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Understanding Bitcoin and the Way it Works


Many people must have heard the term bitcoin or cryptocurrency but they are not fully aware of what bitcoin is and how it works. Bitcoin is a form of virtual money that is different from the typical banking system as it is based entirely on decentralized trust. The trust lies between the parties that are operating within the system of bitcoin. All the transactions that are done within the bitcoin mechanism are recorded in the blockchain which keeps a track of all the transactions made. The transactions that are confirmed between the concerning parties are visible in the blockchain. It helps the system to analyze and calculate the overall spendable balance.

How Bitcoin Transactions are carried out

The transactions that are carried out under the bitcoin mechanism are considered to be a transfer of value that is calculated and added to the bitcoin wallet. There are a few aspects that help secure the transactions, which are as follows:

  • Private Key – The private key is also known as a seed. It is very important for the people as it helps sign transactions that act as a mathematical proof. The mathematical proof is then used to trace and determine whether the payment is coming from the wallet of the owner or not. It is quite similar to signing a cheque before handing it over to the concerned party. The cheque acts as an assurance and proof that the owner allowed the bank to carry out the transaction successfully.
  • Signature – It ensures that the transaction cannot be modified by any third party. Once the transaction is done the process begins after 10 – 20 minutes when all payments are confirmed and identified through the process which is known as mining.

The transactions that are done in the world of cryptocurrency are authorized and it is notified that one owner has transferred a certain number of bitcoins to another owner. The new owner can further transfer the bitcoins to some other owner and this is going to create a chain of ownership. This is highly secure and you can check it out here

Every transaction keeps track of the ownership of every bitcoin individually. The process of spending involves the use of a signature that is used specifically to transfer a certain value from one owner to another.

Types of Transactions

There are different types of transactions that can be done under the bitcoin mechanism. They are as follows:

  1. Simple payment is the common form of transaction that is done. Under this model of the transaction, the payment is sent from one party to another and if there is some change then it is reverted to the original owner. In a single payment mode of transaction, the mode of payment is one i.e. input and the transaction is being in two accounts i.e. output.
  2. The second form of transaction involves numerous inputs so that a collective single output can be achieved. A perfect example of this would be if different coins or currency are being exchanged by a party to get a larger note in return. It is merely done to organize the wallet and get rid of smaller amounts to receive a collective currency or a larger note for whatever amount that exists in the account.
  3. The third form is the one in which there is only one single input but the payment is being transferred to multiple outputs. This form of transaction is issued mostly by companies whenever they wish to pay their employees at the same time or if they wish to distribute funds into multiple accounts.

Bitcoin and the Process of Mining

The process of mining starts after the transaction is made by one owner. It is not going to be transferred to the other account unless and until it passes through the verification process which is known as mining. The entire system of bitcoin and the way it runs and operates is based solely on computation. The transactions that are being done are accumulated in the form of blocks and they need a huge amount of computation to be proven and a very small amount to be verified and considered to be proven.

The process of mining has two sole purposes in the entire process. They are as follows:

  1. Mining helps create new bitcoins in every block and it acts quite similar to the central bank which is responsible for printing and generating new money.
  2. It helps establish a bond of trust between the parties who are carrying out a transaction.

Bitcoin is the safest way of earning money and making transactions. It can certainly make the world a fair and safe place to live in.

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