How Bitcoin Works: Briefly Explained
THE BITCOIN ESSAYS
Originally Published May 2024
*XX* Minute Read
v1.0
The intention of this essay is to provide a high level, introductory explanation of the mechanics that make Bitcoin work. We’ll review nodes and miners, the 21 million equation, halving(s), proof-of-work, the difficulty adjustment, timestamping, elliptic curve signatures, SHA-256 hashing, UTXOs, and Bitcoin Improvement Proposals (BIPs). After reading this, you should have a good sense of how the timechain operates, what keeps it secure, and how users interface with the protocol.
NODES & MINERS
By way of analogy, one can come to think of this pair in terms of governance. In this way, nodes can be understood as the legislators of the protocol, whereas miners act as a kind of law enforcement; wherein ‘the law’ is the consensus rules the nodes have come to agree upon.
In another way, one could consider the nodes to be the digital hosts of the Bitcoin blockchain, whereas the miners are the physical instantiation (or force) backing it. It’s a beautiful dance, a kind of marriage, wherein the pair are bound by a consensus covenant. Should any node defect from the hive, the others will either fork toward agreement in the blockchains next evolution, or exile the defective node toward a kind of digital banishment. The same applies to miners; should any miner choose not to abide by the consensus protocol rules, the global swarm will reject them.
An important observation here is that miners are a form of node, but not all nodes are miners. In other words, all miners must run the Bitcoin source code, but nodes are free to choose whether or not to contribute to the proof-of-work consensus mechanism we call ‘mining’.
THE 21 MILLION EQUATION
Have you ever wondered why Bitcoin is scarce? Or, more specifically, why there will only ever be 21 million? Look no further. The equation above is concise notation for the geometric series describing the asymptotic limit of 21 million Bitcoin.
For those unfamiliar with the math, it’s more straightforward than appearances. The large sigma symbol is a greek letter notating the summation of all terms in the sequence. The sequence simply involves plugging successive integer values in for n, starting at 0 and going to infinity.
Don’t worry, we won’t be counting that high, because at a certain point each successive term becomes de minimus. This is what makes the equation asymptotic. The equation approaches 21 million but never technically reaches it!
THE HALVING
If you’ve been familiar with Bitcoin for a while, you may have noticed there’s much enthusiasm in the space around this four year event. But what is it exactly?
Recalling the equation in the preceding section, we saw the Bitcoin release schedule described in concise notation with n going to infinity via a sequence of integer terms.
Let’s run a few for example…
n=0=10,500,000
n=1=5,250,000
n=2=2,625,000
n=3=1,312,500
These totals represent the total amount of Bitcoin “mined” in each epoch. At time of writing, we’ve just begun the fifth epoch and the block reward is 3.125, meaning all Bitcoin mined in this four year period will be 656,250.
Employ your imagination a bit and you’ll see how given enough time, these epochs will eventually yield nearly zero Bitcoin. Hence, only 21 million Bitcoin will ever exist!
PROOF-OF-WORK
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This is Jonathan David Kellogg – Writing for
That Bitcoin Blog.
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