While many people know of Bitcoin, few actually understand how it works. When you are finished with this guide you'll have a clear understanding of how the blockchain works, and why it is important.
Why?
Having a basic understanding of what Bitcoin is could save you from scammers preying off of your ignorance and give you the confidence to get your feet wet in this ever cryptocurrency filled world.
How does Bitcoin work?
Bitcoin is just a giant shared record of transactions. Creating a shared database is easy enough. We do it all the time whenever we share a google sheet or access a shared excel file.
The hard part is creating a shared database where there is no one person or entity managing, controlling, or hosting it. A system with no moderation or rules will turn to pure anarchy (look no further than un-moderated internet forums).
To solve this problem requires an entirely new piece of technology. A way for rules to be enforced, database to be managed, and interactions to occur without a central entity behind it.
This is where the blockchain comes into play. For all the hype and buzz around the blockchain, it's simply an ecosystem. Much like natural ecosystems such as the rain-forest, social ecosystems such as politics, or the forces of the free market, this ecosystem has its own organisms and rules.
Three main components of the Bitcoin blockchain ecosystem
- Wallets: Just like the wallet in your pocket, a Bitcoin wallet enables you to send and receive Bitcoins. It does this through using the same cryptography that secures your browser, protects your credit card information, and your computer.
- Nodes: Nodes are the next link in the chain. Nodes are the rule enforcers of the blockchain. They take the transactions generated by the wallets and verify that no one is spending more Bitcoin than they have access to. If everything checks out, the nodes broadcast these transactions to the whole network. To understand who has what, the nodes keep a fully updated record (or "ledger") of every transaction.
- Miners: Miners take the transactions that the nodes broadcast and bundle them into blocks. Each miner then works to solve a complex mathematical problem called a hash. The only way to solve this problem is by trying to randomly guess the answer (hackers do this very process when they want to crack passwords). Whichever miner correctly guesses the right solution first, broadcasts his block and solution to the nodes. The nodes quickly verify that the miner's solution is correct and adds the transactions to their own ledger and credits the miners wallet with Bitcoins as a reward.
How bitcoin get’s stronger each time it’s attacked:
This ecosystem not only survives market swings and attacks, but gets stronger from it. When China banned Bitcoin and Bitcoin mining (the country with the most mining power at the time), the strength of the network fell for exactly 2 weeks. When it came back it was more powerful while consuming less harmful sources of electricity. If any governments or groups of governments decide to ban or outlaw it, the technology simply moves to a more friendly environment. As such no government can stop it, they can only make it stronger.
How does it do this? It's because the Bitcoin network itself is composed of thousands of individuals all working in their own self-interest. When China banned Bitcoin, it all of sudden decreased the competition for miners giving the functional miners more profits. This enabled them to expand their operations and easily make up for the dip in mining from China.
Why no one can hack your wallet (if properly secured)
Say someone wanted to "hack" your wallet and drain it of its funds, how could they do this? After-all if it's digital it can be hacked. In order to drain one wallet they would have to "hack" the entire blockchain. As each node verifies for itself every transaction.
Next Steps
Now that you have a basic understanding of how Bitcoin and the Blockchain works, here are some other resources that will help expand your knowledge and give you the tools to maximize this monetary revolution.
