How to Bitcoin
Part 3. How does Bitcoin work?
To most people, Bitcoin is very complicated. However, the average user doesn´t need to comprehend every line of the open source code to get it. It is critical however to comprehend the “how” at a base level, so you have a foundation for your use of this technology. You should never invest in anything your don´t understand. Knowledge is power.
In this section we´ve featured a 22 minute video by a YouTuber by the name of Curious Inventor, who does a great job of explaining how Bitcoin works.
How Bitcoin Works Under The Hood
Satoshi Nakamoto´s Bitcoin White Paper
The anonymous software engineer(s?) who invented Bitcoin under the alias Satoshi Nakamoto, wrote the following white paper entitled Bitcoin: A Peer-to-Peer Electronic Cash System.
Source direct: https://bitcoin.org/bitcoin.pdf
Key Points:
- Bitcoins can be regarded as a chain of digital signatures handled by the peer-to-peer node network.
- The nodes also timestamp the server to prevent double spending.
- To implement a distributed timestamp server, a proof-of-work system (which requires real life energy expenditure) is necessary to defend from attackers.
- To double spend Bitcoin, one needs to control 51% or more of the network´s energy resources and computational power – for instance, 100% of Brazil´s energy infrastructure. They would need to maintain the mentioned expenses, for as long as the attack persists. More energy = greater resilience.
- As time goes on, and the Bitcoin economy continues to grow, the energy and computational proof-of-work of the Bitcoin network will continue to expand and make it even more secure.
- On the Bitcoin network, nodes verify each other´s transactions.
- The incentive of supporting the network is to be rewarded Bitcoins for winning a race to solve a complex mathematic encryption. A new race starts every 10 minutes, and the chance to win increases when the miner has a higher level of computational power.
- Bitcoin is deliberately scarce, and this reward is cut in half every 4 years. We call it “The Halving“. The Halving causes the value of a Bitcoin to increase, because of supply and demand. A polar opposite to fiat, the result is a deflationary currency. At the time of writing, the next halving will be in 2024.
- Bitcoin reclaims disk space and is very space efficient, so anyone can run their own full node.
- Payment verification is simplified, so we don´t need to run a full network node to use Bitcoin. This means we can use Bitcoin on mobile devices too!
- Privacy on this public ledger can be maintained by keeping keys anonymous.
- Bitcoin is an electronic transactions system which does not rely on trust.
