Even Satoshi Nakamoto, the elusive creator of bitcoin, admitted that his invention is hard to explain–because there is nothing you can compare it to. Here is how a bitcoin transaction is work.
- Payers initiate a bitcoin payment using "wallet" software.
- This and other pending transactions are broadcast on the global bitcoin network.
- Once every ten minutes or so, "miners", specialised computers (or groups of computers) on this network, collect a few hundred transactions and combine them in a "block".
- In order to mine a block and validate the transaction, miners compete to solve a difficult mathematical equation (a "hash function"). The miner that solves the equation first further processes the block and broadcasts this "proof-of-work" to the bitcoin network.
- The other miners check the proof-of-work and the validity of the transactions. If they approve, the winning miner gets a reward of 25 newly minted bitcoin (about $6,900 at current prices), which is the incentive for miners to provide computing power. Adjusting the difficulty of the puzzle ensures that the supply of new bitcoins remains steady.
- The mined block is added to the "blockchain", a big, unbreakable ledger that lives on the bitcoin network and serves as a record of all transactions.
- The payee can use his wallet software to see whether the bitcoin have arrived.
How Bitcoin Transactions Work
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