Bitcoin is more than a cryptocurrency. It’s a risky concept that has so far, paid off. Many people thought that this couldn’t work, but it has. The concept? A peer to peer payment system.
Peer to peer payment gets completely rid of the middleman, in most cases the bank or government, allowing people to directly send payment from one person to another. This allows for lower transaction fees, and faster payment transactions, due to the fact that there is no middleman or third person to go through.
This doesn’t mean that payments aren’t any less secure. In fact, some might argue even more secure due to its decentralized nature. Since the whole system is based on cryptographic proofs and not trust, it is “computationally impractical to reverse transactions” allowing for safer transaction for buyers and sellers alike.
Without going too much into detail, the way transactions occur is as follows. Since an electronic coin is a chain of digital signatures, the way coins are moved from one person to another is by appending a hash of previous transactions and the owner’s public key, which then the person receiving the coin verifies.
This is where problems arise however, as the payee has no way of checking if the coin has been double spent, or used previously. Most common solution would be to use a third party to check payments, but would defeat the purpose of decentralized p2p payment.
Instead Bitcoin, and other cryptocurrencies, use a decentralized time-stamp server concept. A timestamp server’s purpose is to take hashes from block of times to be timestamped, then which is publicly broadcasted. This is proof that the transaction did occur at the time it says, otherwise the timestamp server could not have obtained the hash. Each timestamp includes a hash of the previous one, backing the timestamps the longer it goes.
In order for the timestamp to remain distributed, it is broadcasted to a proof-of-work system in which anyone can participate if they have SHA256 capable hardware. The proof-of-work involves “scanning for a value that when hashed, hash begins with a number of zero bits.”
For Bitcoins network, “we implement the proof-of-work by incrementing a nonce in the block until a value is found that gives the block’s hash the required zero bits”. After the hardware has completed this proof, the block cannot be changed without redoing the work. As other blocks are chained together, work required to change one block would require the work of all the blocks included in that chain.
This is the basis of how cryptocurrency works. Someone sends a transaction, hardware confirms. The system really is an intricate system, and with knowledge you will learn how to appreciate it, as it requires no central figure, and is run by the people, which was Satoshi’s main intention when making cryptocurrency. Now we have over 250 cryptocurrencies to choose from, but we have Bitcoin and Satoshi’s system to thank for all of it.