How Does Bitcoin Work?

Before we begin with the explanation of how Bitcoin works , you should first know that a transaction in Bitcoin is the performance of any action in which the coins of a blockchain are in motion. Every time Bitcoins or fractions of Bitcoins are sent or received, this is part of a transaction.

Every time we make a transaction in Bitcoin, we are not moving real money, but rather a digital currency. In that sense, we can say that each Bitcoin on the network does not really exist. There is certainly no bank that regulates Bitcoin, nor a physical Bitcoin coin, everything is completely digital, for this reason, its value is dictated by the laws of the market, supply and demand.

What is blockchain?

To make Bitcoin a reliable form of money, we need an accounting system, and we will have this with what the blockchain does. The blockchain is a large database in which each transaction is permanently recorded.

Blockchain accounting records can be viewed publicly, but without displaying names, there is no direct data that can be associated with a person even if they are using a certain amount of money. This is the privacy and anonymity that Bitcoin transactions provide.

The fact that Bitcoin's accounting records are public and accessible does not mean that it is insecure, but rather it indicates the level of transparency that it has that other systems do not offer. This speaks volumes about the potential of Bitcoin and even more so considering that despite having this feature, your privacy is still protected.

Now, we have already explained what a transaction is and some of its properties, but now it is time to explain how Bitcoin works.

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1. Facing a user

Bitcoin works like a digital bank account, in which the user has a wallet or an account in which he can deposit, receive and send money to another account. To do this, the user must have a type of account number called a “Bitcoin address.” This is made up of a finite series of alphanumeric characters.

Types of Bitcoin Addresses

Bitcoin addresses can have different formats, depending on which one allows the user to access certain technological advances for the use of their money. This difference can be noticed at the beginning of each address. Below are some of the most common formats:

✅ Original format: 15e15hWo6CShMgbAfo8c2Ykj4C6BLq6Not

✅ Format with simple spending conditions: 35PBEaofpUeH8VnnNSorM1QZsadrZoQp4N

✅ Native Segwit format: bc1q42lja79elem0anu8q8s3h2n687re9jax556pcc

✅ Taproot format: bc1pmzfrwwndsqmk5yh69yjr5lfgfg4ev8c0tsc06e

Unlike the currencies we usually use on a daily basis, such as the dollar, peso or euro, which have relatively stable values, Bitcoin has a value that fluctuates constantly. However, this is not a problem, since by being connected to the Internet, users can know exactly how much bitcoin they receive or spend when paying for any product or service.

2. Facing a system operator

Bitcoin works as a network of computers connected through the Internet that are responsible for carrying out two main functions:

✅ Keep the common accounting book for the system updated, synchronized and in order.

✅ Consolidate transactions made by users of the system and issue new currencies.

It is important to note that the word “blockchain” is often used as a synonym for Bitcoin technology. However, this only relates to the ledger. It is certainly an important part of understanding how Bitcoin and its technology work, but it is not a substitute for it.

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In this, the first task is performed by the “nodes”, these are common computers that run the Bitcoin software constantly in order to store the accounting, reconcile with other “nodes” and keep it up to date, just as if we used WhatsApp and the messages were synchronized and only those in a specific language were saved.

Types of Bitcoin nodes

There are generally two types of knots:

✅ Full nodes: These run the Bitcoin software, store the ledger, and keep it synchronized and up-to-date. They are also used to send and receive bitcoin.

✅ Light nodes: These are also known as Bitcoin wallets or accounts and are applications that are used to use Bitcoin without having to maintain the network. These work by requesting the information they need for transactions from full nodes.

3. The miners

The next task is carried out by the “miners”. These are also computers, but they only perform a single high-performance task. This task is to guess a number, among infinite possibilities, that allows them to compose a group or block of transactions sent by users under the rules established by the system and corroborated by the nodes.

There are hundreds of these computers around the world competing to be the first to guess that number (this number is known as a “nonce”) and thus win the reward for correctly composing the block of transactions in each round of approximately 10 minutes. This reward includes the new coins that the system issues and the fees that users pay to send their payments.

Understanding how Bitcoin works is not as easy as it seems. If you put in the effort and dedicate time and training to everything that surrounds the world of Bitcoin technology, you can come to fully understand how Bitcoin works.