Bitcoin is a decentralized blockchain technology allowing trustless exchange of its native currency BTC. Well, many people ask why does it matter? How is this any better than USD, Gold and commodities? Well before we get to any of that lets understand how it works. You must have heard about mining rigs, proof of work mechanisms etc etc. But, Bitcoin’s mechanism needs to be understood.

In this article, we will look into how Bitcoin works in the real world.  Bitcoin is managed by individuals and corporations across the globe. Compared to how banks work – central servers, central authorities, Bitcoin works in a decentralized manner. Meaning, like Banks, Bitcoin does not go down due to outages or maintenance. Well, that is a ginormous right. So, let’s understand how Bitcoin pulls it off. 

In comparison to Banks, Bitcoin does not rely on a central point for- servers, testing, maintenance etc. The Bitcoin network is managed by people (peers). Verifying, updating transactions are done by peers. Now, these peers (people) are not connected to each other nor do they have to provide any personal information. So, how do they make sure that the person who is adding transactions on Bitcoin is honest. 

Working Hard – Proving Honesty

This is where things become interesting. Proof of Work- This mechanism lies on a simple fundamental – generate a proof that is easy to verify but hard to create. So, anyone who wants to get onto the chain needs to know a few things.

• Running a node & use of candidate block 
• Hashrate & mining difficulty & mempool usage

Don’t worry We’ll look into all the meanings of all the above terms.

Joining the Bitcoin blockchain: Well, to solve high computational math the person needs to ensure that the node (computer) can take energy intensive tasks like mining. Besides having a system (mining rig, GPU) it is also important to check if the outlet you are working through has enough power to pull it off. 

Once the setup is ready, the peer needs to have the candidate block template in which all transactions can be added. These transactions are updated in the mempool. A peer (person) needs to pull out these transactions and add it to the candidate template and run it by a specialized software called SHA256. 

Next, when the person runs it through the software. The randomness of the output should be below the target. If the output is closer to the target, then the block with all transactions will be broadcasted to the network is synchronized. Each node will then confirm that the hash (you can see that as a serial number that cannot be edited or overwritten) Once it gets a thumbs up from some network participants, the block in which all transactions are added by the person is then added to the blockchain. For this, the person who added the transactions to the block receives a block reward.    

So, to sum up, this mechanism is groundbreaking because of its robust security and excellent technical infrastructure.  

BTC – the internet gold 

Because of Bitcoin’s brilliant ecosystem, the global adoption, high store of value and state of the art security infra the asset is treasured. Most analysts and skeptics miss out that Bitcoin has helped unbanked nations get a safe and reliable way to transfer money (BTC). 

Unlike fiat currencies and other financial instruments that fluctuate and are managed by central authorities, Bitcoin does not manipulate any individual or official agency. Well, no wonder that financial institutions have taken pains to bring BTC ETFs for traditional investors today. 

Got any questions on crypto? 

Write to me at vinita@alphachaincrypto.com