Before I explain how bitcoin works, I would like to tell you how money is transferred from your account in bank to your beneficiary’s account in another bank.
When you transfer money from your bank account to another bank account, it is first written down on a ledger in your bank. Then, the same transaction is written down on the ledger of the receiving bank. Finally, your beneficiary get the money in his or her bank account.
From a user’s perspective like you & me, bitcoin is nothing more than a computer program or a mobile app. And, which provides a personal bitcoin wallet. This wallet enable us to send and receive bitcoins.
Before, we understand how bitcoin works, we need to what is bitcoin miner, bitcoin mining and block chain.
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The independent individuals like you & me; and, companies, who participate in the bitcoin network are known as bitcoin miners.
Bitcoin mining is the process through which bitcoins are released to come into circulation. This process involves solving a difficult mathematical puzzle on computers to discover a new block. This new block will be added to the block chain.
A block chain is a massive public ledger that keeps records of digital transactions. Instead of any third party intermediary like bank, block chain organizes data in batches. These batches are known as blocks. Block chain not only control the information; but, also avoids duplication of data.
How Bitcoin Works?
All bitcoin transactions are written down on a massive public ledger, known as Block Chain. Now, when you transfer bitcoin from your wallet to another person’s wallet, you write this transaction in block chain.
Everyone in the bitcoin network can see this block chain. Also, they have their own copies of the same ledger. Now, all the miners in bitcoin network know how much bitcoins are there in your wallet, infact in every wallet. In simple words, every miner know the number of bitcoins in each wallet, but, they don’know who owns which wallet. Because, bitcoin has no identity of any wallet.
Now, if everyone can see amount of bitcoins in each wallet, then what’s stopping them from transferring bitcoins from your wallet to theirs?
It’s cryptography technology which is stopping them from transferring bitcoins from your wallet to theirs. When a bitcoin wallet is generated for you, it has two parts. One is public part, an address of your wallet, to share with other miners so that they know where to send you bitcoins. And, the other part is a private key. To approve any transaction from your wallet, you need this private key.
For any successful transaction, you need to send a message from your wallet containing your wallet’s address, receiver’s wallet address, amount and digital signature. This digital signature is unique for every transaction; and, is generates by the combination of transaction message and the private key. Once your digital signature is verified, your transaction finally completes.
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