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Bitcoin Series: How does it work?

In contrast to payment networks like Paypal and credit card networks like Visa, bitcoin is not owned by either a person or a business. Anyone with an internet connection can use Bitcoin, the first fully open payment network in the world. Bitcoin was created specifically for use online and doesn't rely on banks or other private entities to handle transactions.

The blockchain, one of the most crucial components of Bitcoin, keeps track of who owns what, just like a bank does with its assets. The Bitcoin blockchain is decentralized, meaning that anybody can examine it and no single institution controls it, which distinguishes it from a bank's ledger.

The mathematics necessary to validate and record a new transaction are carried out by specialized computers called "mining rigs." Early on, virtually anyone who was inquisitive could try their hand at mining because a regular desktop PC was powerful enough to participate. These days, the necessary computers are enormous, highly specialized, and frequently owned by businesses or huge numbers of people who pool their resources. To mine one bitcoin in October 2019, 12 trillion times more computer power was needed than when Nakamoto mined the initial blocks in January 2009.

The correctness of the ever-expanding ledger is guaranteed by the combined computer power of the miners. The blockchain and bitcoin are closely linked; subsequent transactions involving all current coins as well as each new bitcoin are both recorded on the blockchain.

How does the network encourage miners to take part in the ongoing, crucial task of confirming transactions, which is required to keep the blockchain operational? The Bitcoin network runs a constant lottery in which all of the global mining equipment competes to be the first to complete a mathematical puzzle. A winner is selected roughly every 10 minutes, and the winner adds fresh, legitimate transactions to the Bitcoin ledger. The prize varies with time, but as of the beginning of 2020, each raffle winner received 12.5 bitcoin.

A bitcoin was first theoretically worthless. It was trading at about $7,500 as of the end of 2019. As bitcoin's value increased, its simplicity (the ability to purchase a small portion of one bitcoin) emerged as a crucial feature. The smallest unit of a bitcoin, known as a "Satoshi," is now divisible to eight decimal places (100 millionths of a bitcoin).

Nakamoto designed the network so that there will only ever be 21 million bitcoin, maintaining scarcity. There are currently about 3 million bitcoins left to be mined, albeit this process will proceed more slowly. The last blocks should be mined in the year 2140. As part of this process there is something known as bitcoin halving. The rewards that miners receive are reduced by 50% as per a predetermined schedule (every 210,000 blocks mined) set forth in the whitepaper and is written into the immutable bitcoin network.

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