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How does Bitcoin work?

Bitcoin is the world’s first completely open payment network which anyone with an internet connection can participate in. Unlike credit card networks like Mastercard and payment processors like Square, Bitcoin is not owned by an individual or company. Bitcoin was designed to be used on the internet, and doesn’t depend on banks or private companies to process transactions.

One of the most important elements of Bitcoin is the blockchain, which tracks who owns what, similar to how a bank tracks assets. What sets the Bitcoin blockchain apart from a bank's ledger is that it is decentralized, meaning anyone can view it and no single entity controls it.

Please find below a high level summary of how Bitcoin works:

  • Specialized computers perform the equations required to verify and record a new transaction (known as “mining”). In the early days, a typical desktop PC was powerful enough to participate, which allowed pretty much anyone who was curious to try mining his own Bitcoin. Today, the computers required are large, expensive, specialized, and often owned by businesses or large numbers of individuals pooling their resources.
  • The miners’ collective computing power is used to ensure the accuracy and security of the ever-growing ledger. Bitcoin is inextricably tied to the blockchain; each new Bitcoin is recorded on it, as is each subsequent transaction with all existing coins.
  • How does the Bitcoin network incentivise miners to execute the essential work of maintaining the blockchain — verifying transactions? The Bitcoin network holds a continuous lottery in which all the miners around the world race to be the first to solve a math problem. Every 10 min or so, a winner is found, and the winner updates the Bitcoin ledger with new valid transactions. The prize changes over time, but as of late 2021, each winner of this raffle was awarded 6.25 Bitcoin.
  • At the beginning, a Bitcoin was technically worthless. As of November 2021, it was trading at around $60,000. As Bitcoin’s value has risen, its easy divisibility has become a key attribute. One Bitcoin is currently divisible to eight decimal places (100 millionths of one Bitcoin); the Bitcoin community refers to the smallest unit as a ‘Satoshi.’
  • Nakamoto set the network up so that the number of Bitcoin will never exceed 21 million, ensuring scarcity. There are currently around 3 million Bitcoin still available to be mined, which will happen more and more slowly. The last blocks will theoretically be mined in the year 2140.

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