Understanding Bitcoin, its mechanism and applications


Bitcoin, the world’s first cryptocurrency, has been all the rage in the financial world since its creation in 2009 by Satoshi Nakamoto. But what is Bitcoin and how does it work? This beginner’s guide will help new cryptocurrency users understand the basics of Bitcoin, how it works, and how it can be applied and popularized in everyday life.

What is Bitcoin?

The digital currency known as Bitcoin operates outside of any central bank or authority. To protect transactions, regulate the creation of new units, and confirm asset transfers, it uses cryptography. Therefore, Bitcoin is a decentralized currency that is not controlled by a single entity, unlike fiat currencies such as the Euro or the US dollar.

How Bitcoin Works: Everyday Analogies for the Technology Behind Cryptocurrency

The underlying technology of Bitcoin is called the Blockchain, a distributed ledger that records all transactions using cryptocurrencies. Every time a Bitcoin transaction is completed and acknowledged by a node, it is added to a “block” of data. When a block is executed, it is added to the chain of preceding blocks, creating a permanent, public, and indestructible record of all transactions.

Nodes: The Librarians of the Bitcoin World

Bitcoin nodes are computers running Bitcoin software and connected to the Bitcoin network. Bitcoin nodes validate, transmit, process, and store BTC transactions. In general, a node is a point in a network. For example, a car is a node in a road network, or a work colleague is a node in a professional network. Think of nodes as librarians managing a vast digital library (the blockchain). Full nodes are like head librarians who keep complete records of every book in the library. Light nodes are like assistant librarians who rely on head librarians for comprehensive information, but can still help people find the books they are looking for. These librarians collaborate to keep the library catalog accurate and up-to-date so patrons can easily access the books they want.

Mining: Solve puzzles to get rewards

Imagine a group of people competing in a crossword puzzle event. The goal is to complete the crossword puzzle as quickly as possible and the winner gets a cash prize. In the context of Bitcoin, the crossword represents the complicated math challenges miners must solve, and the monetary reward is the mining reward. Miners use their computing power to solve math problems, much like crossword solvers, and use their skills to compete for the prize: a miner’s chances of receiving the reward increase with their computing power. To be more specific, let’s say that Mary wants to send 1 Bitcoin to Joe. The miners will confirm the transaction by solving a math problem that proves the validity of Mary’s transaction. When the problem is solved, the transaction is added to the blockchain and the miner receives a certain amount of Bitcoin as a reward.

Consensus mechanism: A democratic decision-making process

Imagine a town hall meeting where community members come together to vote on a new policy. Each person casts their vote and the policy is accepted if 51% or more of the votes are in favor. This democratic process ensures that the community’s decision reflects the will of the members.

Similarly, the consensus mechanism in Bitcoin requires nodes to agree on the validity of new blocks added to the blockchain. When a miner proposes a new block, other nodes vote on its validity. If more than half of the nodes approve, the block is added to the blockchain. This democratic process ensures that the blockchain remains accurate and secure.

Other cryptocurrencies and their applications

In addition to Bitcoin, there are thousands of other cryptocurrencies in use today. The most common alternatives are discussed along with their possible applications in the real world.

Ethereum (ETH): Ethereum is a platform that allows developers to create and deploy smart contracts, self-executing contracts with the terms of the agreement written directly in code. A freelance NFT designer could create a smart contract that releases payment once their client approves the final design.

In addition to ETH, there are a variety of cryptocurrencies available for trading on CoinEx, a leading cryptocurrency exchange that prides itself on its crash-free record and commitment to user safety. With over 700 cryptocurrencies and over 1100 trading pairs available, CoinEx continues to enrich its exchange-based product forms and has launched derivative services such as futures, margin trading, AMM, mining, financial accounts, strategic trading, and CoinEx Dock.


Cryptocurrency beginners can better understand the inner workings of Bitcoin and its relevance to the world of digital currencies by understanding the aforementioned principles through real-life use cases. As blockchain and Web3 development continues to mature, new opportunities and challenges are likely to arise for individuals, businesses, and governments.

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