WHAT IS BITCOIN AND

HOW DOES IT WORK?

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What is Bitcoin is the very first cryptocurrency

Bitcoin? and blockchain technology

introduced to the world.

Satoshi Nakamoto is behind the

creation of Bitcoin technology.

It’s currently one of the popular

cryptocurrencies on the market.
How Is Bitcoin Different from Fiat
Currencies?
Bitcoin is a virtual currency that does not have any physical
form.

The currency does not use any central banking system, neither
it’s regulated via the government.

Anyone can send or receive Bitcoin without any official

documentation required, unlike typical fiat money where users
need to show proper documentation to have a bank account.

The value of Bitcoin varies based on the demand.

Characteristics Decentralization

of Bitcoin Transparent

Fast

Immutable

Value Depends on demand

Decentralization
Bitcoin is fully decentralized, which
means it does not have any
centralized authority to control or
manipulate the network.

This ensures that no vulnerabilities

or corruptions are happening
within the network.
Transparent Everything on Bitcoin is
transparent to the users as it’s
public blockchain technology.

It uses a ledger system that all the

users can see and maintain. Users
can see the sender’s and receiver’s
address, amount, time, etc.
Fast Compared to traditional banking
systems, Bitcoin is a lot faster.
Bitcoin can process a transaction
within 10 minutes, whereas it can
take up to 6 days to process a
transaction in traditional banking.

However, the transaction rate may

vary based on the user traffic on
the platform.
Immutable Everything on Bitcoin technology is
immutable.

This means any type of action

happening on the platform can’t
be reversed once it’s executed.

Thus, no one can change or delete

any transaction history.
Value Depends
on Demand Bitcoin does not have any fixed
value. The value of the native
currency of this platform varies
based on the demand of the coin.
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That’s why Bitcoin is one of the

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most highly volatile

cryptocurrencies.
 How Does Bitcoin Work?
Bitcoin uses blockchain technology to function and
offer all of its features to the users.

Basically, it uses a shared public ledger system that

documents every single transaction happening
within the network.

This helps to maintain the balances of every user

and helps to prevent any double-spending.
 Transactions
Bitcoin transactions are merely transfers of value within
blockchain wallets.

In the network, users are given two keys - public and private.

The private key is used to sign or authorize transactions

within the network. The public key is used to encrypt or
receive transactions.

Users can share the public key with others but need to safely
store their private key without sharing it with other parties.
 Processing of Transactions
The processing of transactions depends heavily on
the consensus protocol of Bitcoin technology.

Bitcoin uses the Proof-of-Work consensus protocol to

process and verify all of the transactions.

Consensus protocols help users to come to an

agreement on the validity of a transaction in a safe
and secured way.
 Processing of Transactions
Typically, once a user initiates a transaction, it
packets the transaction within a block containing
information regarding the transaction.

Then the transaction is broadcasted to all the nodes

within the network, and the nodes use Proof-of-work
to verify the transaction.

verification, the transaction is added to the ledger

and executed.
 Working of Bitcoin Mining
Mining is actually the proof-of-work mechanism
within the Bitcoin network. It’s a process of adding
new transactions to the ledger.

Here, miners take part in solving complex

mathematical problems to verify the transaction and
process it.

Unfortunately, mining is a power-hungry mechanism,

which is not an eco-friendly solution for blockchain
technology.
What Are the
Advantages? No Third-Party Involvement

Can’t Track the Users

Low Transaction Costs

No Charge-backs

Can’t Be Stolen
No Third-Party
Involvement There are no third parties within the
Bitcoin network as the users are
responsible for maintaining the
ledger.

Thus, it’s a fair environment where

users have full control over their data
and funds. It’s also free from the
influence of governments.
Can’t Track the
Users Users don’t publicly announce their
wallet addresses here; thus, it’s
impossible to trace a wallet address
to a user.

Also, it’s easy to generate new

addresses every time someone
makes a transaction making it
impossible to track down.
Low Transaction
Costs Sending Bitcoins on the network
requires very little fees compared to
typical banking systems.

However, the pricing may vary based

on the difficulty of processing a
transaction in a given time.
No Chargebacks After a Bitcoin is sent to someone, no
one can reverse or charge back the
Bitcoin. The ownership of the sent
Bitcoins will change to the receiver,
and even the sender can’t revert it
back.

It eliminates the risk of sending or

receiving payment on the platform.
Can’t Be Stolen Only the owner of Bitcoin can
change their addresses. Without the
private key, no one can steal Bitcoin
from the users.

However, if the users compromise

their private keys, then third parties
can steal the Bitcoins from their
wallets.
 EXAMPLES OF
SMART CONTRACTS
101blockchains.com
What Is a Smart
Smart contracts are automated
algorithmic digital forms of
contracts where parties can

Contract? exchange assets without any

intermediaries based on
specified rules.

