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What Is Bitcoin and How Does It Work To Prevent Double-Spending

What Is Bitcoin and How Does It Work To Prevent Double-Spending

Double-spending is possible with digital currency due to the absence of central authority. The main goal for the inventor of bitcoin, Satoshi Nakamoto, was to solve this issue and come up with a way how to prevent double-spending. The first step in solving this challenge was to establish a peer-to-peer communication protocol that would allow nodes in the bitcoin network to communicate with each other while keeping transactions private. In the next couple of months, Nakamoto released a whitepaper describing a design that uses a majority consensus mechanism called Proof-of-Work (PoW).

The best way to explain how bitcoin works is to compare it to something more familiar.

The closest thing to bitcoin in the real world is gold. Gold is a scarce, hard-to-find physical resource that can be owned and traded. It has value because humans decided long ago that it has value, and they agree on how much it's worth.

The way that humans all over the world agree on gold's value is by trading with one another based on how much they think gold is worth at any one time. And the way we keep track of our gold — or any other valuable physical asset — is by using a ledger.

When you buy gold from someone, you take ownership of their physical gold, and they receive a digital record in their ledger saying they sold that amount of gold and no longer own it. They can then trade this ledger entry for other goods or services.

Bitcoin works the same way, except instead of being based around physical assets like gold, bitcoin and other cryptocurrencies are based around cryptographic assets (hence the crypto part of cryptocurrency). Cryptography is a field of mathematics used extensively in computer security for encryption (hiding information in unintelligible gibberish) and authentication (proving identity). 

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