What is Bitcoin and how does it work? (BITCOIN A BEGINNER'S GUIDE1)

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1 Jan 2024

What is Bitcoin and how does it work?

Bitcoin is a decentralized digital currency that operates on a peer-to-peer network, known as the blockchain. It was created in 2009 by an anonymous person or group of individuals using the pseudonym Satoshi Nakamoto1. Here's a breakdown of how Bitcoin functions:

Decentralization: Bitcoin operates independently of banks and does not rely on a governing body. It uses a public ledger called the blockchain to record all transactions made in the Bitcoin network. This ensures transparency, security, and immutability, as each transaction is verified by the consensus of the network participants and then irrevocably recorded2.
Blockchain Technology: The blockchain is a decentralized, distributed ledger that records all transactions across a network of computers. It ensures transparency, security, and immutability, as each transaction is verified by the consensus of the network participants and then irrevocably recorded3.
Proof of Work (PoW): Bitcoin operates using the Proof of Work consensus mechanism. Transactions are processed by miners - distributed nodes participating in the blockchain. They compete to validate the blocks using computing power and receive rewards for their service4.
Transaction Process: When someone sends Bitcoin to another person, the transaction is verified by miners who solve complex mathematical problems. Once confirmed, the transaction is added to a block in the blockchain, making it permanent and tamper-proof5.
Use Case: Bitcoin can be sent anywhere in the world on a 24/7 basis, and transactions cannot be blocked by any intermediaries. By holding their own private keys, users can self-custody their Bitcoin without requiring institutions such as banks6.