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Bitcoin Basic Concepts

  • Bitcoin is a shared ledger system and the current state of the ledger is determined by a decentralized and trustless consensus.
  • Bitcoin “mining” is the process of adding transactions to the ledger and is done by solving math problems that take substantial computational power.
  • The “consensus” is achieved by users and “miners” deciding to run compatible versions of the software and enforcing the consensus rules.
  • Users can run “nodes” using peer-2-peer connections that shares the ledger.
  • Nodes enforce the rules by only broadcasting transactions and sections of the ledger that fit within the consensus rules.
  • A user can verify the shared ledger took a huge amount of computational power to create as a way of trusting it is real.
  • Miners get transaction fees and “block rewards” as an incentive to use their computer power.
  • The “rewards” are a way to initially distribute the currency and are cut in half about every 4 years until 21 million is reached in 2140.
  • Bitcoin addresses are secure because the numbers are so large that all the computers in the world cannot come close to cracking it.
  • A Bitcoin can be broken down to 8 decimal digits so each one has 100 million pieces.
  • A Bitcoin transaction can be used to indirectly store information in the permanent shared ledger without trusting a third party.