Bitcoin basics

The bitcoin platform is a peer-to-peer network. It connects computers around the world. Each computer is a node with equal status, except for a subset of nodes called miners. Mining nodes play the role of collecting/validating transactions, creating a new block, and adding a validated block to the blockchain. A transaction refers to an action such as issuing bitcoin or transferring BTC from one address to another, and so on.

A peer-to-peer network can connect worldwide nodes and allow participants to trade with one another. However, the physical connection is not enough to make two untrusting parties trade with each other. To make them trade, bitcoin takes the following measures:

• Every node saves a complete copy of the ledger. Thus, any alteration to a transaction on the chain becomes practically not feasible.
• Transactions are grouped into blocks. A non-genesis block is linked to its previous block by storing that block's hash. Consequently, a change to a transaction requires changes to be made to all subsequent blocks, and these changes have to be repeated on all nodes where a copy of the ledger is saved. This clever design makes hacking the distributed ledger extremely difficult.
• Bitcoin built in a consensus mechanism to address the double-spending issue; that is, the same BTC is spent twice.
• Hashes are extensively used to protect identities of parties, and to detect any changes that are occurring in a block.
• It uses public/private keys and addresses to mask identities of trading parties.
• Signs a transaction digitally.

With these measures, untrusting parties feel comfortable to trade because of the following reasons:

• The transaction is immutable and permanent. Neither party can nullify a transaction unilaterally.
• No double-spending is possible.
• Transaction and settlement occur simultaneously; therefore, there is no settlement risk.
• Identities are protected.
• Transactions are signed by both parties, which minimizes the possibility of legal disputes in the future.