Even a novice can understand the principles of Bitcoin and blockchain.

Bitcoin originated from a 2008 [paper](https://bitcoin.org/en/bitcoin-paper "paper").

A person named Satoshi Nakamoto proposed a revolutionary idea: let's create a currency not controlled by any government or anyone else! The idea was insane: a string of numbers, backed by no assets and held accountable by no one, how could anyone accept it as money?

![1.jpg](https://moer.si/usr/uploads/2025/09/2273189064.jpg)

However, the wild idea became reality. In the following years, with the support of countless enthusiasts around the world, the Bitcoin network took off. More and more people and capital joined in, and the spark eventually spread like wildfire. In 2017, Bitcoin experienced explosive growth, rising from $1,000 at the beginning of the year to a peak of $20,000. The world was shocked, and everyone from governments to ordinary people watched closely. The fact is that Bitcoin has and will continue to change the world.

![2.png](https://moer.si/usr/uploads/2025/09/3891220950.png)

News media often focus solely on its explosive growth, ignoring or failing to answer some fundamental questions.

>- How does Bitcoin work?
- Why does this unmanaged system operate successfully?
- What is the Bitcoin transaction process?
- How does it relate to the blockchain?
- Below, I will attempt to answer these questions and help you understand Bitcoin. Beyond the technical details, it's fairly straightforward to explain.

One thing to note: this article discusses technical issues only. It doesn't address how to invest in Bitcoin, much less predict its price trends. In fact, I don't know either. If I knew how to get rich, I probably wouldn't be blogging here.

##1. Asymmetric Encryption

First, to understand Bitcoin, you must understand asymmetric encryption.

You may have heard of this term. Asymmetric encryption is actually very simple: encryption and decryption require two keys: a public key and a private key.

![3.png](https://moer.si/usr/uploads/2025/09/3109543703.png)

The public key is public and available to anyone. The private key is secret and can only be used by the owner. Someone encrypts information using your public key and sends it to you. You decrypt it using your private key and retrieve the information. Conversely, you can also encrypt a message with your private key, and others can decrypt it with your public key, thus proving that the message was indeed sent by you and has not been tampered with. This is called a digital signature (for a more detailed explanation, see "What is a Digital Signature").

Now imagine that instead of encrypting ordinary information, the public key encrypts a sum of money and sends it to you. What happens?

First, you can decrypt the encrypted package and retrieve the money because you have the private key. Second, others cannot steal the money because they do not have your private key. Therefore, the payment is successful.

This is the principle of Bitcoin (and other digital currencies): asymmetric encryption ensures the reliability of payments.

Since the money paid must be withdrawn using the private key, it doesn't matter who you are; what matters is who holds the private key. Only those with the private key can access the money paid to you. (In reality, the actual transaction process is slightly different. The private key doesn't guarantee the withdrawal of funds paid to you, but rather ensures that only you can spend the funds that belong to you. See below for details.)

##2. Bitcoin Wallet
With Bitcoin, payments aren't made to individuals, but rather to a specific private key. This is the fundamental reason for transaction anonymity, as no one knows the owner of those private keys.

Thus, the first thing you need to do when trading Bitcoin is to have your public and private keys.

When you open an account at an online Bitcoin exchange, they'll ask you to create a Bitcoin wallet. This wallet isn't used to store Bitcoin, but rather to store your public and private keys. The software will generate these two keys for you and store them in the wallet.

![4.png](https://moer.si/usr/uploads/2025/09/1235487306.png)

According to the protocol, public keys are 512 bits long. This length is not easily transmittable, so the protocol also stipulates that a 160-bit fingerprint be generated for the public key. A fingerprint is a relatively short, easily disseminated hash value. 160 bits in binary, written as hexadecimal, are approximately 26 to 35 characters, such as 1BvBMSEYstWetqTFn5Au4m4GFg7xJaNVN2. This string is called the wallet address and is unique, meaning that each wallet address is unique.

![5.png](https://moer.si/usr/uploads/2025/09/2089487960.png)

When you send money to someone, you simply tell them your wallet address, and they pay you to that address. Since you own the address, you receive the money.

Because ownership of a wallet address is proven by the private key (the specific proof method will be explained later), it is crucial to protect your private key. This is extremely important. If your private key is stolen, your Bitcoin is effectively gone, as someone can impersonate you and transfer the funds from your wallet.

