How does Bitcoin work?

How does Bitcoin work?

On the stage

For the average user, the operation of Bitcoin is very simple. Bitcoins are only managed in a digital wallet, which is a mobile or desktop application that can be downloaded at no cost, and from there the transactions are made, usually free of charge, although the procedure is usually expedited by paying a small commission that It may vary according to network congestion, transaction size and user urgency. The most common is to wait about 10 minutes to receive between 3 and 6 confirmations that validate the transaction.

The record of the amount of bitcoins that an address has - an alphanumeric string that equals a bank account number - plus all transactions made with its date and time can be seen publicly in a blockchain explorer, as in this example from the portfolio where the Internet Archive receives its donations.

Registration in the blockchain of the Internet Archive portfolio.

It is important to clarify that, against the urban myth, Bitcoin is not really anonymous. Although no personal data is required, and therefore at first glance it cannot be known to whom the purse belongs - in the case of the Internet Archive it can be seen, because they decided so, but in other cases no name appears - it is It is possible to track the addresses to their owners if they have not taken any precautions to hide. Therefore, several proposals have been made to increase your privacy or, beyond that, other cryptocurrencies focused on this feature have been created, such as Monero and Zcash.

On the other hand, we can also explain how Bitcoin and its blockchain work with one of the Sideways Dictionary analogies:

It is like a glass locker room. Everyone has their own glass locker with a coin slot on top. If you want to give Bob money, he tells you that his locker number is 1456. You put on a balaclava, go into the locker room, take out the coins from your locker and put them in the slot at the top of Bob's closet. Everyone can see that the transaction takes place, but you are wearing a mask so that nobody knows who you are.

Backstage

We can start the tour by comparing its operation with fiat money. The latter is issued from a central bank, which gives it its value and distributes it in the country. Bitcoin, on the other hand, does not come from a bank, but originates through a procedure that can be carried out by any user with the necessary equipment, called mining.

In mining, each computer or specialized hardware team solves very complex mathematical problems approximately every ten minutes, creating a new 'block' of information for the chain - the database that is the blockchain - in which they record and, therefore, validate the transactions made with the currency. As a reward, the so-called 'miners', that is, those who contribute their computing power to create new blocks, get some bitcoins in exchange for this service. In this sense, the miners can be compared to the central bank, since it is they who first issue the currency and who will begin distributing it once they want to use it.

There are currently thousands of nodes that make up the mining network worldwide, thanks to which the network remains secure: some nodes, called complete nodes, are a kind of software 'station' that protects a copy of the chain of blocks, where all transactions are registered, and these are only validated when they appear in each of those copies, thus ensuring their legitimacy. Miners can run a single node on their computers or their specialized equipment, or join a mining group, where they are more likely to solve the blocks. In this way hacking the blockchain to introduce a false transaction or resorting to double spending of the coins is practically impossible, since most of the nodes would have to be modified and the cryptography with which the data is protected.


It should be noted that cryptography - those complex mathematical structures that make up the entire system - is part of the nature of Bitcoin. Everything in it is built and works cryptographically and never otherwise: coins and wallets are cryptographic elements, including messages or transactions. This is the backbone of the blockchain.

When the tour continued, the reward for the miners, in principle, was 50 BTC per mined block, and the required processing power was much less demanding, so that bitcoins could be mined with just one computer. However, Bitcoin, unlike fiat currencies, was designed to issue just 21 million units in its history, so the amount of coins to be minted will decrease over time on a scheduled basis, until it reaches zero, to avoid inflation. This programmed reduction is called halving, an event that occurs every 210,000 mined blocks (approximately every four years) and consists of halving the reward for mining. The first halving occurred in 2012, reducing it to 25 BTC; and the second occurred in July 2016, so now miners can only get 12.5 BTC per mined block. In the long run, the reward for creating new blocks - something vital for the network to continue functioning - will only come from the transaction fees paid by users, about 1 BTC per block.


The difficulty of mining varies according to the number of miners joining the network, and each 2016 blocks are adjusted by increasing or decreasing. However, given that in recent years more and more miners have joined together, solving the mathematical problems that arise requires more and more processing power: while at first with a computer it was enough to undermine, now specialized hardware is required that it consumes a lot of energy to pass the so-called Work Test (PoW) where billions of calculations are performed per second to try to find the answer that will create the new block. And that's how the bitcoins are born, distributed and maintained.