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Foundational

How Bitcoin Works

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Welcome to our journey into the heart of Bitcoin. Today, we're diving into the mechanics of how Bitcoin operates, from the blockchain technology that forms its backbone to the mining and consensus mechanisms that keep it secure. We'll explore the network's structure, how transactions are verified, and why these processes are revolutionary. This lesson is designed to demystify the inner workings of Bitcoin, making its complex system understandable and accessible.
Video length: 4 mins 48 secs

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Transcript

Hello, dear learner! Have you ever wondered what makes Bitcoin tick? Today, we're going to peel back the layers and see what's inside. Bitcoin isn't just a currency; it's a fascinating blend of technology, economics, and social dynamics. Understanding how it works is crucial to appreciating its value and potential. So, let's embark on this exciting exploration together.

Basics of Blockchain Technology
Imagine a digital ledger that's accessible to EVERYONE but owned by NO ONE. This is the BLOCKCHAIN, a chain of blocks that records all Bitcoin transactions. Each block is like a page in a ledger, filled with transaction details. The very first block in the chain is called the genesis block, and every subsequent block contains a reference to the previous one. This creates a chain of blocks, hence the name "blockchain." The blockchain is immutable, meaning that once a block is added, it cannot be altered. This design makes it practically impossible to undo a transaction once it was included in a block. Compared with traditional databases that are centralized and controlled by a single entity, the blockchain is decentralized and maintained by a large network of nodes. This makes the blockchain an extraordinarily secure, reliable and trustworthy method of storing essential financial data. However, it's NOT an efficient way to store large amounts of data.

Mining and Consensus Mechanism
Mining is the heartbeat of the Bitcoin network. Mining is akin to participating in a massive, global lottery where miners compete to be the first to guess a specific number. It's a process of trial and error, not complex mathematical problem-solving. Every 10 minutes, on average, a new block is created by a miner who successfully guesses the number. This process ensures the security and continuity of the blockchain. Importantly, the Bitcoin network adjusts the difficulty of these guesses—increasing with more miners and decreasing otherwise—to maintain a consistent pace of block creation. This difficulty adjustment mechanism ensures that the issuance of new bitcoins follows the predetermined schedule, irrespective of the number of miners. Anyone can be a miner, but mining is resource-intensive, requiring specialized hardware and significant electricity.

Nodes and Network Structure
Nodes are the guardians of the blockchain and the enforcers of Bitcoin's rules. Anyone can run a node by downloading the Bitcoin software, which typically contains a full copy of the blockchain. Nodes verify transactions and blocks, ensuring the integrity of the network. They reject any blocks or transactions that violate the protocol. This decentralized system means that changes to Bitcoin's code require widespread consensus among node operators. This decentralized architecture makes Bitcoin resilient to attacks and censorship, a stark contrast to centralized financial systems. The authority of nodes ensures that Bitcoin remains open, transparent, and immutable.

Transaction Verification Process
When you send bitcoins, the transaction gets broadcasted to the network. Nodes pick up this transaction, verify its validity, and spread it until it reaches miners. Once included in a block and appended to the blockchain, the transaction is considered confirmed. This process ensures that bitcoins cannot be spent twice and that all transactions are transparent and immutable. After a transaction is included in a block, each subsequent block added to the chain acts as an additional confirmation, further securing the transaction. The more blocks stacked atop the one containing your transaction, the more immutable it becomes.

Today, we've journeyed through the core components that make Bitcoin a revolutionary financial system. From the immutable ledger of the blockchain to the decentralized consensus achieved through mining, each aspect of Bitcoin's operation ensures security, transparency, and freedom from central control. As we continue to explore Bitcoin, remember that its strength lies not just in the technology itself, but in the way it empowers individuals globally.

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How Bitcoin Works

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