How Does Bitcoin Work?

The word bitcoin creates a buzz in the market. It is comparatively a new technology. Bitcoin is a decentralized digital currency. It can be transferred from one peer to another without any third party in between like a central bank or administrator. In other words, bitcoin is a cryptocurrency that has no physical existence and exists only in the digital world. In this article, we will give answers to, how does bitcoin work? and what are the benefits of using bitcoin? In the digital world.

What is bitcoin? And How Does It Work?

Bitcoin is a decentralized digital currency that can be transferred from peer to peer without any central bank or third party involved. Usually, when we send someone money, it is processed through the bank. The bank charges a fee for the transfer. However, this is not the case with bitcoin. Bitcoin has no authority to proceed with transactions. It means you can directly transfer currency from one place to another.

When it comes to the working of bitcoin, it revolves around three principles. These are as follows:

  • Cryptography

Bitcoin is called a cryptocurrency because it uses cryptography to convert the data of transactions. Bitcoin runs on the blockchain protocol. A blockchain consists of a chain of discrete blocks of information. The type of contract between two parties is established on a blockchain. This removes the need for a third party from any contract. And allows direct transactions.

  • Supply And Demand

It is a well-known concept in business that when a thing is limited, its price goes high. On the other hand, when something is abundantly available, it is of less value. The same concept of supply and demand applies to bitcoin working. The supply of bitcoin is limited and, it is produced at a fixed rate, which will eventually decrease with time. There is a bitcoin limit, once there are 21 million coins, no more bitcoins can be created.

  • Decentralized Networks

Bitcoin uses a decentralized network. In a decentralized network, the data is not in one place instead it is everywhere. The Bitcoin database is shared because of the decentralized network it uses. The shared database is known as a distributed ledger and it gains access using the blockchain. If you want to send bitcoin to someone, you need to digitally sign a message that says, “I am sending 100 bitcoins to Alex”. The message would be stored on a database and then would be broadcasted to all the computers that share the network.

Benefits Of Using Bitcoin

Cryptocurrency comes with a lot of benefits to its users. The following are few benefits of using bitcoin:

  • There is no verification needed to transfer money, unlike banks.
  • International payments are made easy. With bitcoins, it takes minutes to an hour for transfer.
  • It is cheap because no third party is involved. No central bank or administrator is required for the transfer.
  • The system is decentralized, therefore, it cannot be shut at a single point.
  • Blockchain is impossible to hack, unlike banks.