How Blockchain Works? Lesson 2

Video Credit: BBC

Bitcoin, often described as a cryptocurrency, a virtual currency or a digital currency - is a type of money that is completely virtual. It's like an online version of cash. You can use it to buy products and services.

Individuals can use bitcoins to make payments to other individuals or merchants without involving a third-party, like a bank or financial institution. For the purpose of validation, transactions are cleared and validated within the system through the blockchain.


What is the Blockchain?

The blockchain is a public ledger that records and publicly displays all bitcoin transactions that have been executed within the Bitcoin system. A block is a permanent record of recent transactions like the date, time, and dollar amount of your most recent purchase on the network.

all transaction must be verified. After making that purchase, your transaction must be verified. With other public records of information, like the Securities Exchange Commission, there’s someone in charge of vetting new data entries. With blockchain, however, that job is left up to a network of computers.

These networks often consist of thousands (or in the case of Bitcoin, about 5 million) computers spread across the globe. When you make your purchase from Amazon, that network of computers rushes to check that your transaction happened in the way you said it did. That is, they confirm the details of the purchase, including the transaction’s time, dollar amount, and participants. (this happens in a second.) That transaction must be stored in a block. After your transaction has been verified as accurate, it gets the green light and added to the block.

That block must be given a hash, once all of a block’s transactions have been verified, it must be given a unique, identifying code called a hash. The block is also given the hash of the most recent block added to the blockchain. Once hashed, the block can be added to the blockchain.

Mining

Bitcoin mining is the backbone of the Bitcoin network. Miners provide security and confirm Bitcoin transactions. Without Bitcoin miners, the network would be attacked and dysfunctional Bitcoin mining is done by specialized computers.The role of miners is to secure the network and to process every Bitcoin transaction. Miners achieve this by solving a computational problem which allows them to chain together blocks of transactions (hence Bitcoin’s famous “blockchain”).
For this service, miners are rewarded with newly-created Bitcoins and transaction fees.

Why You Need A Bitcoin Wallet

As Bitcoins don’t exist in any physical shape or form, they can’t technically be stored anywhere. Instead, it’s the private keys — which are used to access your public Bitcoin address and transaction signatures — that need to be securely stored. A combination of the recipient’s public key and your private key is what makes a Bitcoin transaction possible. This address – a long string of 34 letters and numbers looks like this- 1DSrfJdB2AnWaFNgSbv3MZC2m74996JafV it is also known as my “public key.”

 I don’t mind that the whole world can see this sequence. Each address/public key has a corresponding “private key” of 64 letters and numbers. Private key looks like this-5J76sF8L5jTtzE96r66Sf8cka9y44wdpJjMwCxR3tzLh3ibVPxh.This is private, and it’s crucial that I keep it secret and safe. The two keys are related, but there’s no way that you can figure out my private key from my public key.

There are several different forms of Bitcoin wallets that cater to different requirements and vary in terms of security, convenience, accessibility and so on.

Types of wallets

1 Paper Wallet

A paper wallet is essentially a document that contains a public address for receiving Bitcoin and a private key, which allows you to spend or transfer Bitcoin stored in that address. Paper wallets are often printed in the form of QR-codes so that you can quickly scan them and add the keys to a software wallet to make a transaction.

2 Mobile Wallet

For those actively using Bitcoin on a daily basis, paying for goods in shops or trading them face-to-face, a mobile BTC wallet is an essential tool. It runs as an app on your smartphone, storing your private keys and allowing you to pay for things directly from your phone.

3 Web Wallet

Web wallets store your private keys on a server, which is constantly online and controlled by a third party. Different services offer different features, some of which can link to mobile and desktop wallets and replicate your addresses across the devices you own.

4 Desktop Wallet

Desktop wallets are downloaded and installed onto your computer, storing your private keys on your hard drive. By definition, they are more secure than online and mobile wallets, as they don’t rely on third parties for their data and are harder to steal. They are still connected to the internet, which makes them inherently less secure. However, desktop wallets are a great solution for those who trade small amounts of Bitcoin from their computers.

5 Hardware Wallet

A hardware wallet is a rather unique type of Bitcoin wallet that stores the user’s private keys in a secure hardware device. It is the most secure way of storing any amount of Bitcoin. There have been no verifiable incidents of money being stolen from a hardware wallet.

    Video Credit: IFTF

Watch out for Lesson 3.