain (like a public ledger).
The placement of that transaction on the blockchain doesn’t happen instantly, however. This is where Bitcoin miners come into play.
Bitcoin Mining for the Win
Bitcoin miners are responsible for confirming the transaction and adding it to the blockchain. It’s fascinating – miners have to solve mathematical problems to complete the transaction. This process is also competitive, and the first one to solve the problem wins. What’s the incentive or reward for the miner? You guessed it. Bitcoin.
Click here for a quick, informative video from BBC on Bitcoin mining back in 2018.
Once the mining is complete, the transaction is added to the Bitcoin blockchain and the parties involved see their wallet balance properly adjusted.
This, at a high-level, is how Bitcoin works.
Thanks for reading!
Thanks for reading! I hope you found this content insightful. If you have any comments or thoughts, feel free to contact me on Twitter. If you haven’t subscribed, you can do so below. It would be much appreciated. 🙂
