Guides

Bitcoin

Sections

Introduction
Brief History
How it Works

How it Works

Bitcoin is completely distributed, which means that it doesn’t require a third party (such as a bank) to operate. A record, or ledger, of all transactions and account holdings is kept on thousands of individually owned computers around the world, which constantly check each other for fraudulent activity. This effectively decentralizes (in this case, we mean that power is removed from a single authority–technologically, the network is distributed, not decentralized) the network and ensures fair play.

The Bitcoin network is distributed.

Transactions are verified by people who donate their computer power towards keeping the whole system running. These people, called miners, are rewarded with newly created bitcoins for their work. The rate at which bitcoins are created slows down over time, such that there will only ever be 21 million of them.

What does Bitcoin allow us to do?

By utilizing a distributed protocol, we can send money cheaply and quickly anywhere in the world. As long as you have Wi-Fi, you can use Bitcoin no matter which country you’re in, what time it is, and regardless of how much you want to send.

Since Bitcoin’s inception, many other cryptocurrencies (‘cryptos’) have been created, each operating in a slightly different way. You may have heard of some popular ones: Ethereum, Ripple, Litecoin, etc.

The internet allows us to send information quickly, easily, and ubiquitously; cryptocurrencies allow us to send value quickly, easily, and ubiquitously.

How? Cryptos use a new technology called blockchain. Let’s take a look at how that actually works.