What Is Bitcoin?

 Bitcoin is a digital currency that was created in January 2009. It follows the ideas set out in a
whitepaper by the mysterious and pseudonymous Satoshi Nakamoto.1
 The identity of the person or persons who created the technology is still a mystery. Bitcoin
offers the promise of lower transaction fees than traditional online payment mechanisms and,
unlike government-issued currencies, it is operated by a decentralized authority.

Bitcoin is a type of cryptocurrency. There are no physical bitcoins, only balances kept on a public ledger
that everyone has transparent access to. All bitcoin transactions are verified by a massive amount of
computing power. Bitcoins are not issued or backed by any banks or governments, nor are individual
bitcoins valuable as a commodity. Despite it not being legal tender (is anything recognized by law as a
means to settle a public or private debt or meet a financial obligation, including tax payments, contracts,
and legal fines or damages.),

Bitcoin is very popular and has triggered the launch of hundreds of other cryptocurrencies, collectively
referred to as altcoins. Bitcoin is commonly abbreviated as "BTC."

The basics for a new user As a new user, you can get started with Bitcoin without understanding the
technical details. Once you've installed a Bitcoin wallet on your computer or mobile phone, it will
generate your first Bitcoin address and you can create more whenever you need one. You can disclose
your addresses to your friends so that they can pay you or vice versa. In fact, this is pretty similar to how
email works, except that Bitcoin addresses should be used only once.

Balances – block chain

The block chain is a shared public ledger on which the entire Bitcoin network relies. All confirmed
transactions are included in the block chain. It allows Bitcoin wallets to calculate their spendable balance
so that new transactions can be verified thereby ensuring they're actually owned by the spender. The
integrity and the chronological order of the block chain are enforced with cryptography.

 The block chain is a public record of Bitcoin transactions in chronological order. The block chain
is shared between all Bitcoin users. It is used to verify the permanence of Bitcoin transactions
and to prevent double spending.

Transactions - private keys

A transaction is a transfer of value between Bitcoin wallets that gets included in the block chain. Bitcoin
wallets keep a secret piece of data called a private key or seed, which is used to sign transactions,
providing a mathematical proof that they have come from the owner of the wallet. The signature also
prevents the transaction from being altered by anybody once it has been issued. All transactions are
broadcast to the network and usually begin to be confirmed within 10-20 minutes, through a process
called mining.

 Private Key
o A private key is a secret piece of data that proves your right to spend bitcoins from a
specific wallet through a cryptographic signature. Your private key(s) are stored in your
computer if you use a software wallet; they are stored on some remote servers if you
 use a web wallet. Private keys must never be revealed as they allow you to spend
bitcoins for their respective Bitcoin wallet.
 Signature
o A cryptographic signature is a mathematical mechanism that allows someone to prove
ownership. In the case of Bitcoin, a Bitcoin wallet and its private key(s) are linked by
some mathematical magic. When your Bitcoin software signs a transaction with the
appropriate private key, the whole network can see that the signature matches the
bitcoins being spent. However, there is no way for the world to guess your private key
to steal your hard-earned bitcoins.
 Wallet
o A Bitcoin wallet is loosely the equivalent of a physical wallet on the Bitcoin network. The
wallet actually contains your private key(s) which allow you to spend the bitcoins
allocated to it in the block chain. Each Bitcoin wallet can show you the total balance of
all bitcoins it controls and lets you pay a specific amount to a specific person, just like a
real wallet. This is different to credit cards where you are charged by the merchant.

Processing – mining

Mining is a distributed consensus system that is used to confirm pending transactions by including them

in the block chain. It 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. To be confirmed,
transactions must be packed in a block that fits very strict cryptographic rules that will be verified by the
network. These rules prevent previous blocks from being modified because doing so would invalidate all
the subsequent blocks. Mining also creates the equivalent of a competitive lottery that prevents any
individual from easily adding new blocks consecutively to the block chain. In this way, 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.

 Mining
o Bitcoin mining is the process of making computer hardware do mathematical
calculations for the Bitcoin network to confirm transactions and increase security. As a
reward for their services, Bitcoin miners can collect transaction fees for the transactions
they confirm, along with newly created bitcoins. Mining is a specialized and competitive
market where the rewards are divided up according to how much calculation is done.
Not all Bitcoin users do Bitcoin mining, and it is not an easy way to make money
 Confirmation
o Confirmation means that a transaction has been processed by the network and is
highly unlikely to be reversed. Transactions receive a confirmation when they are
included in a block and for each subsequent block. Even a single confirmation can be
considered secure for low value transactions, although for larger amounts like
$1000 USD, it makes sense to wait for 6 confirmations or more. Each confirmation
exponentially decreases the risk of a reversed transaction.

So, how does it work?

1. Nick opens his bitcoin wallet. This implies that Nick is indirectly creating his own bitcoin address.
He’s supposed to get some bitcoins.
2. Nick wants to transfer bitcoins to Rose. So, he scans or copies Rose’s bitcoin address.
3. Nick fills an amount of bitcoin he wants to transfer and the fee he is willing to pay for this
transaction. So, a transaction includes inputs, outputs and the amount of bitcoin that will be
transferred.
4. Before sending the new transaction to the blockchain, the wallet using Nick’s private key signs it.
5. Now, the transaction is sent to the closest node on the bitcoin network. Then it is propagated
into the network and verified (basic checks: eg. there are enough bitcoins on the origin wallet,
structure, etc.). After it successfully passes verification it goes and sits inside the “Mempool”
(short for Memory Pool) and patiently waits until a miner picks it up to include it in the next
block to be mined.
6. It’s mining time and miners pick up the transactions (first those who pays more transaction fee)
and group them into blocks trying to solve the Proof Of Work (or POW — a consensus algorithm)
and calculate a certain hash function.
7. The miner who get it propagates the new block to the network.
8. The nodes verify the result and propagate the block.
9. Now Rose sees the first confirmation.
10. New confirmations appear with each new block that is created and linked.