How does Bitcoin work?

Bitcoin operates on a decentralized peer-to-peer network, allowing users to transact directly with each other without the need for intermediaries like banks or payment processors. Here's a simplified overview of how Bitcoin works:

1. **Digital Wallets:** Users need a digital wallet to send, receive, and store bitcoins. Wallets come in various forms, such as software wallets, hardware wallets, and paper wallets, each with its own advantages in terms of security and convenience.

2. **Public Ledger (Blockchain):** All Bitcoin transactions are recorded on a public ledger called the blockchain. The blockchain is a decentralized database that stores a continuously growing list of transactions, grouped into blocks. Each block contains a set of transactions, along with a reference to the previous block, forming a chain of blocks.

3. **Transactions:** When someone wants to send bitcoins to another user, they create a transaction. A transaction includes the sender's and recipient's Bitcoin addresses, the amount of bitcoins being transferred, and a digital signature created using the sender's private key to verify the transaction's authenticity.

4. **Verification and Confirmation:** Transactions are broadcast to the Bitcoin network, where they are verified by network nodes called miners. Miners collect transactions into blocks and compete to solve complex mathematical puzzles in a process called mining. The first miner to solve the puzzle and validate the block broadcasts it to the network, where other nodes verify its validity.

5. **Consensus:** Consensus is achieved when the majority of nodes agree on the validity of transactions and the order of blocks. This decentralized consensus mechanism ensures the integrity and security of the Bitcoin network.

6. **Incentives:** Miners are rewarded with newly created bitcoins and transaction fees for their efforts in validating transactions and adding them to the blockchain. This provides an incentive for miners to participate in the network and maintain its security.

7. **Scarcity:** The total supply of bitcoins is capped at 21 million, ensuring scarcity and protecting against inflation. This scarcity is maintained through a halving mechanism that reduces the rate at which new bitcoins are created approximately every four years.

Overall, Bitcoin provides a decentralized, secure, and transparent way to transfer value over the internet, without the need for intermediaries or central authorities.