TECH EDUCATION
What Is Bitcoin and How Does It Work – Simple Explanation
Definition:
Bitcoin is a cryptocurrency designed to allow people buy or sell Bitcoins using different currencies within market-places called “Bitcoin exchanges”.
In fact, Bitcoin is a new currency that was created in 2009 in-order to make transactions without middle-men or banks. Additionally, Bitcoin can be used to book hotels, shop for furniture on Overstock and even buying Xbox-games. Lastly, Bitcoins can also be traded and this has actually made a lot of people rich.
How Does Bitcoin Work?
As a new user, once you install a Bitcoin-wallet onto your computer or mobile phone, It will generate your first Bitcoin-address and can even create more addresses whenever you need one. On the other hand, you can disclose your addresses to friends so that they can pay you and vice-versa. In fact, Bitcoin is more similar to how email works except that Bitcoin-addresses should only be used once. Likewise, below are some of the basic to terms you need to know when using Bitcoin:
- Balances-(Blockchain): A blockchain is a shared public ledger on which the entire Bitcoin network relies. In fact, a blockchain includes all confirmed transactions and it even allows Bitcoin-wallets to calculate their spendable-balance so that new transactions can be verified thus ensuring that they’re actually owned by the spender. Lastly, the integrity and chronological order of blockchains are enforced with cryptography.
- Transactions (Private-keys): A transaction is a transfer of value between Bitcoin-wallets that get included in the blockchain. In fact, Bitcoin-wallets keep a secret part of data called a private-key or seed which is used to sign transactions and provides mathematical proof that Bitcoins have come from the owner of the wallet. Additionally, a signature prevents the transaction from being altered by anybody once it has been issued. Lastly, all transactions are broadcasted to the network and usually begin to be confirmed within 10-to-20 minutes, through a process called mining.
- Processing (Mining): Mining is a distributed consensus system that is used to confirm pending transactions by including them in a blockchain. In fact, processing enforces a chronological order in the block chain, protects the neutrality of the network and allows different computers to agree on the state of the system. On the other hand, for transaction to get confirmed, they must be packed in a block that fits very strict cryptographic-rules that will be verified by a network. These rules can prevent previous blocks from being modified because by doing so it would invalidate all the subsequent blocks. For example, mining creates the equivalent of a competitive lottery that prevents any individual from easily adding new blocks consecutively to the block chain and this implies that no group or individuals can control what is included in the block chain or replace parts of the block chain to roll back their own spends.
What Is A Bitcoin-Wallet?
Bitcoins are stored in a digital-wallet which exists on either a cloud-service or user’s computer. A wallet is like a virtual bank-account that allows users to send or receive Bitcoins, pay for goods and even save their money. Additionally, unlike bank-accounts, Bitcoin-wallets are not insured by the FDIC.
Why Use Bitcoin?
Bitcoins can actually be used to buy products/services anonymously. Additionally, making international payments is easy and cheap because Bitcoins are not tied to any country or subject to regulation. On top of that, small-businesses prefer using Bitcoins because there are no credit-card fees involved. Lastly, some people can also buy Bitcoins as an investment hoping that they will go up in value.
How to Buy Bitcoins:
There are many marketplaces called “Bitcoin-exchanges” that allow people to buy or sell Bitcoins using different currencies. For example, Coinbase is the leading exchange coupled with Bitstamp and Bitfinex. However, security should be a concern when buying Bitcoins worth tens or millions of dollars.
How To Transfer Bitcoins:
Today, people can actually send Bitcoins to each other using mobile apps or their computers. in fact, it is similar to sending cash digitally.
How Get More Bitcoins (Mining):
This involves people competing to “mine” Bitcoin by using computers to solve complex math-puzzles. In fact, this is how Bitcoins are created and currently a winner is rewarded with about 12.5-bitcoins every 10-minutes.
Is Bitcoin Anonymous?
Although each Bitcoin transaction is recorded in a public log, names of buyers and sellers are never revealed but only their Wallet-IDs are shown. This can actually help to keep Bitcoin users’ transactions private but it has a drawback of letting people buy or sell anything without easily tracing it back to them. In fact, this has made Bitcoin a perfect choice for people to buy drugs online and even do other illicit activities.
What’s Bitcoins Future?
Although Bitcoin is becoming popular every day, no one knows what it will become in the future because it’s unregulated. However, some countries have started putting in place regulations for use of Bitcoins. Additionally, most governments are very concerned about the effects of Bitcoin like; lack of control and taxation over this digital-currency.
