Bitcoin is at the heart of a new decentralized economy and distributed community. Since its release in 2009, Bitcoin has continued to evolve with national headlines, pricing shifts, and new cryptocurrency tokens following suit. With interest expanding and new consumers looking to buy, information on how Bitcoin actually works can be difficult to understand.
The Bitcoin ecosystem relies on constituent individuals and groups playing important roles such as miners, traders, merchants and many more. Without any of these, the whole ecosystem fails. If you’re interested in learning more about Bitcoin, you should start by getting to know the ecosystem that surrounds it.
Let’s take a closer look at each of these roles:
While central banks create traditional currencies, bitcoin is “mined” by bitcoin miners. In this way, bitcoin resembles gold. Like gold, there is only a limited amount of bitcoin out there to find. The original Bitcoin protocol permanently limited the total number of bitcoin to 21 million.
Bitcoin mining involves a peer-to-peer computer interaction that secures and verifies Bitcoin transactions. Bitcoin is awarded to miners as payment for carrying out the task of validating bitcoin transactions.
Miners deploy the specific software and computational power at their disposal to compete with other miners in solving complex mathematical problems. Whoever successfully uses cryptographic hash functions to solve a block containing the latest bitcoin transaction data is rewarded with bitcoin. They also add the solved block to the blockchain, enabling the bitcoin ecosystem to continue functioning.They key here is that the miner that solves the block first is the one who gets rewarded.
Just as a forest depends on oxygen and sunlight for survival, the Bitcoin ecosystem depends on the blockchain. The blockchain is the technology behind bitcoin and most other prominent cryptocurrencies.
The blockchain refers to a public ledger that can be accessed at any time by anyone on the Bitcoin network. The blockchain is not stored in a central server. Instead, it is spread around the globe using a vast network of private computers that simultaneously store data and execute computations.
Each computer on the Bitcoin network serves as a node of the blockchain and contains a copy of the entire bitcoin transaction record. Mining serves the function of adding new blocks to the blockchain, thus keeping track of every bitcoin transaction.
The blockchain protocol prevents problems like counterfeiting and debasement from undermining the value of bitcoin without the intervention of a central authority.
With all of the exchanges happening on the blockchain through mining, there must be a place for individuals to store their bitcoin. Rather than holding a collection of bills, coins, and bank cards, a digital wallet can be used to store bitcoin and other cryptocurrencies.
Unlike the blockchain, a digital wallet is exclusively controlled by its owner. There are many different types of bitcoin wallets but they all must follow the Bitcoin protocol to send and receive funds within the network. Digital wallets can hold a multitude of assets, whether it be fiat currencies, commodities, or cryptocurrencies.
Uphold is a cloud-based digital wallet that enables anyone, anywhere, to move, convert, hold and transact in any form of money or commodity instantly and securely. Uphold is one of the safest and easiest digital wallets used to buy, send, and hold bitcoin, and 30+ other currencies.
Traders buy and sell bitcoin using traditional currencies or other cryptocurrencies. They may trade bitcoin on exchanges or they may work outside the exchanges as independent brokers.
Traders speculate on the likelihood that bitcoin will go up or down in value in the short term. They will buy or sell based on their speculations, and if they are right they can profit.
Merchants can be retailers or any other business that choose to accept bitcoin as a form of payment. The more merchants that accept bitcoin as a form of payment, the more bitcoin is legitimized as a currency and means of exchange. Check out this list of top retailers that accept bitcoin for more information on spending bitcoin on goods and services.
While miners, traders, and digital wallets all play an important role in the bitcoin ecosystem health, the long-term viability of the top cryptocurrency in the world ultimately depends on its mainstream adoption, especially by major merchants around the globe.
Understanding the Bitcoin ecosystem is incredibly important if you want to jump into the cryptocurrency craze. There’s a lot of people talking about Bitcoin, but they simply don’t have a good definition or understanding of how it all works. Becoming familiar with the ecosystem and all the different players in it will help you take another step into the world of Bitcoin. To get started with your first digital wallet, learn more about Uphold.
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