This article covers the following:
- What is Bitcoin?
- How does a Bitcoin Transaction work?
- How long does a Bitcoin transaction take?
- How does Bitcoin get its Value?
- What’s in store for Bitcoin?
What is Bitcoin?
Bitcoin is a digital and global money system currency.
Created by the anonymous Satoshi Nakamoto, the whitepaper for bitcoin was released in 2009 which introduced a peer-to-peer (P2P) electronic cash system built on a decentralised network. This means that the system removes the need for any central authority to oversee these cash exchanges.
Bitcoin's key difference from traditional currencies (also known as fiat money) is the technology which the currency runs on. This technology is known as Blockchain, which allows Bitcoin to have a ledger (think a public record book) governed by P2P networks as opposed to the conventional banking system of centralized checks.
Aside from the transaction itself, the transaction verification process is also decentralized.
Consider this example:
When you send money to a person (Alice), everyone would know about it and be able to see the amount of Bitcoin that is being sent to Bob – except that the names of the involved parties are encrypted.
For the transaction to be processed, it has to be accepted and acknowledged by every server that runs on the network called 'nodes' - before any changes in the value of Bitcoin is reflected in your account.
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How does a Bitcoin Transaction work?
Transaction Flow
Bitcoin transactions are recorded, before they are made official on the Blockchain.
Phase 1: Mempool
When a transaction takes place on the Bitcoin network, the transfer of ownership of the coins are validated according to a list of encoded rules.
These transactions are validated by nodes running on the Bitcoin network, which updates its own record of transactions. These transaction records are then sent to a pool of data, known as the Mempool (Short for memory pool) waiting to be confirmed by the Bitcoin network.
To find out more about who Miners are and what Miners do, kindly refer to this page.
Phase 2: Mining
The mempool awaits further processing by computers, which compiles these valid transactions into a new block. This is what you probably know as 'Mining'.
The blocks arranged by the computers are like a list of transactional records, and are compiled by mining softwares that solves mathematical puzzles to link up with the chain of existing blocks on the Bitcoin’s blockchain.
Once recorded on the blockchain, the transaction becomes official and the recipient address should have the sent amount reflected in their wallet.
DID YOU KNOW: The mining of a single bitcoin block consumes enough electricity to power more than 28 US homes for a full day. The total annual power used for mining bitcoin matches or even surpasses the electricity consumption of countries like Denmark and Switzerland.
How long does a Bitcoin transaction take?
Bitcoin blocks were made to compile up to 6 blocks per hour, meaning new blocks are being created every 10 minutes.
Network faults and transaction congestion has caused the Bitcoin’s network to slow down in the past, and you might find delays in transactional timings during periods with high transaction volume.
How does Bitcoin get its value?
In its infancy in 2009, bitcoin was valued at nothing. However, its price reached a peak of nearly $20,000 per bitcoin in late 2017. You might be wondering then, how does bitcoin obtain its value?
DID YOU KNOW: In 2010, a man named Laszlo Hanyecz purchased two Papa John’s pizzas for 10,000 bitcoin. Today, this transaction would be worth around $100 million.
As there is no Central Bank involved in handling Bitcoin, its value is decided largely by demand and supply forces in the market – which is also regulated by a difficulty algorithm. If the supply for Bitcoin outweighs its demand, mining Bitcoin will get a lot more difficult.
What’s in store for Bitcoin?
The maximum supply of bitcoin is at a maximum of 21 million. The final bitcoin is expected to be mined around the year 2140, unless there is a change in the bitcoin network protocol.
The fixed supply of the currency means that the supply will be kept in check while miners remain incentivized to validate the bitcoin transactions. because they will collect transaction fees from users.
As of this writing, the number of bitcoin in circulation stands at 18.5 million.
You can view Bitcoin's Whitepaper to learn more about the digital currency
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