How Bitcoin Works

Inseparable pieces

System as a whole

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At a basic level, we can understand how Bitcoin works by breaking it down into 3 separate gears that spin together to make the system work.

bitcoin the token: The native token of the protocol used to carry and transfer some sort of value. It is also used as part of an incentive system for miners to secure the blockchain.

the public blockchain: The most widely used and secured blockchain equating to the censorship resistant, immutable global public ledger that is used to record something of value.

the network: This is the global network of all the participants in the Bitcoin ecosystem – in particular the miners and full bitcoin core nodes.

Removing just one of these will render the system non-functional by compromising the immutability of the blockchain. This is an important note for the proponents of blockchain adoption because they need to understand the grand scheme of things – what does the blockchain bring for your company and what does it do better than what already exist?.

Other Resources: Bitcoin (KhanAcademy), How does Bitcoin work? (bitcoin.org), How Bitcoin Works Under the Hood (CuriousInventor), Network Statistics (blockchain.info)

The public blockchain

The blockchain is a public ledger that contains a record of every single transaction encapsulated in something called “blocks”. These blocks are all linked together by a proof-of-work hash from their previous block to form a chain where each new block added to the blockchain exponentially increases the security of all previous blocks.

The blockchain enables transfer of tamper-proof ownership for digital data without an intermediary. Beyond digital cash, the blockchain enables time-stamping actions, copyrights, validation schemes, digitizing physical assets, tracking, etc.

Other Resources: Live blockexplorer (blockchain.info)

bitcoin, not Bitcoin

bitcoin is the money or token part of the system. It is the part that holds the value (Ex: $648 USD / btc) and used to transfer the ownership of value through the Bitcoin network. Additionally, it is what incentivizes the Bitcoin miners around the world to continue validating transactions. bitcoins.

The network

Bitcoin is a global network with no boundaries and requires no permissions. The ecosystem includes many different actors but we’re going to focus on miners and Bitcoin core full nodes.

Miners: The primary goals of miners are to secure the blockchain and to taper out the 21 million bitcoin. Miners compete either individually or collectively (in a pool) to solve a block every ~10 minutes.

Bitcoin core full nodes: These are the users that run at least once instance of a software called “Bitcoin Core” 24/7 with port 8333 unblocked. These users validate the blockchain’s integrity by cross-referencing each others blockchain at a global level.

Secondly, the software is used to vote democratically on new software updates/changes. If a developer/group of developers release a new version of Bitcoin Core and you download/install it – this is you saying that you agree with the new changes. If the majority of other Bitcoin Core users agree the new change will be activated on the network.

Both miners and full nodes are spread globally and adds to the decentralization of the network.

The participants


bitcoin-vpnUsers are the ones that interact with Bitcoin in some form – even if they do not know they are using Bitcoin.

Developers improve the functionality via Bitcoin’s code. They develop new use-cases, improve security and build applications on-top of Bitcoin.

Investors are the ones who see the potential in Bitcoin and are in a position to invest funds into Bitcoin and Bitcoin infrastructure.

Innovators incorporate Bitcoin into their lives before the average joe. They are the ones who led the way – by investing, using or implementing the technology into their businesses before mainstream adoption.

The full nodes are people around the world running a fully synced blockchain on Bitcoin Core software. These full nodes hold the entire blockchain, keeps it up to date and helps validate transactions.

The miners are users around the world that run specialized hardware to verify transactions from being double-spent and submit verified transaction blocks into the blockchain by providing a proof-of-work in the block.

Exchanges are what set the value for Bitcoin based on supply and demand – just like gold, silver, stocks, etc. You can trade, buy and sell bitcoins on these platforms.

Merchants are the companies or organizations that accept Bitcoin for their goods and services. Also included are those that accept Bitcoin for donations – such as the Red Cross.

Funds, ETFs and other credited financial accolades are usually professionals with a strong background in the traditional financial world that build financial vehicles to eventually bring stability to the Bitcoin price. In addition, these vehicles are a more traditional and familiar service to those not ready to hold bitcoins themselves, likely because of security or a lack of competency.

Hackers are the users that try to steal your Bitcoin. Some ways they can do this are by compromising your password, compromising a central website with poor security features, compromising a company from the inside (an insider), etc. There are also White-hat hackers that try to find security flaws to have them fixed to improve security.

Regulators try to understand and make the rules that people, machines and companies interacting with Bitcoin must follow. Although Bitcoin itself cannot be regulated because it is just a protocol but innovation built on-top of Bitcoin can be regulated (Unless that innovation is decentralized in itself). Regulators can play a large role on both the pace of innovation created from this industry and the adoption.

Scammers in Bitcoin come in the form of users or businesses that steal your bitcoin because you either invested in their business or gave them control of your bitcoin to use their service. Whether or not they initially had the intention to do this is irrelevant. They may have had the intention to steal your funds from the start or the the company may have started to go belly-up and they decide to steal customer funds for profit.


“The power of friction-free transactions over the Internet will unleash the typical forces of consolidation and globalization, and we will end up with six digital currencies: US Dollar, euro, Yen, Pound, Renminbi and Bitcoin.”

Charlie Songhurst | Microsoft’s head of corporate strategy

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*Oct 27, 2016: Bitcoin Core v0.13.1 released. 95% of miner hashing power must upgrade for SegWit activation. | What's New? | Download Update | % blocks mined w/ Segwit | % Running v.0.13.1+
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