The Bitcoin Journey
  • Why learn about Bitcoin?
    • Introduction
    • Table of contents
    • Changing nature of money
    • Role of money in protecting human rights
  • Trust problems with our money
    • Introduction
    • Banks: insolvencies, confiscation, and censorship
      • Gunman takes hostages at Beirut bank
      • Nigerian aid group finds sovereign lifeline in Bitcoin
      • Nigeria's central bank freezes accounts of police brutality protesters
      • Chinese depositors left in dark as three local banks freeze deposits
      • Freezing of bank account to shut down pro-democracy outlet
      • Hong Kong bank account freezes rekindle asset safety fears
      • Belarus tells banks to seize money raised to help out protesters
      • Banks have started to freeze accounts linked to Ottawa protests
      • Whose bank accounts can be frozen through the Emergencies Act?
      • Kremlin critic Navalny's bank accounts frozen
      • Long lines at Myanmar banks after coup
      • The Cyprus banking crisis and its aftermath
      • Bailout blackmail claims Cyprus president
      • Afghan central bank says U.S. plan for frozen funds an 'injustice'
      • Afghanistan sanctions from a first-person view
    • Central banks: money supply and currency debasement
      • Inflation by Wikipedia
      • Monetary inflation across the world
      • Inflation affecting Argentinian citizens
      • Inflation affecting Turkish citizens
      • Egypt devaluates currency by 48%
      • Bitcoin has saved my family
      • Problems with the CFA
      • Role of money in protecting human rights
      • Hanke's inflation rates
      • Milton Friedman on inflation
      • Inflating away sovereign debt in developed countries
      • How inflation is disproportionally affecting the poor
      • Financialization of an economy
    • A note on CBDCs
      • Impact of CBDCs different across the world
  • So, why do we need banks?
    • Introduction
    • Hard money and gold
      • Money and hardness
      • Gold as the hardest money (p1)
      • Gold as the hardest money (pt2)
      • Hard money survives
    • Problems with gold and resulting centralization
      • On centralization of gold
      • Layered money speeding up commerce
      • Global gold standard
      • The order of technology leading to centralization
      • Nations inflating their debt away
    • Abandoning hard money
      • Abandoning the gold standard
      • Abandoning the gold standard (pt2)
      • Breaking the gold standard completely in 1971 pt1
      • Breaking the gold standard completely in 1971 pt2
      • WTF happened in 1971?!
    • Digital money and eCommerce
    • Summary by Lyn Alden
  • What if?
    • Hayek on money the government can't stop
    • The first email
    • The first post
    • The Bitcoin whitepaper
  • How does Bitcoin work?
    • Introduction
    • Computers, code, and a ledger
      • Role of nodes
      • Full nodes
    • Mining and proof-of-work
      • Reaching decentralized consensus
      • Reaching decentralized consensus (pt2)
      • Dealing with conflicts
    • Where do bitcoins come from?
      • Bitcoin's money supply
      • Difficulty adjustment
    • The superpowers of a Bitcoin user
      • Public addresses and private keys
      • Signing transactions
      • Wallets and mnemonic phases
  • What is Bitcoin?
    • Outro
  • Getting started with Bitcoin
    • Using Bitcoin
      • Obtaining bitcoin
      • Storing bitcoin
      • Paying with bitcoin
    • Working for Bitcoin
    • Learning more about Bitcoin
  • Contribute
  • Support me
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  1. How does Bitcoin work?

Computers, code, and a ledger

PreviousIntroductionNextRole of nodes

Last updated 2 years ago

The Bitcoin system is a large network of over 100.000s of computers that are distributed across the world and that are owned by many different individuals and corporations. In fact, you yourself can choose to become a part of this network, helping maintain and operate Bitcoin.

All these computers run a software application called Bitcoin Core that allows them to be a part of the network and communicate with the other computers.

These computers also store some information in their own database, similar to how your computer stores information on its hard-drive. In fact, each computer stores and maintains the exact same data, so that all computers are in agreement on what is true.

The data that is stored by such a computer consists of information on transactions of the bitcoin currency from one address to another. Essentially, they store a long, chronological list of all transactions of bitcoin that have ever taken place in the entire history of the network. Because it is a database of transactions, it is often referred to as a ledger.

These computers that run this software and store this database of transactions are called the nodes of the Bitcoin network.

Note When we say "computers", we are generally not referring to the types of computers that we personally use every day such as laptops or desktop computers or mobile phones. Rather, these are simpler, specialized computers with fewer bells and whistles often dedicated to a particular task. As such, most of these nodes just focus on this one task of being connected to the network and maintaining the database of bitcoin transactions.

Because each node tracks all bitcoin transactions that have ever taken place in its own ledger, they all know exactly how much each address owns, by knowing exactly how much bitcoin was sent to an address, and how much bitcoin was sent from an address. The entire network reaches agreement on what bitcoin transactions to add to their ledger by speaking according to a specified protocol, or set of rules (more on this in a bit).

What we end up with is a large network of globally distributed computers called nodes that collectively keep track of who owns how much bitcoin. This means there is no single point of failure or control. That is a remarkable trait: because the system underpinning the bitcoin money is distributed all over the world, it is virtually impossible to be taken down if some adversary would desire to do so.

Furthermore, there is no locus of power that is the arbiter of truth; there is no central party deciding what data is true - and thus who owns what. This resembles ownership of physical gold: what somebody owns is not determined by some entity, it is simply the result of what transactions have actually happened.

There are of course some important things to address:

  • With all these nodes spread across the world keeping their own ledger, how do they agree on what is the true history of bitcoin transactions? And how do they decide what new transactions are added to the ledger?

  • How do we ensure that only the owner of an address can send bitcoin from it, if other people are the ones adding transactions to the ledger? And how do we ensure an owner cannot send more than the amount of bitcoin they own?

  • Where do or did bitcoins come from in the first place? Who has issued these bitcoins in circulation and what makes it different from a central bank issuing currency?

  • How does somebody receive bitcoin and how do they go about sending bitcoin?

We will answer these questions in the next segments. For now, what is important to understand is that Bitcoin exists only because of a large network of globally distributed computers that all run the same piece of software and that all maintain the exact same database, or ledger, of what bitcoin transactions have taken place in the past.

There are 100.000s of nodes distributed all over the world.