Baskadia

It’s important to understand there are three separate components to Bitcoin, all of which combine together to create a decentralized payment system:

The Bitcoin network

The native cryptocurrency of the Bitcoin network, called bitcoin (BTC)

The Bitcoin blockchain

Bitcoin runs on a peer-to-peer network where users — typically individuals or entities who want to exchange bitcoin with others on the network — do not require the help of intermediaries to execute and validate transactions. Users can choose to connect their computer directly to this network and download its public ledger in which all the historical bitcoin transactions are recorded.

This public ledger uses a technology known as “blockchain,” also referred to as “distributed ledger technology.” Blockchain technology is what allows cryptocurrency transactions to be verified, stored and ordered in an immutable, transparent way. Immutability and transparency are vitally important credentials for a payment system that relies on zero trust.

Whenever new transactions are confirmed and added to the ledger, the network updates every user’s copy of the ledger to reflect the latest changes. Think of it as an open Google document that updates automatically when anyone with access edits its content.

As its name implies, the Bitcoin blockchain is a digital string of chronologically ordered “blocks” — chunks of code that contain bitcoin transaction data. However, it is important to mention that validating transactions and bitcoin mining are separate processes. Mining can still occur whether transactions are added to the blockchain or not. Likewise, an explosion in Bitcoin transactions does not necessarily increase the rate at which miners find new blocks.Irrespective of the volume of transactions waiting to be confirmed, the Bitcoin is programmed to allow new blocks to be added to the blockchain approximately once every 10 minutes.

Due to the public nature of the blockchain, all network participants can track and assess bitcoin transactions in real-time. This infrastructure reduces the possibility of an online payment issue known as double spending. Double spending occurs when a user tries to spend the same cryptocurrency twice.

Bob, who has 1 bitcoin, might try to send it to both Rishi and Eliza at the same time and hope the system doesn’t spot it.

Double spending is prevented in the traditional banking system because reconciliation is performed by a central authority. It also isn’t a problem with physical cash because you can’t hand two people the same single dollar bill.

Bitcoin, however, has thousands of copies of the same ledger and so it requires the entire network of users to unanimously agree on the validity of each and every bitcoin transaction that takes place. This agreement between all parties is what’s known as “consensus.”

Just as banks constantly update the balances of their users, everyone that has a copy of the Bitcoin ledger is responsible for confirming and updating the balances of all bitcoin holders. So, the question is: How does the Bitcoin network ensure that consensus is achieved, even though there are countless copies of the public ledger stored all over the world? This is done through a process known as “proof-of-work.”