What is Bitcoin? || How does it work?

What is BitCoin?

The currency which we see around us in dollars, rupees, etc are fiat currencies. These fiat currencies have their physical existence. Bitcoin does not have their physical existence. i.e you just cannot hold a Bitcoin in your hand like you hold other fiat currencies. Bitcoin is a digital currency that is electronically stored in storage media’s like HardDisk, SSD, etc.

Fiat Currency transaction is done through Banks which acts as a central authority and keeps an eye on our transaction. BitCoin does not have a central authority governing it. It is decentralized. There is no authority that decides its value, how much to produce, where they are and investigating frauds.

So, Why do we even use Bitcoin?

The reason being simple as it is decentralized, there is no one who can track your transaction. Indeed there is a sheet which shows every transaction of BitCoin. But it’s very complex to know who has done the transaction due to a simple fact that all transactions of BitCoin are encrypted using Cryptography. Also, you do not have to give tax to keep the Bitcoin. There is nothing called as transaction processing fee in Bitcoin. These stuff’s motivates a person to invest in BitCoin.

How Bitcoin Work?

Basically, Bitcoin works on peer to peer network. A peer to peer network is when a couple of computers connected to each other, to share resources without going through a central server computer. So, if Raj needs to send some BitCoin to Simran, he can send it directly to Simran's computer without actually going to through a central server.

A characteristic of every network is that data is copied when sending some resources from one computer to another. Like when you are downloading a pdf file or mp3 from a server, the file or data is copied to your computer from the server. Considering the above example, if Bitcoin transaction gets copied on the network, Raj can use the same Bitcoins for other uses that he had previously sent to Simran. Well, this is not how it works.

A Bitcoin transaction is not just the string of data that can be duplicated, but it’s the entry on a huge global ledger called Blockchain. The Blockchain is the principle technology behind the success of Bitcoin. Blockchain keeps track of all the transaction that occurs on the Bitcoin network.

Every transaction on the Bitcoin network is a block. And every block(transaction) is chained to a block(transaction) preceding it. Hence, Blockchain. Don’t misinterpret Blockchain as a Central Authority. Basically, anyone on the Bitcoin network can maintain their separate ledger. And Because a bunch of people does that, they can compare their ledgers at the end to verify all the transaction.

So, whenever anyone on the network makes a transaction. They announce it to the whole network so that everyone maintaining the ledger on the network can add this new entry to their ledger. This announcement seems like telling your credit card information to everyone, which can lead to fraud. There comes cryptography. Bitcoin uses SHA256(Secure Hash function 256 bits) cryptographic hash function to secure their transaction.

Basically, everyone on the network has a private key which is also called as Secret key. This key is only known to the user. It also has a public key which is known to everyone on the network. Whenever a person makes a transaction, he signs it with his private key. And anyone on the network can verify the transaction using the public key. Every transaction on the network must be verified before adding it to the Blockchain.

Summing up everything, if Raj wants to send 5 BitCoins to Simran. He signs the transaction using his private key and sends it to the BitCoin network. Anyone on the network can verify the transaction by solving a math problem. Once the transaction is verified, the money is deducted from Raj’s account and added to Simran's account. And this transaction block gets added to the Blockchain. Thus, Completing the transaction.

The people who verify the transaction are called BitCoin miners. I will talk about BitCoin Mining in the Next post. I hope this information helps and finally Thank you.