To understand how Bitcoin works, it helps to stop thinking of it as a physical coin and start thinking of it as a massive, global, shared accounting book.
In the traditional world, if you want to send money to a friend, you rely on a bank to update its private ledger.
Bitcoin replaces that central bank with a decentralized network of thousands of computers, all maintaining the same record simultaneously.
Here is the step-by-step technical steps of how the system operates.
Bitcoin doesn’t use names or account numbers.
Instead, it uses Public-Key Cryptography.
When you set up a Bitcoin wallet, you are generating two mathematically linked strings of characters:
- Public Key (Your Address): Similar to an email address. You give this to others so they can send you Bitcoin.
- Private Key (Your Signature): This is your secret password. It is used to “sign” transactions, proving to the network that you are the rightful owner of the funds.
Transaction
When you send 1 BTC to a friend, you aren’t sending a “file.”
You are broadcasting a message to the Bitcoin network.
The message effectively says: “I, the owner of [Your Address], am moving 1 BTC to [Friend’s Address].”
This message is signed with your Private Key.
Every computer (node) in the network can use your Public Key to verify that the signature is authentic without ever seeing your private key.
Once verified, your transaction enters the Mempool (Memory Pool)—a digital “waiting room” where it stays until a miner picks it up.
Blockchain will Link to the Ledger
The blockchain is master record of every Bitcoin transaction ever made.
It is organized into “blocks,” with a new block added roughly every 10 minutes.
Each block contains three vital pieces of information:
- A list of recent transactions from the Mempool.
- A “Nonce”: A random number used in the mining process.
- The “Hash” of the previous block: This is a unique digital fingerprint.
- By including the previous block’s fingerprint in the new block, the blocks become mathematically “chained” together.
Why is this secure? If a hacker tries to change a single transaction in an old block, that block’s fingerprint (hash) will change. Because the next block contains the old fingerprint, that link will break, alerting the entire network that the data has been tampered with.
Proof of Work (PoW)
Miners are powerful computers that compete to solve a complex mathematical puzzle.
They take all pending transactions and previous block’s hash, then add a “Nonce” and run it through a formula called SHA-256.
The goal is to find a result (a hash) that starts with a specific number of zeros.
Because the result is completely random, the only way to find it is through trillions of “guesses” per second.
- The first miner to find the correct hash broadcasts it to the network.
- Other nodes can instantly verify the answer.
- If it’s correct, miner is rewarded with newly created Bitcoin (currently 3.125 BTC as of the 2024 halving) plus the transaction fees from that block.
| Phase | Action |
| Initiation | You sign a transaction using your Private Key. |
| Validation | The network nodes check that you have the funds and the signature is valid. |
| Grouping | Miners collect your transaction into a candidate Block. |
| Hashing | Miners compete to find a valid Proof of Work for that block. |
| Finalization | The block is added to the Blockchain, and the ledger updates globally. |
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