Two words ‘Bit’ and ‘Coin ‘make Bitcoin. If all the information inside computers is cut into smaller pieces then you will find 1s and 0s. These are known as “Bits.” You are already familiar about Coins.
Three types of people exists in this world:
- The Producer
- The Consumer and,
- The Middleman
You must pay a big 40-50 % fee if you want to sell a book on Amazon. In every industry this is the similar case. A big part of the producer’s money is taken by the middleman.
Bitcoins were invented to remove The Banks which are one type of middleman. If you have to transfer $500 to your friend in the UK from your country, the money must go through a bank. A processing fee is taken by them. Your friend’s bank charges a fee too once the money reaches the bank in the UK. Now you can buy bitcoin and sell it with ease.
How Bitcoin Works?
In understanding the principles of Bitcoin, the creator of Bitcoin made three main concepts:
Let’s understand each concept, one by one:
When you type ‘www.google.com’ and go to your internet browser then your computer starts a conversation with Google’s computers. Then your browser shows buttons, images etc while both computers start talking to each other.
You would not be able to see these buttons and images if Google’s servers were down for some reason. The basic reason for this is because the data is stored in one centralized network – in one place.
It is important to find what is a decentralized network in order to understand how Bitcoin works. The data is everywhere in a decentralized network. If Google used a decentralized network, you will still be able to see the data as it is everywhere. It is not just in one place, it is everywhere. This indicates that Google will never go offline.
Cryptography was used a lot in World War II. Radio messages were converted into code and nobody was able to read them. You would need to convert back to the original message in order to read it. You needed a key to do that. Mathematical formulas also made it possible.
In the same way Bitcoin uses cryptography. To convert transaction data, Bitcoin uses cryptography instead of converting radio messages. This is the reason Bitcoin is called “Cryptocurrency.” How actually Bitcoin works, it takes you one step closer to understanding.
Using the Blockchain, Bitcoin does that. The Blockchain technology was invented by the Bitcoin creator.
Supply and Demand
Only one cake was left when John visited the bakery last week. Four other people wanted to have it too. The cake costs $2 normally. He had to pay $10 for it because 4 other people wanted it.
This is the basic principle of Supply and Demand: It has more value when something is limited. The price of it will go up when more people will want it.
The same concept is used by Bitcoin. There is a limited supply of Bitcoin. At a fixed rate Bitcoin is produced. It halves every four years which will decrease over time. No more coins can be created once there are 21 million Bitcoins. Approximately 21 million coins is its limit. There are 18.5 million Bitcoins created currently. Before it reaches 21 million, it is still a long way to go.
How Do Transactions Happen?
We need to put them in a database (like an Excel sheet), to record transactions.
In a centralized network, it is normally stored in one place. The Bitcoin database is shared because Bitcoin uses a decentralized network. It is accessed using the blockchain and this shared database is known as “A Distributed Ledger.”
If you plan to send bitcoin to someone, you have to digitally sign a message that says, “I am sending 50 Bitcoins to Peter.” This message will only then be broadcasted to all the computers in the respective network. On the database/ledger,they store your message.
Can Someone Fake My Identity?
When you make your Bitcoin wallet, you receive a public key and a private key (to store your Bitcoin). Public keys and private keys are a set of long numbers and letters, they are like your username and password. For truly understanding how Bitcoin works both are very important. Nobody needs to know your email address or name because it is just a set of numbers and digits. That way Bitcoin users stay anonymous.