Bitcoin's
Base Layer
Let's look at how Bitcoin works from a technical point of view. You can skip this section entirely without any impact on the other sections. Or feel free to jump to the following video for a visual overview.
The Bitcoin blockchain is the accounting ledger of all Bitcoin transactions that have ever occurred.
Bitcoin funds are associated with an address (like an account number) on the blockchain. Having the private key (password) associated with that address entitles a user to spend their Bitcoin. The Bitcoin is spent by sending it to another address.
The Bitcoin network consists of tens of thousands of nodes distributed across most countries in the world. These nodes are pared-down computers that run the Bitcoin software. Nodes store a copy of the full Bitcoin blockchain. All nodes are users, and some are also miners. Simply being a user is not energy-intensive, while being a miner is extremely energy-intensive.
The creation (or "mining'') of new Bitcoin is intimately tied to the processes of maintaining the ledger of transactions and securing the network. Here is a rough overview:
All transactions are broadcast to all the nodes (user/miners) in the network
All transactions are verified by all the nodes
Each miner binds the verified transactions, in order, into a block
Each miner attaches that block to the blockchain
The miners race to perform a simple calculation involving cryptography (called proof-of-work)
The fastest miner broadcasts the new block to all the nodes
All the nodes verify the new block and add the new block to their copy of the blockchain
The fastest miner receives all the transaction fees, plus the block reward (in 2021, this is 6.25 Bitcoin)
This process repeats approximately every ten minutes, 24 hours a day, 7 days a week
If there is ever disagreement on what the correct block looks like, then the blockchain will temporarily have two versions (this is known as a fork). Every ten minutes thereafter, the fastest miner appends their block to the version of the blockchain they have verified to be correct. The correct version of the blockchain is the one with more blocks since it has more computational work invested in it. This is the sense in which proof-of-work secures the network.
The only way for a malicious actor to compromise the Bitcoin network is by getting and maintaining more than half of the total global computing power on the Bitcoin network. This is why the network spreads computing power across different countries and different miners. Information about computing power and its distribution is publicly available. Individuals who own large quantities of Bitcoin, who are heavily invested in Bitcoin's success, would mount additional computing power to secure the network if necessary.
Every 2016 blocks (approximately every two weeks) the difficulty of the proof-of-work calculation is adjusted depending on how much computing power is on the network. This ensures that blocks are always verified approximately every ten minutes, regardless of external factors.
In 2021, the block reward for the fastest miner is 6.25 Bitcoin. This amount of Bitcoin is created ("mined'') every ten minutes. The block reward is halved ot each halving, every four years. By the year 2140 all Bitcoin will have been mined and transaction fees will be sufficient to reward miners. Miners sell their earned Bitcoin on exchanges to cover their operational costs--this is how Bitcoin gets to the broader market.
The next section on Payment Networks demonstrates how Bitcoin can be used for small day-to-day payments.