This article will explain in detail how bitcoin works under the hood.
There has been an unsettlement in the financial world since the invention of Bitcoin in 2008 by the mysterious Satoshi Nakamoto.
Though numerous bitcoin price predictions stated that, currently the price of bitcoin is not in good condition as it dropped by over around 73%, still financial markets have been facing disruption due to the existence of this cryptocurrency as well as others.
It would not be a waste of money or time if you decide to invest in bitcoin in 2019. The majority percent of people in the world don’t know how to utilize bitcoin, or how it really works, especially the portion of its blockchain technology.
Fortunately, the reason we are here today is mainly to make them clear regarding the complete buzz about how bitcoin works under the hood.
Are you ready? Let’s dig into it.
How Bitcoin Works Under The Hood
What is Bitcoin?
Bitcoin is a digital currency that enables you to do transactions without even needing to mint coins or printing bills to use it. There is no central authority for bitcoin to control its operations.
It’s simply a decentralized digital currency.
Usually, you will not get to know who is owning the bitcoin. With bitcoin, encryption keys are the ways that buyers and senders interact with each other instead of names or tax IDs.
Unlike fiat currencies, this cryptocurrency is basically “mined” utilizing modern PCs associated with the internet.
Bitcoin is generally mined by settling a progression of complex numerical or mathematical problems. However, you can only mine about 21 million digital coins because of the protocol of bitcoin.
What is Blockchain and how does it work?
Blockchain is a creative distributed ledger innovation that actually powers bitcoin. A blockchain contains an expanding index of records, called blocks, that are associated with everyone utilizing cryptography.
There are a cryptographic hash, a transactional data and a timestamp in each block in the chain coming from the previous block. The process of having hash in every block from the preceding block is the veracity of the blockchain.
As a result, if any block in the chain gets tampered, then the whole blockchain will get rendered as it will cause in wrong cryptographic hashes directing to the blocks.
Transaction in Bitcoin System
At its center, bitcoin alludes to an advanced document that has a history of the transaction, simply like a customary ledger. Every PC in the bitcoin system keeps the most recent copy of this document which includes the whole record of the past exchanges.
When it comes to completing a transaction, you essentially communicate to the system that the amount of bitcoins in your account has to be reduced and the quantity of the recipients should increase.
Nodes, Hubs, or the PCs associated with the bitcoin system, include that transaction within their file of the ledger and forward the subtleties of the transaction to all other existing computers in the network.
This is all about the network operations of bitcoin which solves some mathematical issues in a body for security reasons. It’s a generally computerized foundation that enables computers to keep up a ledger.
While how the record is kept up could have a few likenesses with the customary financial framework, but the idea that the record is decentralized over a gathering of computers, rather than a solitary specialist, uncovers some noteworthy contrasts.
For instance, if you think about a bank account, all your data are secret while in the bitcoin world, every transaction is knowable to everyone.
Moreover, the banks provide you safety to keep your funds within their reach but with bitcoin, you do not have such safety as the transaction process by anonymous people. Hence, trust is not top-notch.
However, the trust is a non-issue here as the crypto network is fittingly crafted in such manner – the unique numerical functions will provide its security itself.
What are Hubs or Nodes?
Nodes are just computers that are associated with the Bitcoin system. They interface with the system by running the Bitcoin programming that lies beneath the whole Bitcoin environment.
Not only a kind of nodes but also a few kinds of nodes are connected to the Bitcoin network. Some of them happen to be complex, on the other hand, some are really simple.
There will be a message broadcasted to the Bitcoin network whenever somebody starts a transaction. All hubs that are furnished with Bitcoin’s “mining” and software get this message, and procedure it.
The nodes that contain blockchain will also get the latest copy of the blockchain. Because of the publicity of information to millions of nodes, hackers cannot easily get past to it or cheat the system.
What’s the process of sending money with Bitcoin?
To transact money in bitcoin, all you need to do is broadcast a message along with all the subtleties and details of the transaction.
Just like this, “Send 5.0 BTC from Lucas to Joe.”
Each node will update its file of the ledger after getting this message and forward the data to other nodes.
Here comes a question.
- What’s the legitimacy of the request?
- How do the nodes make sure of the authenticity?
- How do they come to know that the message request is from the actual owner of the digital currency?
And here comes digital signature in handy. The digital signature is a lengthy string of tamper-proof numbers and letters which are specially created for each bitcoin transaction. A digital signature can only be used once and they broadcast it across the entire network.
There are two different but associated keys that a digital signature utilizes to authenticate the transactions: a public key and a private key. The former is utilized to make a signature and the latter enables others to verify the confirmation.
Basically, a private key functions as the genuine secret password and the signature as a middle person that learns that you have the secret password without revealing it.
The public key is the address that helps you to use while sending bitcoins to someone. Before finishing an exchange, you should validate that you are the genuine proprietor of the public that got the bitcoins.
To do that, you can create a digital signature by utilizing two inputs: the transaction message and your private key. Therefore, different hubs in the bitcoin system can utilize that digital signature in another utility to affirm that it coordinates your public key.
The complicated numerical calculation prevents your private key from being reverse-engineered from the data available publicly. Since the digital signature needs both of your transaction message and private key, the bitcoin system may accomplish two objectives:
- Validate the genuine owner of the public key of the sender
- Make sure of no changes to the transaction amount after it is sent
A digital signature with the help of Digital Signature Algorithm: RSA, will allow you to demonstrate that you possess a private key and that you utilize that key to deliver a specific message, while never uncovering your private key to anyone.