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How does bitcoin work?

If you are wondering how to use Bitcoin, studying its inner workings might help, too. You may have discovered that the questions about Bitcoin more often refer to what it is, rather than how does Bitcoin work. In fact, these two are inextricably linked, as the proper definition of Bitcoin is complete only after you learn what makes it tick.

Bitcoin works as a digital currency at its heart, powered by its code and the belief of its user community in its value. This is similar to fiat currencies, like the dollar or the euro, which are also not backed by physical things, as their value is derived from the relationship between supply and demand. The difference is that there is no single central place where Bitcoin comes from, whereas those currencies come from central banks. This property is called decentralization.

Bitcoin does not need a central agency to protect it, as it is already protected:

1) by being distributed
2) with cryptography.

Distributed means that every computer on the network has a copy of Bitcoin’s ledger called the blockchain. If one person wanted to change a part of it for any reason, everyone else would know where that change comes from, as the majority has the same copy. This makes sure that nobody manipulates the blockchain.

Its cryptographic protection also comes from properties of the blockchain. Every block is protected by a hash, a mathematical function, which makes it almost impossible to change the data in that block. Even if a malicious actor changed the data, we would be back to step one - everybody would know something was changed and nobody would be fooled. The majority would simply reject such a change.

What is the process of Bitcoin? In short, some of the computers (nodes) participating within that system validate transactions and compete with each other in a process called mining. Read more about how mining works in our guide.

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