In our last discussion, we talked about basics of Bitcoinand discovered where we can buy them. Many readers were fascinated by the idea of Bitcoin mining and wanted to know more about it. Today, we will see its working. Bitcoin network is decentralized, meaning that there is no regulatory authority monitoring and processing your transactions.
One may wonder that there needs to be an organization which has a large database, to stores all our transaction history, and some powerful computers to process all the transactions going on.
This is exactly what Bitcoin shuns ——one large company regulating our money. Now, if there is no organization then who runs the system? The answer is Bitcoin miners. Who are the Bitcoin miners?
Bitcoin miners are ordinary citizens like us who regulate transactions on their computers through mining software; anyone can be a Bitcoin miner. The main reason that makes this system decentralized is that all miners are crowdsourced. All the power of regulating this system and making necessary decisions, whenever the need arises, come down to the hands of Bitcoin miners. Bitcoin mining is very much like the mining of gold: The rate at which new Bitcoins are introduced in market resembles that of gold, thus the word Bitcoin mining.
How does mining work? Bitcoin miners run a mining software on their computer, GPU or some other specialized hardware. On this whole setup, transactions happening on Bitcoin network are checked for their authenticity, and once verified, their record is updated on a public ledger.
The Bitcoin network creates a block, which contains transactions that happened in particular period, and sends it to miners. Miners verify it and create a hash of this block. When a block of transactions is created, miner makes it go through a mathematical function, which creates a random sequence of letters and numbers called hash.
This hash is made from data of transactions in the block and also the hash of the previous block. No one can tell about transactions by just looking at the hash.
Now, after verification, each block contains a hash and also a reference to blocks created before it. What if someone tries to meddle with the Bitcoin network by creating a fake block? As I said earlier, each new block is linked to the block created before it. So that fake block will stand out and other miners will easily identify it.
This is how Bitcoin network is secured from tampering. Once a block is verified, its record is updated on a public ledger and can be seen at sites like blockchain.