How Bitcoin works

Bitcoin works without a bank or financial organisation behind it -what is known as a trusted third party – unlike fiat money (traditional money). It is one of its main characteristics.

But then, who keeps the record of all transactions, and how?

That task is distributed among different participants in the network: some receive and verify transactions, others propose new blocks, and everyone uses the same rules to decide what information is valid.

You absolutely do not need to know the technical details to use Bitcoin, but it is useful to understand the main pieces.

How the Bitcoin network works

Bitcoin is a network made up of computers running software with its rules. Many of these machines operate as nodes: they receive information, check transactions and blocks, and share valid data with other nodes.

Each node can verify, among other things, that a person is authorised to spend the bitcoins, that they are not trying to use the same funds twice, and that new blocks follow the issuance rules.

If you want, you can set up your own. It is not especially complicated, but it is not necessary to use Bitcoin either.

There is no main computer in charge of all the others. Nodes accept information that follows the rules and reject information that does not. That is why a miner, a company or a developer cannot change the maximum number of bitcoins on their own or take the balance of a wallet.

The blockchain is the shared history of confirmed blocks. Each block contains a set of transactions and a reference to the previous block. This relationship means that altering an old transaction would require redoing an enormous amount of work and convincing the rest of the network to accept the change, which prevents illegitimate modifications.

How a transaction is made and confirmed

When you send bitcoins, the process is as follows:

Your wallet creates a transaction indicating which funds you want to use, which address they should reach and what fee you are willing to pay.
1. Then you sign with the corresponding private key to prove that you have permission to move them.
1. La transacción se comparte con la red.
1. Los nodos comprueban que la firma sea válida, que los fondos existan y que no se hayan gastado antes. Si todo está correcto, la operación queda pendiente a la espera de entrar en un bloque.
1. Los mineros seleccionan transacciones pendientes y compiten para crear el siguiente bloque.
1. Cuando uno lo consigue, lo difunde y los nodos vuelven a revisar que cumpla todas las reglas. Si es válido, lo añaden a su copia de la blockchain.

At that point, the transaction is said to have one confirmation. Each later block adds another.

For small amounts, one confirmation may be enough, while platforms and large transactions usually wait for several because each new confirmation makes it harder to reorganise the history.

The fee you pay for using the network depends mainly on the space the transaction occupies and the current demand on the network. That is why sending 50 euros can cost the same as sending 5.000.

How new bitcoins are created and the network is maintained

Miners use specialised equipment to compete to create each block. To do this, they perform an enormous number of calculations until they find a solution that meets the conditions required by the protocol. This mechanism is called proof of work.

The miner who manages to create a valid block can include a reward made up of new bitcoins and transaction fees. This creates an incentive for participants to dedicate equipment and energy to protecting the network.

The amount of new bitcoins is reduced approximately every four years through a process called halving. Currently, and until April 2028, solving a block awards 3,125 BTC to the miner. From then on it will be 1,5625.

This reduction will continue until the maximum of 21 million is reached. From then on, miners will depend only on fees.

Miners propose blocks, but nodes accept them only if they comply with the protocol. This separation is important because it prevents whoever has more computing power from creating bitcoins out of thin air or changing balances at will.

The system is more complex than a bank transfer when viewed from the outside, but the main idea is simple:

The network shares the ledger.
Keys authorise movements.
Miners organise transactions into blocks.
Nodes verify the rules.

Next steps

Below are the next articles in the series. They are designed so that, if you do not know much about Bitcoin, you can read them in order, but they are all independent, so you can jump to the one that interests you most:

Frequently asked questions

How does Bitcoin work without a bank?

Bitcoin distributes the record and verification of transactions among different participants in the network. Nodes check that transactions and blocks follow the protocol rules.

Who controls the Bitcoin network?

There is no single computer, company or bank that controls the network on its own. Different nodes use common rules to decide what information they consider valid.

What is a Bitcoin node?

It is a computer that runs Bitcoin software. It can receive and share information and check that transactions and blocks comply with the network rules.

Do I need to run a node to use Bitcoin?

No. You can use Bitcoin without maintaining your own node, although anyone can install one if they want to verify network information directly.

What do Bitcoin nodes check?

Among other things, they verify that signatures are valid, that bitcoins have not already been spent and that new blocks follow the issuance rules.

What is the Bitcoin blockchain?

It is the shared history of confirmed blocks. Each block contains transactions and a reference to the previous block.

What happens when I send bitcoins?

Your wallet creates and signs a transaction, which is then shared with the network. Nodes verify it and miners can later include it in a new block.

What is the private key used for in a transaction?

It is used to sign the transaction and prove that you are authorised to spend the corresponding bitcoins. The private key does not need to be shared with the network.

When is a Bitcoin transaction considered confirmed?

A transaction gets its first confirmation when it is included in a valid block accepted by the nodes. Each new block after that adds another confirmation.

How many confirmations does a Bitcoin transaction need?

It depends on the amount and the service being used. For small transactions, one confirmation may be enough, while platforms and higher-value transactions may wait for several.

What determines the fee for a Bitcoin transaction?

It mainly depends on the space the transaction occupies and current demand on the network. It does not directly depend on the number of bitcoins or euros you are sending.

Why can sending 50 euros in Bitcoin cost the same as sending 5.000?

Because the fee is mainly related to the size of the transaction on the blockchain and network congestion, not to the economic value being transferred.

What do Bitcoin miners do?

Miners compete to create new blocks through proof of work. They select pending transactions, perform the required calculations and propose a new block to the network.

What is Bitcoin proof of work?

It is the mechanism through which miners perform a large number of calculations to find a solution that allows them to propose a new valid block.

What reward does a Bitcoin miner receive?

The miner who creates a valid block can receive new bitcoins as a reward, in addition to the fees included in that block's transactions.

What is the Bitcoin halving?

It is the periodic reduction in the amount of new bitcoins awarded as a reward for creating a block. According to the schedule explained in the article, this reduction happens approximately every four years.

What is the maximum number of bitcoins that will exist?

The protocol sets a maximum of21 million bitcoins. The issuance of new bitcoins will gradually decrease until that limit is reached.

What will happen to miners when no new bitcoins are created?

When there are no longer new coins as a block reward, miners will depend on the fees paid by transactions.

Can miners change Bitcoin's rules?

Not on their own. Miners can propose blocks, but nodes only accept them if they follow the protocol rules.

Can a miner create bitcoins out of thin air?

No. A block that creates more bitcoins than the rules allow would be rejected by the nodes that verify the network.