How does Bitcoin work?
This is a question that often causes confusion. Here's a quick explanation!
The basics for a new user
As a new user, you can get started
with Bitcoin without understanding the technical details. Once you have
installed a Bitcoin wallet on your computer or mobile phone, it will
generate your first Bitcoin address and you can create more whenever you
need one. You can disclose your addresses to your friends so that they
can pay you or vice versa. In fact, this is pretty similar to how email
works, except that Bitcoin addresses should only be used once.
Balances - block chain
The block chain is a shared public ledger on which the entire
Bitcoin network relies. All confirmed transactions are included in the
block chain. This way, Bitcoin wallets can calculate their spendable
balance and new transactions can be verified to be spending bitcoins
that are actually owned by the spender. The integrity and the
chronological order of the block chain are enforced with cryptography.
Transactions - private keys
A transaction is a transfer of value between Bitcoin wallets that gets included in the block chain. Bitcoin wallets keep a secret piece of data called a private key
or seed, which is used to sign transactions, providing a mathematical
proof that they have come from the owner of the wallet. The signature
also prevents the transaction from being altered by anybody once it has
been issued. All transactions are broadcast between users and usually
begin to be confirmed by the network in the following 10 minutes,
through a process called mining.
Processing - mining
Mining is a distributed consensus system that is used to confirm
waiting transactions by including them in the block chain. It enforces a
chronological order in the block chain, protects the neutrality of the
network, and allows different computers to agree on the state of the
system. To be confirmed, transactions must be packed in a block
that fits very strict cryptographic rules that will be verified by the
network. These rules prevent previous blocks from being modified because
doing so would invalidate all following blocks. Mining also creates the
equivalent of a competitive lottery that prevents any individual from
easily adding new blocks consecutively in the block chain. This way, no
individuals can control what is included in the block chain or replace
parts of the block chain to roll back their own spends.
Going down the rabbit hole
This is only a very short and concise summary of the system. If you want to get into the details, you can read the original paper that describes the system's design, read the developer documentation, and explore the Bitcoin wiki.
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