What is Bitcoin?
Bitcoin is neither more nor less than the first virtual currency in history. That is, a digital unit interchangeable for goods and services.
It is based on two revolutionary pillars: A new conception of understanding monetary transactions and the innovative Blockchain technology.
And why is it so special?
Being a type of money independent from banks, corporations, and states, the management costs for each transaction are minimal. In this way, people can buy and sell without asking permission from any bank or third party.
Unique features of Bitcoin:
– Bitcoins can be used anywhere in the world instantly.
– Transactions are anonymous and exclusive between two people.
– Any ordinary user can buy and use them.
– Its code is open but the transactions are strongly encrypted by algorithms and mathematical functions, making the software unhackable.
– There is no typical inflation for traditional currencies, as Bitcoin’s growth is estimated and set at 21 million Bitcoins (to be achieved in the next 100 years).
– Their use is voluntary: They are not imposed by any government.
How do Bitcoins work?
In the financial world in which we live, each transaction that we carry out passes through a bank, which validates and records the movement.
On the other hand, when buying or selling Bitcoins the following occurs roughly:
1. Antonio buys a car in Maria’s car shop and the total price is 1 Bitcoin.
2. Instead of paying by credit card, Antonio “sends” a 1 Bitcoin transaction from his wallet account to Maria’s wallet.
3. The following happens here: Antonio communicates his intention to transmit 1 Bitcoin to the nodes connected to the network. Once the transaction is verified, it is added to a block of already validated transactions.
The miners (people who voluntarily lend the power of their computer and their time) are in charge of verifying that the information block is indeed correct and does not contain errors or falsifications.
4. If the information is trustworthy and the nodes by consensus confirm it, the transaction is recorded in the digital ledger (this is known as the Blockchain). It is distributed by thousands of computers around the world. Account books update automatically
5. Registered transaction: Antonio now has 1 Bitcoin less and Maria 1 Bitcoin more.
The magic behind Blockchain:
How is all this possible? Blockchain is actually an open-source, distributed P2P database that contains the record of all the transactions that have been carried out since the beginning. The network is made up of the following elements:
Imagine that 300 people buy and sell Bitcoins at once. To verify them, transactions of a certain time are packed into blocks of information.
These blocks are made up of a code that links them to the previous block + the package with the transaction information + a code (called a hash) that will link them to the next block. To create a candidate block, you must also take into account the registration of all previous transactions to avoid counterfeiting or to reuse coins already spent in other operations.
A node is each one of the computers connected to the Bitcoin network that contains a replica of the account book or the blockchain database. The nodes distribute a copy of the account book updated in real-time to the network.
Anyone could download the Blockchain software and start mining Bitcoins. It is the process of verifying, distributing, and increasing the registration of bitcoins and is called “mining”. Since there can be no errors, the network requires many resources: very powerful processors and an increasing amount of energy to mine.
For all these reasons, although it is a voluntary service, the work of the miners is rewarded with fractions of Bitcoins and this reward system is the only existing way to create new Bitcoin coins that enter circulation.
That is why, it has been fixed in the algorithm since its origins, as the complexity of the network increases, more resources are needed, and it is more difficult to mine bitcoins. So much so, that it has gone from private users and mid-range computers to bitcoin farms and super-powerful computers.
Since the code is open and public, hundreds of cryptocurrencies have been born from Bitcoin that rely on its Blockchain technology to later modify the software and develop their virtual currencies. As of today, we have more than 5000 available cryptocurrencies.