The 21st century witnessed one of the most revolutionary inventions in the form of blockchain technology. It’s perceived to be almost as radical as the internet technology that changed the way we live. One of the most popular uses of this ground-breaking technology is in the form of cryptocurrencies like Bitcoin. Let’s delve deeper into the subject to understand what is Bitcoin and how does it work,
What is Bitcoin? This is a frequently asked question by people who want to understand and invest in this exponentially growing asset. Bitcoin is a popular cryptocurrency that has no central backing and is used in the peer to peer Bitcoin network. In simpler terms, it can be understood as a digital currency that is not represented by a central authority and doesn’t require any intermediary to function.
This means that there would be no transaction charges or fees what so ever. Bitcoin was officially launched as open-source software in 2009. It is among the world’s largest crypto-currencies when valued using the market capitalisation.
The aim of using Bitcoin is to remove all the intermediaries that exist and adds to the financial burden of common individuals. Also, the absence of a central authority makes it more transparent and less regulated. The underlying technology behind cryptocurrencies like Bitcoin is known as the Blockchain technology. Blockchain can be simply understood as a decentralised digital ledger that records transaction which can’t be altered later or manipulated by any one individual.
Any new entry will be visible to all the peers in the network, reducing the chances of fraud altogether. The use of cryptographic hashing and decentralisation is the key highlight for blockchain technology as it helps to create a more transparent system reducing the dependence on the intermediaries and chances of corruption.
Just to give you an analogy, think of the blockchain ledger as a shared spreadsheet. Any changes made to the spreadsheet is visible to all the people who have access to the spreadsheet, the same is the case with blockchain.
How Blockchain Works
Fiat currencies are issued as a legal tender and are backed by the central government; this includes the normal currencies that exchange hands daily like the US Dollar, Euro, Yen, Rupee, etc. Unlike a fiat currency, the Bitcoin doesn’t have a physical presence rather it is mined digitally and kept on a distributed digital ledger that multiple people in the network have access to. Bitcoin has very low and almost nil transaction fees, the present online transaction methods charge a good percentage of the transaction as a fee.
Bitcoin uses peer-to-peer technology and facilitates instant transactions using the network. The Bitcoin network has individuals and companies that own the governing computing power, it is comprised of miners. So who are the miners? Well, miners are people who help to process transactions on the blockchain, they are compensated using rewards and transaction charges paid in Bitcoin.
They are a decentralised authority who manages the reputation of the Bitcoin network. Using the Bitcoin mining process, the cryptocurrency is released into circulation.
Mining requires discovering new blocks by solving difficult puzzles, these blocks are added to the blockchain. One Bitcoin can be divided to a maximum of 8 decimal places; this smallest unit is called a Satoshi based on the mysterious founder of this revolutionary crypto-currency. You can Bitcoin using a credit card, bank account or cash, it will be transferred to your Bitcoin wallet and you can then use it to make a purchase or sell an item using the Bitcoin as an exchange medium. Every transaction is recorded in a digitally distributed blockchain ledger to maintain accountability.