How Bitcoin Works
Bitcoin transactions appear are quick and easy. However, behind the scenes, the technology that makes the Bitcoin network run seamlessly is a massive ledger known as the blockchain.
It’s gigantic because it contains a record of all bitcoin transactions that have ever taken place since Bitcoin was first released in 2009.
Over time as transactions accrue, the size of the blockchain continues to grow. So here is a graphical representation on how blockchain functions/.
Closer Look at a Bitcoin Transaction
When you send a payment, your wallet or app sends out a request to the entire Bitcoin network which is made up of computers or nodes. These nodes then validate your transaction using known algorithms.
Once your transaction is verified and confirmed, it is then combined with other transactions to create a new block of data on the blockchain.
This new block is then added to the end of the blockchain. When this happens, the transaction becomes complete and is now permanent.
This entire process takes about 5-25 minutes from start to finish (this is why Bitcoin transactions don’t happen instantly). Once the transaction is finalized, no one can undo or delete the transaction. The person you’ve sent the bitcoin payment to (the receiver) will now see your payment in his wallet.
So who verifies and confirms transactions if there’s no central body governing the network?
The answer is the miners. The miners are literally the lifeblood of the entire bitcoin network. Some have even compared miners to being hamsters in the wheel that keep the entire Bitcoin network going! And this is true.
Miners play such a huge role in the success of Bitcoin that they truly deserve getting rewarded in precious bitcoin. Without them, no new blocks would be created and added to the blockchain.
If nothing is added to the blockchain, no transactions are ever finalized. This means no bitcoin payments are sent and received by anyone on the network and no new bitcoin will be created.
Because miners are indispensable to the Bitcoin network, they are compensated for their hard work in terms of bitcoin (it would not make any sense to reward them in traditional paper currency). They are almost like employees of the network.
Since there are only a limited number of bitcoins (21 million), the number of bitcoins that miners are paid with will continue to dwindle until all bitcoins are exhausted by around 2140.