Wie funktioniert Bitcoin?

As we described in part one of our Bitcoin Basics series, Bitcoin is a radically new currency – called a cryptocurrency or digital currency – that is designed to be used as a global payment system. 

Bitcoin and Blockchain

Bitocin relies on a fundamentally new technology, cryptography, the use of high-performance PCs and the Internet to offer payment transactions. 

Since there is no single administrator responsible for maintaining or securing Bitcoin, all transactions made through Bitcoin are recorded in a publicly accessible ledger – this ledger is called the blockchain. 

Where, for example, one’s own bank keeps a copy of the ledger as proof of all transactions in an account, blockchain uses a type of ledger that – instead of being kept in a bank – is instead shared between Bitcoin “miners” and “nodes” around the world. 

What is blockchain technology?

The blockchain gets its name from its underlying data structure, which consists of 1-megabyte files called blocks, which are essentially ledgers themselves. Blocks are joined together as a “chain” through a complicated mathematical proof.

The blockchain is a publicly accessible ledger on which the entire Bitcoin network depends. All network nodes (computers running Bitcoin software) can theoretically access the blockchain and verify authenticated transactions. The parties involved remain, to some extent, anonymous because the blockchain does not represent the names of the parties, but instead creates an alphanumeric number for identification. 

Where in normal life one relies on the trustworthiness of a bank to guarantee the authenticity of a ledger, blockchain relies instead on cryptography (the science of writing and decrypting code) for proof.

Bitcoin Wallets

In a Bitcoin transaction, the parties involved use what is called a “Bitcoin wallet” to exchange denominations of Bitcoins (BTC). Bitcoin wallets provide the user with a public key (the address from which a person sends or receives Bitcoin) and a private key. 

The term “wallet” is a bit misleading; a more appropriate term would probably be “keychain”, since users can copy both of their own keys and not just have access to a single one. 

A private Bitcoin key

A Bitcoin private key is an incredibly important “signature” for Bitcoin users that is used to confirm pending transactions through a mathematical proof provided by the owner of the respective wallet.  

When a user wishes to make a transaction in bitcoins, this intention is represented in the blockchain by submitting a transaction signed with the user’s private key. The Bitcoin network then validates these transactions by confirming that the recipient and sender are correct, that the private keys are correct, and that there are sufficient funds available to complete the transaction. The transaction is usually completed on the network within 10 minutes. 

Bitcoin Mining

The process of authenticating pending transactions and collecting them into blocks to incorporate them into the blockchain is called mining. “Miners” are computer users who use incredibly powerful hardware to solve complex mathematical problems to cryptographically sign a block of transactions and append it to all other previous transactions in the Bitcoin network. 

Miners serve the Bitcoin community by making the network more secure. The process of solving the cryptographic proof of a block is extremely resource intensive. By winning the race to the 1-megabyte transaction block, miners receive a reward in Bitcoins. 

A malicious transaction requires so much computation (and therefore so much electricity) that in almost all cases it is more profitable to use the same computer network to make the network more secure instead and then collect the block reward. This prevents people with bad intentions from attacking the network and protects the blockchain from recording malicious or fraudulent transactions. 

Mining gets its name from the metaphor that it is as difficult for miners to receive Bitcoins as a reward as it would be to extract rare minerals such as gold and diamonds from the ground. 

What do I need to know about using Bitcoins?

Although Bitcoin is a fascinating new form of technology and likely to be both an exciting store of value and a medium of exchange, the Bitcoin network is fundamentally different from the traditional banking system and there are some important differences to note. 

While Bitcoin is unhackable in the sense that the Bitcoin network relies on mathematical proofs as its foundation and one would therefore need enormous resources to hack even one transaction, Bitcoin wallets are just as vulnerable as conventional wallets as they are only as secure as the user’s behavior allows. 

Since Bitcoins can be easily transferred all over the world, Bitcoin wallets are a popular target for computer hackers looking for a quick way to steal digital currencies. You should be very careful when choosing a wallet provider and always secure your wallet. 

Bitcoin Storage

Another popular means of Bitcoin storage is through services or exchanges that usually involve holding or transferring cryptocurrencies . Since these establishments usually hold large amounts of Bitcoins and other digital currencies, they are very attractive targets for internet hackers and great care must be taken when using them. 

Bitcoin is also easy to steal because Bitcoin transactions cannot be refunded without the help of the party who mistakenly received the respective amounts. 

Even though the Bitcoin network can detect typos and doesn’t allow users to send money to an invalid address, confirmed transactions must be considered final (thanks to cryptography), so the parties involved must be able to trust each other to exchange Bitcoins.

Bitcoin is transparent

Finally, Bitcoin is not a completely anonymous system. Whereas with a private ledger you rely on your bank to guarantee the anonymity of your account, in the Bitcoin network all computers have the ability to access the blockchain and check every wallet balance. All transactions are visible on the network in the future. Even though the names of the participating parties in the network are not revealed during a Bitcoin exchange, a close analysis of the network allows third parties to track how Bitcoins flow through the network. 

In part 3 of our Bitcoin Basics series, we will take a closer look at how Bitcoin mining works .