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What Is Bitcoin and How Does It Work for Dummies?

What is Bitcoin?

Bitcoin is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain.

Bitcoin is unique in that there are a finite number of them: 21 million.

Bitcoins are created as a reward for a process known as mining. They can be exchanged for other currencies, products, and services.

As of February 2015, over 100,000 merchants and vendors accepted bitcoin as payment.

How Does Bitcoin Work?

Bitcoin is a peer-to-peer network that enables new transactions (or “blocks”) to be added to the blockchain ledger of previous transactions. This distributed ledger is consensus-based, meaning that it’s verified and agreed upon by the collective network participants rather than by any central authority.

NOTE: WARNING: This article is intended to provide basic information about Bitcoin and how it works. It is not intended as an endorsement of any particular cryptocurrency or product. Please do your own research before investing in any cryptocurrency or product. The content in this article should not be taken as professional advice, and is provided for informational purposes only.

Each transaction added to the ledger is verified by miners using complex algorithms.

Once verified, these new blocks are added to the end of the blockchain in chronological order – this public record of all Bitcoin transactions ever made is known as the blockchain. The consensus-based nature of the Bitcoin protocol means that each transaction must be verified by the collective network before it can be added to the blockchain ledger, making it virtually impossible to tamper with or reverse Bitcoin transactions.

What Are Bitcoin Miners?

Bitcoin miners are individuals or businesses that confirm transactions and add them to the public blockchain ledger in exchange for a reward. For their efforts, miners are rewarded with newly minted bitcoins and transaction fees paid by users sending bitcoins.

Mining is how new bitcoins come into circulation – it’s also how transaction fees are paid in the Bitcoin network. Miners are incentivized to confirm transactions because they earn rewards for doing so – these rewards make up their income.

How Does Bitcoin Mining Work?

Mining is how new bitcoins come into existence – it’s also how transaction fees are paid in the Bitcoin network. Miners use specialized software to solve complex math problems and are issued a certain number of bitcoins in exchange for solving each problem correctly. The difficulty of these math problems adjusts automatically according to how much mining power is active in the network, so that new blocks are created roughly every 10 minutes regardless of mining activity. This self-regulating feature ensures that miners always have an incentive to stay active in verifying transactions and adding new blocks to the chain since they earn rewards for doing so – these rewards make up their income.

When all 21 million bitcoins have been mined, there will be no more new coins created – although transaction fees paid by users will still provide an incentive for miners to stay active on the network. At this point, miners will primarily be rewarded for their transaction verification efforts rather than for creating new bitcoins.

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