Learn how bitcoin works with blockchain

Bitcoin is actually a type of cryptocurrency. It comprises digital asset to record and validate transactions. It is fast, secure, and borderless. In fact, the transactions in bitcoin is an integral part of  blockchain.

The transactions happen using bitcoin is with the help of hash functions.

Cryptocurrency is the collection of concepts and technologies. However, users can utilize it same as traditional currencies. The main difference is that conventional currency has physical existence whereas it is virtual.

Bitcoin considers money as “value” to make trust relationships.The corelation is among other verified crypto users. Cryptocurrency coins don’t have coins. It contains address have hash values (SHA 256) to build chain. Crypto users moves from  address to address for making transactions with virtual currency.

Unlike traditional currency user must be verified throughout the network. He can transfer or use cryptocurrency by signing every transaction. The transfer of cryptocurrency is through his private keys. The bitcoin holder is only one who have private key.

However, this does not mean that we cannot convert bitcoin into cash. We can exchange bitcoin from btc to usd or usd to btc. Bitcoin price may vary as per trend in cryptocurrency market. Anyone can find btc rate in crpto market.

in brief, Bitcoin is the combination of 04 process:

  • Decentralized or borderless. Contacts without any involvement of centralized authority. It is through peer-to-peer networks.
  • Chain of transactions or blocks (Public transaction ledger). It moves from address to address.
  • Consensus rules. It is the general agreement between blockchain members to approve transactions.
  • Proof of work. A mining process that depends on the members of the blockchain to reach a consensus by creating hash.

Proof of Work(PoW)

The process of proof of work is to eliminate the double-spending problem. It is the creation of a distributed trustless consensus system. Detail description on PoW mechanisim described in Satoshi Nakamoto white paper.

Everytime, a new block will form whenever a consensus finalized. Consensus is basically a general agreement among all trustless and distributed nodes. 

However, there is no need for PoW for private blockchain. Every member in private chain knows each other. More specifically,  we can say everyone can trust each other and not distributed.

How Bitcoin Point of Sale ( PoS ) system works:

Following diagram is the simple ecommerce illustration of  paying for an extra virgin oil in a restaurant.

bitcoin for beginners example

Now, what is “TRANSACTION”?

If anyone wants to earn bitcoin or buy bitcoin, transaction is the way. It is the procedure of asking members about transfer of bitcoins.  Transaction hash value moves towards input to output from one member to another. 

An Input is where the coin value is coming from.That input is basically a previous transaction output. The output from one transaction can be used as input for the new transaction. The procedure of moving inputs and outputs from address to address makes a chain of blocks. Subsequently, every transaction linked in a chain.

This can be illustrated with the following simple diagram:

transaction with bitcoin
Private keys are interlinked with a signature algorithm (a mathematical procedure of creating identities and validating signatures)


Illustration

Above diagram define the transaction mechanism. For instance, Mr. X purchased 0.8btc which means his transaction value has 0.8btc as input. Now X wants to transfer 0.5btc to another member Y. The procedure to do that X will send all 0.8btc to Y. Neverthless,  X wants only 0.5btc to transfer,  0.3btc will return back to X address by Y.

Every created input or output are interlinked. In every transaction, complete amount transfers as input and the remaining bitcoin returned back as output.

This is simply the exchange of the change in current traditional system. For example, if a ball costs 5$ and we have 20$, we will pay complete 20$ to shop keeper (as input). Nonetheless, the shopkeeper will return us back 15$ (as output).

In fact, transactions are simply like an accounting ledger system of credits and debits. Ideally inputs and outputs in Blockchain case. Most importantly,  there is major difference between “Outputs (debits)” and output. It’s implied transaction fee wheras “Output(debits)” don’t.

Merkle Tree

Merkle root is the method to verify complete blockchain ledger. If Mr. X block has 04 transactions, Merkle root creates on all 04 transactions. It generats hashes for all 04 transactions separately. Transaction 01 hash and transaction 02 hash will again concatenate to create another hash. Similarly, the concatenated hash will create with transactions 03 and 04. Similarly, both concatenated hashes will concatenate again and another hash will  create.

in brief, the above merkle root generation standard is with even number transactions. In case of odd numbers, then one remaining hash duplicates to complete the concatenation process accordingly .

Mining

Every transaction floods on the entire blockchain network. it moves through node-to-node for being a part of the ledger, but not Instantaneous. It is to be verified by all nodes and includes transactions in a block through mining (computation). Mining nodes validate all transactions through consensus to avoid any malware or phishing. After validation, it creates a new bitcoin in each created block. Every block creates 12.5 bitcoins, just like the printing of new currency notes as in the central banking system.

The theory behind the creation of 12.5 bitcoins with the creation of every block, is based on the decentralization concept of blockchain.

A banker – free bitcoin mining:

Mining can be performed as solo mining or pool mining. Solo mining is the process of completing the task without any other miner. Pool mining is the cooperation of miners to share block and obviously the rewards. For pool mining, we need:

  1. First, a computer with a good graphics card.
  2. Seond, a wallet for public SHA address.
  3. Third, Pool address with which we have to attach and start mining.
  4. Also, a pool software.

Pool miners can use the following for the proof of work(PoW) :

  1. Bitcoin Wallet – an example of the wallet is electrum to create a bitcoin account.
  2. Mining pool – an example of a mining pool is slush pool.
  3. Graphics card – can be used a minimum of 2GB. An example of a graphic card is AMD 480X GPU.
  4. Pool software- an example of pool software is guiminner.

One GPU (graphical processing unit) processing power is equal to 30CPU (central processing unit). Similarly, with the latest FPGA (field-programmable gate array) is 300 times faster than GPU. Recently, we use ASIC systems for mining with mining pools.

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