6.1 How Does Bitcoin Work? A simplified overview
Bitcoin is often compared to digital cash. It allows you to send money (bitcoins) to anyone in the world instantly and securely without needing a middleman like a bank. Here's how it functions:
Decentralized Network: Bitcoin operates on a decentralized network of computers (nodes). These computers are all connected to each other and communicate to maintain the Bitcoin system.
Blockchain: At the heart of Bitcoin is a technology called blockchain. Think of it as a public ledger that records every transaction made with Bitcoin. This ledger is shared across all computers in the Bitcoin network.
Transactions: When you send bitcoins to someone else, the transaction is broadcast to the entire network. Miners, special nodes in the network, verify these transactions to ensure they're valid and add them to the blockchain.
Miners and Mining: Miners play a crucial role in the Bitcoin network. They use powerful computers to solve complex mathematical problems that validate transactions. In return for their efforts, miners are rewarded with newly created bitcoins and transaction fees.
Cryptographic Security: Bitcoin uses advanced cryptography to secure transactions and control the creation of new units. Each user has a pair of cryptographic keys: a public key (similar to an email address) and a private key (like a password). The private key is used to sign transactions, proving they come from the rightful owner.
Limited Supply: Unlike traditional currencies, there's a limited supply of bitcoins. Only 21 million bitcoins will ever exist. This scarcity is built into the Bitcoin protocol and ensures its value is not diluted over time.
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