Smart contracts are the next

version of automated contracts
where the user won't have to rely
on trust. The contract is fully
decentralized, distributed, and
transparent to the involved
parties.
 Smart contracts use blockchain

How Smart technology to function. Here, the

program within the smart
contract will self-execute based

Contract Works? on the conditions previously

defined by the parties.

Oracles feed information to the

smart contracts, and it verifies
that information and
automatically executes the
contract. A contract will not
execute unless all the conditions
are met properly.
What Are the Benefits of Smart
Contracts?
Autonomous

Secured

Interruption Free

Cost-effective

Fast Performance

Accurate and Error-Free

Examples of Smart Contracts
Digital Identity Financial Data Recording

Securities Government

Cross Border Payments Supply Chain Management

Loans Insurance

Healthcare Record Storage

Escrow Trading Activities

Digital Identity
Access to your identity can play a
vital part in safekeeping all of
your sensitive information. With
smart contracts, it's possible to
allow third parties to access a
certain part of your identification
without fully revealing all of the
information.

This allows the third party to

validate your information, but
you still retain full control over
your identification.
 With smart contracts, managing
Securities securities can be improved and
simplified. Usually, there are
intermediaries involved in security
custody chains. Therefore, there is
always a vulnerability involved.

But smart contracts can reduce the

operation risk of securities and make
the workflow more digitized. Users
can also use it for automatic
payments, dividends, stock splits,
and even liability management.
 Making cross-border payments can be

Cross Border more simplified using smart

contracts, mainly in tokenization of

Payments
assets where the owner can define the
attributes of the asset and then send
that asset to other parties.

Also, cross-border payments need to

adhere to many laws, which can
restrict businesses. But with smart
contracts, partners residing in
different countries can work together
without any financial issues.
Loans Smart contracts can help in
facilitating loans. For example, it
can connect the lender and
borrower over a blockchain
platform where the lender can
lend the money to the borrower
based on certain conditions.

It will track the conditions and

follow the rules based on the
outcome of the borrowers –
whether the loan was paid off in
due time or not.
Financial Data Smart contracts can play a huge
part in recording the financial data
Recording of a company. These offer a more
proven way to record these data in
a transparent and accurate
environment.

Using smart contracts, it's possible

to collect data uniformly
throughout a company's business
processes without needing any
regular auditing.
 As smart contracts have automated

Government
features, it can help the government
to run operations without
interference from third parties.
Operations such as recording land
titles can be done more efficiently
and faster.

Also, as it's a public record, there is

no option for anyone to alter it as
they want. Another possible use case
is electronic elections, where smart
contracts can count the votes and
automate the whole process.
Supply Chain Smart contracts can improve

Management supply chain management greatly.

If companies integrate smart
contracts in all parts of the supply
chain processes, it can help track
items to record data in real-time.

It can also manage inventories and

help to process all transactions
and payments throughout the
supply chain faster.
 Smart contracts can automate the

Insurance process of insurance claims. Insurers

can use contracts to facilitate their
insurance filing processes and save
time.

Using blockchain, smart contracts can

verify the documentation and data and
process the insurance claims if it falls
within the conditions. Everything is
stored on the immutable ledger in
blockchain, so no one can bypass the
conditions or alter them.
Healthcare Smart contracts can help greatly in
the healthcare sector, specifically in
clinical trials. In clinical trials,
multiple institutions can get
involved.

Smart contracts can streamline data

between these institutions and
preserve security. It can also
automate the trials and collect the
data based on certain conditions.
Escrow
Automating the escrow process can
come in handy in businesses. Smart
contracts are perfect for escrows.

Here, the payer can fund the contract,

and when certain conditions are met,
the contract will automatically release
the funds. Therefore, it gets rid of the
issue of trust, as both parties won't
have to worry about the funds. This is a
great option for online freelancing
platforms.
Record Storage Users can use smart contracts as
storage to record information. It can
also help in digitizing real-world
assets. Users can use these databases
to store any type of record.

It can also help in renewing the data

or releasing them based on pre-
defined rules. However, smart
contracts need to be thoroughly
audited to get rid of any form of
programming bugs.
 Another great smart contact

Trading Activities example is using it in trade finance.

In trade finance, the exporter and
importer can use smart contracts to
facilitate payment and shipment.

The importer can track the

shipment and verify the documents
accordingly. The exporter can get
the payment as soon as the
document gets verified. So, they
don't have to use any intermediaries
and will get to facilitate things
faster.
Mortgage System Smart contracts can automate
the mortgage system as well. It
can help in finalizing the
mortgage contract between the
parties.

Once each party agrees with the

rules of the mortgage, the smart
contracts can be set into motion.
This process is much secure,
faster, and cheaper for both
parties.
 Learn More About
Smart Contracts

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