While everyone’s heard of Bitcoin, not everyone knows how it works. So, here’s a technical yet accessible explanation to ensure you are up to speed.
Australian crypto exchange Mine Digital has outlined the origins of the cryptocurrency and why it’s so secure, so if you’ve always dreamed of investing in a decentralised alternative to traditional currency and markets, you’ll now know what you are in for!
How it began
Bitcoin emerged post-global financial crisis from an anonymous source known only as “Satoshi Nakamoto”. There’s fierce debate as to whether or not “Satoshi” is a single entity or a collective.
In Bitcoin, there’s several concepts working together in an open system to create a viable digital currency, according to Mine Digital.
How it works
Bitcoin derives its value from security and decentralisation.
Mine Digital explained that “the actual mechanism of how it does that is revolutionary in perceiving the essence of money accurately”.
The simplest explanation the crypto exchange could provide is that difficult cryptographic puzzles are solved by a network of computers (that don’t necessarily “trust” each other) to maintain the system’s integrity.
This work – commonly referred to as “proof of work” or POW – creates value that is locked into the transactions and the tokens, which is then “baked” into each token and traded among users.
So, what does blockchain have to do with it?
Blockchain (or DLT, distributed ledger technology) has existed for far longer than Bitcoin, but the technology has helped make Bitcoin possible.
Bitcoin blockchain is a ledger that contains the full transactional history of each individual bitcoin.
The cryptocurrency is therefore able to be traded by announcing transactions to the ledger, with each transaction then checked by a decentralised network of computers who “agree” on the event and confirm it to the blockchain.
Multiple confirmations allow the Bitcoin to gain consensus on the transaction, with the most recent transactions grouped together in a “block” that’s then held in a “chain” of transactions.
According to Mine Digital, it’s the permanence of transactions on the ledger, and the length of the blockchain, that are the basis of the integrity of the system.
“The Bitcoin system validates a transaction with the greatest amount of supporting evidence that it is the ‘right’ blockchain. This is the transaction with the longest ‘blockchain’ history – a history going back to that Bitcoin’s origin or its ‘Genesis Block’.”
How is it different to other currencies?
Older currencies relied on a centralised authority to validate transactions, whereas Bitcoin uses a decentralised network of computer power to perform the transaction.
