While no knowledge of the underlying technology is necessary in order to use Bitcoin, we believe that understanding the basics leads to a more full experience. On the surface Bitcoin appears no different than any other payment system out there ex. Apple Pay, Google Pay, Samsung Pay, Pay Pal, Venmo, Ali Pay, Cash App, M-Pesa, Zelle, debit/credit card, wire transfer, etc. It is when you look behind the scenes that Bitcoin radically differentiates itself from the multitude of other methods for transferring value. In this section we will go over some of the basics of the technology behind the Bitcoin network.
Bitcoin or bitcoin
The Bitcoin Network is a protocol for a decentralized peer-to-peer network that creates consensus without needing a central authority to provide trust. The Bitcoin Network is composed of 4 key technologies: the blockchain, the proof of work, a peer to peer network, and the currency.
The currency (token) issued as a reward in the proof-of-work mining process. The bitcoin token is often abbreviated as BTC or btc. Both the Bitcoin Network and the bitcoin token are commonly referred to as Bitcoin, even by professionals. This is a major source of confusion for many new to the space.
The block chain is a shared public ledger on which the entire Bitcoin network relies. All confirmed transactions are included in the block chain. It allows Bitcoin wallets to calculate their spendable balance so that new transactions can be verified thereby ensuring they’re actually owned by the spender. The integrity and the chronological order of the block chain are enforced with cryptography.
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 to the network and usually begin to be confirmed within 10-20 minutes, through a process called proof of work mining.
Proof of Work
Proof of work also known as Mining is a distributed consensus system that is used to confirm pending 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 the subsequent blocks. Mining also creates the equivalent of a competitive lottery that prevents any individual from easily adding new blocks consecutively to the block chain. In this way, no group or individuals can control what is included in the block chain or replace parts of the block chain to roll back their own spends.