Ok, clearly there is more to it.
Now that we have a solid understanding of the core concepts behind bitcoin, it’s time to continue our journey.
In order to use this payment network and fully realize it’s potential, we need to see exactly how it works.
We’ll start by redefining some terms and changing the way we think about this “list”.
What is Bitcoin, really?
Bitcoin is a computer program. In order to start using the list to transact with people, you first need to download the software.
Once you start running Bitcoin on your computer, you are officially part of the network! Other computers in the network will automatically see that you have joined, and they will send you a copy of the transaction list. Now you know exactly what the list of names and balances should look like.
Also, it’s not exactly a list of “names” and “balances”
The bitcoin list is actually just a list of every transaction that ever took place, there are no balances anywhere. But without balances, how do you know how much bitcoin you have?
Just add up all the money people have sent to your name! After all, the amount of money you have is equal to the amount of money that has been given to you.
Since bitcoin is digital, we just need to keep a record of money transfers… no need to actually move anything around. If this sounds weird to you, don’t forget this is what banks do too!
The Life of a Transaction
It might help to look at how money is actually sent across this network of computers. If you remember from our first lesson, Bob needs to pay Dave $7 for dinner.
1
Bob is running Bitcoin on his computer and he has a copy of the transaction list.
2
Bob writes a message to the other computers in the network asking them to edit their list. The message says to add $7 to Dave. But since nobody is keeping track of Bob’s balance, he first proves he has $7 to spend by showing a time he received $7. Finally, Bob enters his password to prove it’s really him sending this message.
3
After Bob writes his message, he sends it out to every single computer in the network. He tells them to add this new transaction to their records. First, they will check their list to make sure Charlie had really sent Bob $7. Then they will approve Bob’s request and add “Bob -> Dave: $7”.
4
Awesome! Now every computer in the network has updated their list… and Dave has an extra $7 to spend. He just needs to remind the rest of the network when this transaction happened, then he can ask them to move the $7 to someone else.
Want to keep learning about how transactions work?
But wait… there’s more.
We still haven’t talked about cryptography or blockchain. These key concepts are the magic behind bitcoin and allow for a global, decentralized, trust-less payment network to exist. We’re also still talking in terms of $, so it’s time to change that up too.
Ready to dive in?
Time to take our understanding to the next level.
If you’re looking for more technical answers to your questions, or you want to learn about how cryptography, mining and blockchain fit into all this, click the button below!