Bitcoin was invented in 2009 by a pseudonym known as Satoshi Nakamoto. Since its invention, lots of questions have been asked about its exact role in the world’s financial system and also how it functions. While Bitcoin might seem to be an amazing financial concept, it is really impossible to take complete advantage of it if you do not understand how the Bitcoin protocol works.
What is Bitcoin Protocol
The Bitcoin protocol is a platform through which Bitcoin can be exchanged. It is the guiding principle on which Bitcoin transactions (BTC) are carried out. This protocol which is based on laws of cryptography dictates the process of Bitcoin deals. This process begins from the creation of a Bitcoin, all the way to its validation and then its confirmation. The fact that the Bitcoin protocol dictates the mechanism of Bitcoin transactions, makes it really important to understand the way Bitcoin transactions are carried out; so, knowing how the Bitcoin Protocol works leads to better comprehension behind its inner workings.
Please note that we will cover the very basics of how the Bitcoin protocol is set up and leave the highly technical details out for now. This is so that people looking to start transacting with Bitcoin for the first time get a better understanding of how it’s done. We hope that this will help build user confidence.
For a Bitcoin transaction to be accurate, it has to contain certain information. Some of this information that should be contained by a Bitcoin transaction include:
This is usually the first piece of information required for a Bitcoin transaction to be accurate. A Bitcoin ID is simply the publicly shared address of a Bitcoin account from which payment in Bitcoin (BTC) can be sent or received.
More About Bitcoin Addresses…
The Bitcoin transaction input contains information about the source of the Bitcoin that is about to be transferred. For a Bitcoin address to become an input address, it has to be an output address. With the input address, the sender of the Bitcoin can be verified and their balance checked.
The quantity of Bitcoins that is being transferred in a transaction.
The transaction output gives out information about the recipient of the transferred Bitcoin. A Bitcoin output can also become a Bitcoin transaction input. This basically depends on who is on the receiving end.
Validation of Transaction
This is a mechanism through which the transaction is looked into to ensure its authenticity. This is done with the use of Blockchain technology.
Sequences of the Bitcoin Protocol
Basically, the Bitcoin protocol follows the steps below:
- A transaction is made known to all nodes that are taking part in a network.
- New transactions are collected into a block by each node and then attempts to validate recent transactions are made.
- Whichever node “gets the answer”, meaning solves a complex math puzzle and successfully validates all pending BTC transactions, reports the answered block to the system.
- The set of transactions along with their associated signatures are then validated by the existing nodes and the block accepted.
- Nodes begin operating on the subsequent block. Also, a hash is created to represent the last accepted block. The hash is also used as a reference.