Bitcoin works as a person-to-person (P2P) payment network , with which we can transfer electronic money. Its protocol works over the Internet and allows us to transfer bitcoins anywhere in the world, quickly, cheaply and without intermediaries.
To understand how it works, think of it as if it were your email.
We all have an email account that helps us send data to other people, such as text or images. Well, in this case, the software developed by the one known as Satoshi Nakamoto, allows us to create a Bitcoin account or wallet, which will help us to save, send and receive bitcoins.
What is a bitcoin?
It is a unit of virtual currency encrypted by cryptography or cryptocurrency, which helps us to exchange value within the Bitcoin network . These are the characteristics of this coin:
- The cryptocurrency bitcoin fulfills the three functions of traditional money : it is a unit of account, a store of value and a medium of exchange.
- This is virtual money , which we can send to anyone with a “Bitcoin address” (similar to a bank account number). You can see it abbreviated with the acronyms: BTC or XBT.
- A bitcoin or a fraction of this currency is something unique. It cannot be duplicated as other types of digital files (photos, videos, etc.).
- One bitcoin is divisible and the smallest unit is known as a satoshi (0.00000001), so 1 BTC = 100,000,000 satoshis.
- The Bitcoin software was programmed to create a maximum of 21 million coins , thus eliminating the inflation problem, so common in fiat money (dollar, euro, yen, etc.).
- Trust, scarcity, utility and level of demand are some of the factors that determine its value.
- We can store our bitcoins in a wallet with access to our private keys or use an exchange.
- Only the owner of the bitcoins has the private keys that allow him to move or spend his money.
- As it is a decentralized system, nobody has power over your bitcoins. They cannot freeze your funds or seize them.
- It solves the problem of double spending, so in practice it is impossible for anyone to spend the same money in two different places.
- Bitcoin is transparent, anyone can follow a transaction and see the balances of all existing wallets. But they can’t know who they belong to unless the owner makes it public.
How do bitcoins work?
Bitcoins are the virtual currency that we use in the Bitcoin payment system, these cryptocurrencies travel through the Bitcoin network and are governed by their own protocol, just like sending emails over the internet.
Suppose you want to send 1 bitcoin to your friend Juan. You both already have access to a wallet and therefore have Bitcoin addresses, which allow you to send and receive bitcoins.
You will only have to ask Juan for a public address, and send him the bitcoin that you have agreed to. Once sent, Juan will receive it in a few minutes and the transaction will have been completed successfully.
How does bitcoin work internally?
Internally, the wallet links the public key of the recipient (Juan) to the amount transferred, and signs it with your private key. This information is transmitted to the nodes for their approval, and once a consensus is reached, Juan becomes the accredited owner of that bitcoin and you will see it subtracted from your wallet balance. Preventing you from spending that same coin again.
This chain of transactions that has already been validated by the nodes of the network, will become part of a new block of transactions and in a few minutes will be part of a new link in the Bitcoin ledger (blockchain), which no one else you can modify or delete.