With the unprecedented success of the Bitcoin phenomena, more and more companies and individuals are getting involved in this evolving technology of cryptocurrency. Bitcoins have a certain protocol they follow and to understand this protocol, it is first important to comprehend certain concepts that are connected to the world of cryptocurrency.

What is Bitcoin

Bitcoin is a decentralized digital currency that is not controlled by governments, banks or other institutions. It uses a peer-to-peer paying system to operate connecting buyers and sellers through encrypted keys that allows them more privacy. It was invented by an unknown person or group of people under the name of Satoshi Nakamoto and was released as open-source software in 2009.

Peer-to-Peer Network (P2P)

One of the things that make Bitcoins special is the use of peer-to-peer as a payment method. Peer-to-peer in general is a distributed application that partitions tasks or workloads between peers and all peers are equal participants in the application. Now in the Bitcoin world, the use of P2P is applied to match people who want to sell Bitcoin with sellers. Many prefer using P2P exchange because funds move directly between parties and it allows for greater privacy.

What are Nodes

Nodes are the computers that run the Bitcoin software. There are tens of thousands of them around the world. They work to validate any transaction that happens using Bitcoin.

Blockchain Technology

Blockchain is the revolutionary decentralized technology that was invented by Satoshi Nakamoto in 2008 to solve the problem of double-spending without relying on a central server. It records all previous transactions on blocks that are resistant to modifications or alterations. The blocks are connected chronologically in a chain, creating a shared database called Blockchain. It is an open digital ledger that is hosted by millions of computers around the world, which basically makes everyone collectively and simultaneously the bank.

Hash

The Blockchain technology in Bitcoin uses SHA-256 (Secure Hash Algorithm) to solve difficult math problems to add the newest block to the chain. Doing that is very similar to the lottery because no one knows the solution to the math problem so they guess it by hashing the block’s header to try to solve the solution by guessing the target value.

Mining

Mining Bitcoins is solving difficult mathematical problems and keeping records. Mining is managing the Bitcoin network. When someone sends a Bitcoin to someone else, the transaction is broadcasted to the nodes in the network. Then, miners start to hash the block by guessing its target value. When the value is discovered, the block is hashed and the transaction is validated.

So how does this all add up to the Bitcoin Protocol?

When two parties decide to make a transaction using Bitcoin, this is what happens:

  • To start, both parties should have Bitcoin wallets
  • A transaction is generated when the two parties agree to buy/sell something using Bitcoin
  • When the transaction is made, it is broadcasted to all the nodes in the network
  • Nodes then collect the information in blocks to validate the transaction
  • A mathematical operation of hashing a block starts by solving a mathematical problem (mining)
  • Miners try to guess the target value
  • Once the mathematical problem is solved, the block is broadcasted to the system (block is mined)
  • The block is accepted and validated by other nodes
  • The block is added to the chain in its chronological order
  • Nodes move to new blocks and a hash of the previous block is created
  • The blocks are updated in all the nodes
  • The solved block means that the transaction is official
  • Miners earn Bitcoin rewards, as well as fees for mining the block successfully and validating the transaction

This world of Bitcoin has opened many doors to explore from bitcoin accounting to Smart Contacts. Bitcoin has changed the virtual world and it continues to do so. The future is filled with endless opportunities that are yet to be discovered.