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Friday 22 December 2017

How does bitcoin works?

Bitcoin:What is it?How does it work?How to use it?What is meant by a cryptocurrency?What is block chain?What is bitcoin mining?

How does bitcoin works
The Bitcoin is attracting global attention due to it's recent surge in value and growing acceptance as a form of payment with more and more merchants, retailers and individuals.To understand what is bit coin really is and how it works,a little technical knowledge is required.In this article we have tried to answer a few questions arise in your mind about bitcoin and it's working in simple words.

What is bitcoin?

Bitcoin is a digital cryptocurrency believed to be developed by a pseudonym entity Known as Satoshi Nakamoto.It is It is just one among thousands of cryptocurrencies. But it is widely accepted as the first successful and most popular cryptocurrency on web.

Bitcoin is a software developed based on the blockchain protocoal.It appeared on the internet in January 2009.

Blockchain:Block chain is distributed ledger that can record record financial transactions.It is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block typically contains a hash pointer(an address) as a link to a previous block,a timestamp and transaction data.

A blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks, which requires involvement of the network majority.So,a blockchain cannot be corrupted easily unless majority users want to bring down the network.

How blockchain works?

Here is the sequence of changes occurs in a blockchain network during a transaction is performed

The blockchain database isn’t stored in any single location, meaning the records it keeps are truly public and easily verifiable. No centralized version of this information exists for a hacker to corrupt. Hosted by millions of computers simultaneously, its data is accessible to anyone on the internet. Since each block is linked to previous block via hash pointer data corruption becomes nearly impossible.To corrupt a block it's subsequent block also need to be edited.

Blockchain originally devised for the digital currency, Bitcoin,but the tech community is now finding other potential uses for the technology.

Blockchain is a list of verified transactions. For example,A sent X bitcoin to B on December 14, 2017, between 12:10 p.m and 12:20 p.m.Bitcoin's blockchain is public. Anyone can download it.
Bitcoin transaction data available on website

We have seen there is no central authority to verify transactions and maintain ledger.Then who will do this verification and ledger maintains? Are they paid for this?

Usually in a currency system central bank is responsible for the issue of currency.Here who will issue bitcoin?


The process of issuing new bitcoin into the circulation is called mining. Miners will verify transaction and add validated transaction to the ledger. As a reward of their work new coins will be issued and given to them.

At first it seems to be simple.But real process involved in mining is difficult.Bitcoin's software makes the process artificially time consuming.If mining process is made simple bitcoin will be worthless. Think about Gold.Why it so much valuable?Because , it is rare and limited and process involved in mining and purification is expensive

It's not just one transaction individuals are trying to verify. All the transactions are gathered into blocks with a virtual lock on them.A miner has to verify a block of 1MB of data. By verifying transactions, miners are helping to prevent the "double-spending problem." If no one is verifying any transactions fraudsters may have the chance to spend the same coin again and again.

After transaction verification you will get some task to complete. One who complete this task is the winner of subsequent bitcoins issued.To earn something "proof of work" is required.

Miners receives the latest block of transaction data. They run the data through a cryptographic algorithm that generates a "hash," a string of numbers and letters that serves to verify the information's validity, but does not reveal the information itself.
Actually there is no advanced math or computation is involved in this 'math problem'.What miners doing is trying to be the first one to come up with a 64-digit hexadecimal number (a "hash") that is less than or equal to the target hash. It's basically guess work.

To generate maximum number of hashes you need high power computing devices.Powers of such computers are expressed in MegaHash per second(MH/s) or GigaHash per second(MH/s)
Answer to the said math problem is a 64-digit hexadecimal number. Then, you can image how difficult is to guess that number.

Miners don't generate 64 bit hex number, instead they generate 'nouces' ( "number only used once," )and the nonce is the key to generating these 64-bit hexadecimal numbers In Bitcoin mining, a nonce is 32 bits in size--much smaller than the hash, which is 256 bits(64*4). The first miner whose nonce generates a hash that is less than or equal to the target hash is awarded credit for completing that block, and is awarded the newly issued bitcoin.

Here you can see the details of the block number 350010 and it's corresponding hash,nounces,reward etc..
block hash and nounces in bitcoin
All target hashes begin with zeros--at least eight zeros, and up to 63 zeros.

There is no minimum target, but there is a maximum target set by the Bitcoin Protocol. No target can be greater than this number:

You may have doubt in mind that is it so much difficult to guess a hexa decimal number. You can check the current difficulty level of guessing a nounce that produce a hash less than or equal to a target hash from the block explorer site. When I am writing this it has reached {"difficulty":1873105475221.611}. That means chance of win for a nounce is 1/ 1873105475221.611.

Let us analyze this situation with some smaller number.

Suppose target hash is between 1 and 100.Three persons were asked to guess the target number.They need not guess exact number ,instead number less than or equal to the target. First person guesses 25, second person 27 and third person 67.But the target was 45. Then Who is the winner. First and second guessed a number less than 45 which satisfies the condition for a win. In bitcoin scenario , there cannot be two winner. So, person who have verified block with maximum number of transactions will the winner.

You may be thinking if you choose the smallest number ,you could be the winner all the time. This is not possible in bitcoin mining algorithm.'Nounce' once used cannot be reused.Nounces are the key to the hashes. Hash function used in bitcoin is SHA-256 Cryptographic Hash Algorithm.To understand bitcoin completely ,you must know SHA-256 algorithm We will be discussing deeply about SHA-256 algorithm and bitcoin in our coming article.

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