An Idiots Guide to the Digital Currency ‘Bitcoin’

January 3, 2014     / / / / / / / / / / / /

An Idiots Guide to the Digital Currency 'Bitcoin'

Bitcoin is a digital and global money system or currency which is causing quite a buzz around the world. Want to know what it is all about? We know you are not an idiot as you are on connector360, but here is an idiots guide for your less clever friends 8-)

Bitcoin is a new form of money similar to the US Dollar, Euro etc but it is not formed by one single entity or government.  Instead of being controlled by a single organisation, Bitcoin is a decentralised peer-to-peer currency, meaning that it lives on the computer of each person that uses it.  It’s decentralised, so nobody can tamper with the market by releasing more Bitcoin into circulation and there is no bank getting rich off each transaction you make with Bitcoin. Essentially it cuts out the middle man (banks) and allows the customers avail of the cheapest way to move money around, Using the Bitcoin network is free, except for a voluntary fee you can use to speed up transaction processing.

Unlike most currencies, Bitcoins are created over time by the users of the Bitcoin network. It allows its customers to work for them to retain Bitcoins. This is called Bitcoin Mining.

Bitcoins allow for people to send money to other people anywhere in the world in very little time and with little, or no fees. Another way of retaining Bitcoins is by purchasing them.

Benefits of Bitcoin is its secure, strong cryptography which verifies transactions with the same state of the art encryption that is used in military and government applications.

How Bitcoin Mining Works

As mentioned earlier, Bitcoin miners use software such as Bitcoind and Bitcoin-QT which allows them to connect to the Bitcoin network. The miners in the network collect the unacknowledged transaction and collect them in a data file called block. Once done, the miner then adds a nonce value to the previous block and then computes the SHA-256 hash of the block and the added nonce value. The miner then repeats this process until he or she has created several generations or strings of hash.

Since even the most powerful computers cannot reverse  the hash, finding errors require lengthy and repetitive trials. This is where the concept of proof-of-work comes in. Once the miner finds a solution, it immediately announces to the rest of the network.  The other miners or peers who get the solved block can validate the solution by computing the hash tag and verifies whether it really begins with the given number of zero bits. As soon as the peers have verified the solution, they accept the hash and add it to the chain before they proceed with the next problem.

3 steps to knowing what makes Bitcoin work

1. Balances block chain

The block chain is a shared public ledger on which the entire Bitcoin network relies on. All confirmed transactions are included in the block chain. This way, Bitcoin wallets can calculate their spendable balance and new transactions can be verified to be spending Bitcoins that are actually owned by the spender.

2. Transactions- private keys

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 between users and usually begin to be confirmed by the network in the following 10 minutes though a process called mining.

3. Processing mining

Mining is a distributed consensus system that is used to confirm waiting transactions by including them in the block chain.

So now you should be up to speed on the world of Bitcoin!

Originally posted by Michael Brennan