How does the Bitcoin system work?
Bitcoin works a bit like email. No one single entity owns or controls email, and there are lots of programs to send and receive email that you can use.
- Bitcoins are bits of computer code that match a formula.
- Bitcoins are created by using computers to carry out huge volumes of computations to try different combinations and eventually find one that matches the Bitcoin formula.
- The process of creating new bitcoins is called mining.
The protocol for computing the code was developed from the original paper on peer-to-peer payment network. The Bitcoin network relies on a database, which is a kind of public ledger that records all the transactions in the system and who owns the individual bitcoins. It is known as a “block chain” because blocks or bundles of transactions are added to the database every 10 minutes. The Bitcoin block chain is a complete historical record of all Bitcoin exchanges.
Some Bitcoin e-wallet programs will download the list of blocks when you first start up as a reference point to add your transactions to this record. Each time a transaction is made, it’s broadcast to the Bitcoin network and each payment is digitally signed to verify it and prevent double-dipping of bitcoins.
Bitcoin uses cryptography to protect transactions so they can only be locked and unlocked by right sellers and buyers to prevent theft.
Bitcoin wallets: cloud, computer and mobile
There are three types of bitcoin wallet that can be used to store and transact Bitcoins:
- Cloud-based wallets that use a web browser
- Software wallets that run on your computer, and
- Mobile wallets that use an app on a tablet or smartphone.
A Bitcoin program sends and receives transaction to other users in the network. Each user has an address – an alpha-numeric string of between 27 and 34 characters, a bit like an email address that identifies you and the destination for your bitcoins. You can get an address within your Bitcoin program by clicking “New Address”.
The Bitcoin Foundation has links to download a wallet and is a good place to start if you're keen to learn more about different Bitcoin wallets.