Bitcoin, a digital cryptocurrency, is the most well-known and accepted of the cryptocurrencies now available on the market. Users can exchange bitcoins without going through a central bank because the currency is administered by computer code on decentralised systems. Bitcoin uses a blockchain, an encrypted public ledger of all transactions made, with all transactions recorded on a decentralised peer-to-peer network.
The blockchain keeps a record of transactions and the owners and recipients of coins. When a transaction is made, it is added to the end of blockchain using a series of complex mathematical computations. In order to transfer coins to someone else, the owner of the coins creates a request and broadcasts it over the Bitcoin peer-to-peer network. After that, the Bitcoin miners take over.
They scoop up the requests and do a few checks to ensure that the digital signature is correct and that there are sufficient Bitcoins to make the transaction. They then bundle the new records into a block and add it to the end of the blockchain.
Just a bit of code
Since a digital coin is essentially just a bit of code, or a file, which could be copied numerous times and reused and sent to multiple people, the issue of double spending has, in the past, stopped digital currencies from working. However, the Bitcoin blockchain addresses this issue by verifying each recorded transaction using a Proof-of-Work (PoW) mechanism.
Before the transaction (or block) can be entered into the blockchain, the miner must provide an ‘answer’ or ‘proof’ to a specific challenge. This proof is difficult to produce but is very easily validated.
Stored in a digital wallet
Bitcoins can be purchased from online exchanges using fiat currencies, which are legal tender whose value is backed by the government that issues them – like Australian dollars. Bitcoins can be stored in and sent from an encrypted digital wallet, which runs as a program on the purchaser’s computer, or they can be stored on an online digital wallet.
These digital wallets work with two keys – a public and private key – which look like a random string of numbers and letters. The public key acts much like a bank account number and it is given to other people so that they know what address to send the Bitcoins to. The private key is kept secret and acts like the password that unlocks the wallet, allowing owners to send and receive Bitcoins. If anyone other than the owner obtains access to the private key, their funds could be stolen.
