This article is part 2 of a 3 part series that becomes progressively more technical. For necessary background on Bitcoin, see part 1.
The author will be holding a Q&A call-in session this Thursday, December 5th. You can submit a question at the bottom of this article. Selected questions will be published in a podcast.
Bitcoin’s success as a currency is a feat of mathematics and cooperation of the individuals that have lent their machines as nodes to the Bitcoin network. The United States Government maintains the circulation of Dollars, but no central government or agency regulates Bitcoin. Yet there is no Bitcoin inflation, no theft, no fraud, and no lasting discrepancy over the public ledger of transactions made. This article begins to explain how Bitcoin functions so seamlessly.
First of all, there is a network of ‘nodes’. Individuals have incentives (such as mining rewards or collecting transaction fees) to contribute their computing resources and join as nodes on the network. These nodes are really just servers - computers plugged into the Internet - which are running Bitcoin software. A node might be a teenager keeping her computer on running Bitcoin software in her basement while she’s at school, or someone running software in the cloud. Anyone can be a node. Every time a new transaction is made with Bitcoin, all of the nodes in the network record the transaction in their ledgers. The nodes are in constant communication and work to share each transaction with each other so that they can come to a consensus and prevent their transaction ledgers from differing.
This ledger is a database of every Bitcoin transaction that has ever been executed. It is constantly growing with new transactions and is broken into units called blocks. The ledger is referred to as the block chain because it is a linear, chronological ordering of these blocks. Upon joining the network, each node downloads the most recent copy of the block chain in its entirety.