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In laymans terms, how does Bitcoin work?

How is Bitcoin structured so that users are guaranteed that there will not be an inflation of Bitcoins?

Without a master server, how does a Bitcoin network ensure the integrity of its data?
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categorytechnology
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tynamite
tynamite's avatar

In laymans terms, how does Bitcoin work?

To answer your 2 questions in your question description.

Question 1

How is Bitcoin structured so that users are guaranteed that there will not be an inflation of Bitcoins?

The inflation of Bitcoins are controlled automatically using an algorithm. Bitcoin will only ever have 21 million Bitcoins (BTC) generated; after that no more money will be added into circulation. New Bitcoins (BTC) are generated through mining.

The government or banks CANNOT print more money out of thin air!
This means that the devaluation of currency is less likely for you the consumer, as inflation moves at a steady rate. Correct me if I'm wrong here! It also means that you don't want to get yourself in debt of Bitcoins, as the government won't be able to help you through inflation and taxing.

Question 2

Without a master server, how does a Bitcoin network ensure the integrity of its data?

Through the information being stored on people computers. It's like Bittorrent, but for money. That's why it's called Bitcoins. It's because of P2P.

I am giving you a basic laymans terms answer to a complicated question. There's a lot I don't know about this, and you'll have to congratulate Satoshi Nakamoto for making such a complicated system, open source, and not be open to intrusion or manipulation. He's a hacker.

Bitcoins has no master server like PayPal keeping a log of all transactions. Instead this database is stored on people's computers, like it is on Bittorrent. The creator of Bitcoin is very clever, by solving the double spending problem.

If I have a £50 note, and give it to you; you know that after I've given it to you, I can't spend it again, because I don't have it anymore. With no master server, Bitcoins are decentralised, unlike PayPal. If money is just a bunch of 1's and 0's, how can Bitcoin make sure that people don't spend the money twice? Couldn't hackers create money out of thin air on their computers? They can't because Bitcoin has solved the problem of double spending.

All Bitcoin transactions are logged publicly, and by doing mining, you are checking the authenticity of all Bitcoins, whilst solving scientific algorithms in the background when you use your computer. To solve the problem of double spending, transactions have to be logged publicly. There is no way to solve the double spending problem, other than to do that.

A Bitcoin is a value of currency (BTC).
>A Bitcoin address is like a PayPal email address, but it's where you keep your Bitcoins. (Note that you don't need ID to get a Bitcoin address. I got a disposable one in 5 seconds, upon loading the homepage of a disposable Bitcoin provider.)
Let's explain how this works. Unlike paper money that you, a person, keep in your wallet; when you keep bitcoins that you, a person, keep in your bitcoin address, each individual Bitcoin is identified with 2 things.

The Bitcoin address which is in hold of the Bitcoin. (bitcoin holder)
The Bitcoin address which sent the Bitcoin to the holder. (bitcoin sender)
Here's an example of a Bitcoin address.
1N9vKDweKCF9Yibapky7UmqRJ8PKgnvM2s
Here's where you can publicly check the transactions.
http://blockexplorer.com/address/1N9vKDweKCF9Yibapky7UmqRJ8PKgnvM2s

To explain this more accurately, (bold text is added by me)

Bitcoins contain the current owner's wallet address. A user can create as many wallets as he likes. When a bitcoin belonging to user A is transferred to user B, then A’s ownership over that bitcoin is relinquished by adding B’s address to it and signing the result with the private key that is associated with A’s address.[17]A private key is like a signature on a piece of paper, but because it's private, no other person (bitcoin address), can sign it, because it's private, so if they try to, their attempt to match it, won't match the key on the Bitcoin.

Because of the asymmetric cryptographic method, nobody else can grant this signature, and the private key cannot be determined based on the signed bitcoin Because it's private and encrypted.. The resulting bitcoin is broadcast in a message, the transaction, on the peer-to-peer network. These messages are stored on the computers of miners several times. The rest of the network nodes validate the cryptographic signatures and the amounts of the transaction before accepting it. Each Bitcoin transaction is validated, and they take from 10 minutes to 1 hour in order to complete, depending on who you deal with. This validates whether you've actually spent the money you are claiming to of spent. Each transaction is checked by several third parties, and each Bitcoin is signed with a public and private key (signature) of the sender and the holder, and is also timestamped.

http://en.wikipedia.org/wiki/Bitcoin
I hope that answers your questions. I'm sure my answer can be expanded to be even more complicated, as Bitcoin is very advanced and clever.
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