HOW DOES IT WORK?

When users send or receive bitcoin, their transaction is sent to the network of nodes. Each node receives the file and verifies that it’s legitimate. Once verified, it’s added to the Mempool and then passed onto the other nodes in the network. The Mempool stores valid, yet unconfirmed transactions.

Miners then group those transactions together and create a block of transactions, typically selecting those transactions with the highest fees first. Each block is encoded with a block header, transaction counter and transactions, which contains supporting information about the transactions and the hashes.

Miners then compete with each other to be the first to append the next block to the blockchain. The miner or mining pool with the most computational power has the best chance of doing so, however that isn’t deterministic. Transactions are confirmed and new blocks are added thanks to a proof-of-work (PoW) consensus algorithm that requires miners to find a valid hash below a target set by the network. The successful miner is rewarded with new bitcoin as a reward for securing the network; this is known as the block reward and it’s how new coins are minted.

Each block is linked to the previous block thus creating a chain of blocks that cryptographically establishes a public record of valid transactions that can’t be altered (immutable) without altering its block and the ones after it..

It’s worth noting that the protocol defines the rules and PoW determines how these rules will be followed and is regarded as one of the most secure solutions to the Byzantine Generals Problem, a more academic term for solving the double-spending problem without relying on any third party.

Users don’t need to know how Bitcoin works precisely, like they probably don’t know how the internet works despite benefiting from its use. However, it is helpful to grasp the basics as this will help them understand why Bitcoin matters.