In this article, we will try to analyze the way Bitcoin works and we will present its special features. Most people have confuse information about cryptocurrencies, while their exact usage is completely unknown to them. There is no specific literature as it is a widely known economic phenomenon for the last 10-12 years, when the well-known Satoshi paper came to light. Even the media struggle to accurately refer to crypto because of its non-conventional origins. Initially, it would be good to understand that no one ‘manages’ Bitcoin, as its existence is independent of any organization.
Essentially there are various groups of people who exert their influence in various ways:
- Bitcoin users
- The miners, that is, those who support its operation
- Companies and web pages that provide Bitcoin services
- Developers and Those who pay developers to maintain the code
When performing a transaction the user enters the number of bitcoins as well as the recipient’s public key. This transaction is signed by the sender (private key). Each bitcoin user owns a wallet, in which he or she has stored all addresses belonging to them. In this way, using each time one of these addresses can send bitcoins to any user thus performing transactions.
But how exactly Bitcoin works?
One of the key features of the bitcoin protocol is the transaction itself. To understand it better… It is enough to think that every transaction is data signed by the private key of the user who creates it, combined with the public key of the user who receives it. Each one of these transactions is created within the network and stored in blocks. The important thing is that within a block they can refer to previous transactions as well as have many input and output addresses.
The bitcoin protocol is based on the assumption that the majority of the nodes – that is, the users – make proper use ensuring the correct completion of transactions. As we have already mentioned, this can easily be achieved through public key encryption, where users are authenticated without being identified. The protocols that dominate, while there are hundreds of specifications, are proof of work and proof of stake. Miners are the users who maintain and through validation and verification all cryptocurrency transactions. The advantages of using digital currencies, which we will refer to below, are what reflect their value.
The description of the process is as follows:
The user has two keys at his disposal, a public key, and a private key. The public key has the ability to be made public and enable anyone to encrypt a message that only their own private key can decrypt. With the private key, the user has access to his electronic wallet, in which all the bitcoins he owns are stored. On the other hand, the public key cannot be used to reveal the private key, emphasizing its security transaction. This process can use and vice versa by using the digital signature technique. In this way, all nodes – users – are provided with a complete record of all transactions, known as a blockchain. First, we encrypt a message with our private key, we create a message that can be decrypted using the public key.
So imagine you wanted to send a file about an important purchase your business is about to make to one of your partners. Through the public key, the user digitally signs the posting of this file without anyone being able to see it. The important thing with the way that bitcoin works, is that no one can claim that a file was not sent or uploaded once it is digitally signed. Each signature is recognized by the system as unique, while its content can only be decrypted using the private key. These transactions are stored and grouped into blocks. The blocks are designed to have in their memory a volume of valid Bitcoin transactions, which are spread to all nodes in order to check their validity.
It is worth noting that transactions are time-stamped and linked via a cryptographic hash function to the immediately preceding block. In this way, no one can claim that it has been modified. In order to be able to consider a transaction absolutely secure, it is required at least 6 confirmations. This means that a chain is created – extending the blockchain by 6 new blocks. As we can understand this measure is very time-consuming. However, it is extremely necessary to ensure both the correctness as well as the security of the transactions.
If you want to discover more about Bitcoin and the way it works check out the video below by 3blue1brown