A very simple explanation of how Bitcoin works

Bitcoin – a popular cryptocurrency created in the late 2000s by developer/s Satoshi Nakamoto – can be complex in terms of operations. It can be said that Bitcoin is a digital currency that uses cryptography to record transactions. It can also be said that the underlying blockchain technology adds uniqueness to Bitcoin. It can also be said that Bitcoin is synonymous with the absence of any middlemen like banks, with full control of operations in the hands of the people. The current situation is such that even stakeholders in the cryptocurrency world lack consensus on Bitcoin.

Before assuming anything about Bitcoin, including that it is an emerging speculative investment asset, it is important to understand how Bitcoin works. Is Bitcoin a business where employees work in an arrangement that resembles the operations of a bank? Are bitcoin operations controlled from any seat? How are records of the movement of BTC tokens from one party to another kept? Here is a simple explanation.

How Bitcoin Works

First, Bitcoin is also a blockchain network in addition to being a cryptocurrency. Bitcoin’s mainnet is a distributed ledger, which means that record keeping is not centralized but distributed across a large number of participants. Nakamoto imagined Bitcoin as “electronic money” or virtual currency. Money only makes sense when records are properly kept and there is no double-spending. The holder should have the ability to use the money once, and the right to spend later should pass to the recipient.

Bitcoin works in such a way that all transactions are recorded in the ledger by peers spread across the globe. This process verifies the authenticity of transactions and avoids double-spending. Things like hashing and proof of work can be complicated, even for someone with a technical background. These simply contribute to the record keeping process, with rewards for archivists, also known as nodes. It’s simple – when two parties make a transaction, it triggers a record-updating exercise, which is undertaken by independent nodes who are rewarded for the work done.

Data provided by CoinMarketCap.com

Both cryptocurrency and blockchain

Many cryptocurrency enthusiasts mainly focus on Bitcoin as a cryptocurrency. However, there is a defined and distinctive blockchain mainnet. It is similar to Ethereum or Solana or Cardano blockchains. Notably, the Bitcoin blockchain can support a so-called secondary framework, also called Layer 2 in the blockchain world. Lightning Network is one such layer 2 protocol that sits on top of Bitcoin’s mainnet. When a token is mined on the mainnet, it becomes the cryptocurrency Bitcoin (BTC).

At the end of the line

Bitcoin can be simple to understand – given that it is a decentralized virtual currency – and also complex when you consider how the mainnet’s record keeping is handled. Intermediaries such as central banks and commercial banks play no part in it and authority is distributed among participants called nodes. Is Bitcoin a speculative investment asset? This is another debatable subject.

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