Similarly, when you send Bitcoin to someone, be sure not to enter the wrong wallet address, otherwise your Bitcoin will be sent to a different person.

##3. Transaction Process
Below, I'll outline the entire process to see how a Bitcoin transaction is completed.

**A transaction is the transfer of Bitcoin from one address to another.** Since Bitcoin transaction records are public, each address can be traced to determine how many Bitcoins it holds. Therefore, it's easy to verify whether the payer has enough Bitcoin to complete the transaction.

The problem lies in preventing others from falsely claiming transactions under your name. For example, someone claims a transaction: Address A pays Address B 10 Bitcoins. How can I be sure that this claim is genuine and that the claimant is the owner of Address A?

The Bitcoin protocol stipulates that when reporting a transaction, in addition to the transaction amount, the party sending the Bitcoins must also provide the following data.

>- Hash of the previous transaction (where you obtained the bitcoins)
- Addresses of both parties in this transaction
- Public key of the payer
- Digital signature generated by the payer's private key

Verifying the authenticity of this transaction requires three steps.

> First, find the previous transaction and confirm the source of the payer's bitcoins.

Second, calculate the fingerprint of the payer's public key and confirm that it matches the payer's address, thereby verifying the authenticity of the public key.

Third, use the public key to decrypt the digital signature, verifying the authenticity of the private key.

After these three steps, the transaction can be confirmed to be authentic.

##4. Transaction Confirmation and Blockchain
Once the transaction is confirmed to be authentic, it is not yet complete. **The transaction data must be written to the database for it to be valid and for the other party to actually receive the funds.**

Bitcoin uses a special database called a blockchain. For a detailed introduction, please see "Blockchain Introduction Tutorial". This article will only discuss how transactions are added to the blockchain.

First, all transaction data is transmitted to miners. Miners are responsible for adding these transactions to the blockchain.

According to the Bitcoin protocol, a block can be up to 1MB in size, and a transaction is approximately 500 bytes. Therefore, a block can contain up to 2,000 transactions. Miners are responsible for bundling these 2,000 transactions into a block and then calculating the block's hash.

![6.jpg](https://moer.si/usr/uploads/2025/09/943538598.jpg)

The process of calculating the hash is called mining, and it requires a significant amount of computation. Miners compete with each other. Whoever calculates the hash first gets to be the first to add the new block to the blockchain and receive all the rewards from that block, while other miners receive nothing.

Once a transaction is added to the blockchain, it is irreversible. It's important to understand that Bitcoin isn't stored in a wallet or anywhere else; it exists only on the blockchain. The blockchain records every transaction you participate in, including how many Bitcoins you've received and how many you've paid, allowing you to calculate your assets.

##5. Miner's Revenue
Transaction confirmation is essential for miners. Why would anyone want to be a miner?

The Bitcoin protocol stipulates that miners who mine new blocks receive a reward. Initially (in 2008), it was 50 Bitcoins, which is halved every four years. Currently (in 2018), it is 12.5 Bitcoins. This is how Bitcoin's supply increases, and it's how new Bitcoins enter circulation.

You may have noticed that the reward is halved every four years. Since Bitcoin can be divided to eight decimal places, by 2140, miners will receive no rewards, and the number of Bitcoins will cease to increase. At this point, miners' revenue will depend entirely on transaction fees.

Transaction fees are a percentage of each transaction that miners receive, with the specific amount determined voluntarily by the payer. You can absolutely refuse to pay miners anything, but your transaction will remain unprocessed, delaying its inclusion in the blockchain and confirmation. Miners prioritize transactions with the highest fees.

Currently, due to the surge in transaction volume, transaction fees have skyrocketed. A block with over 2,000 transactions can cost between 3 and 10 bitcoins in fees. If you pay too little, your transaction might not be confirmed for a week.

With a block reward of 12.5 bitcoins, plus transaction fees, the profit is substantial. At current prices, it could reach 1 to 2 million RMB. Imagine if you're lucky and can mine a block in just a few minutes, earning such a large sum. It's no wonder mining is so popular.

##6. Blockchain Expansion
Blockchain Tutorial states that the Bitcoin protocol specifies that a block is created every 10 minutes on average. A block is only 1MB in size and can contain no more than 2,000 transactions. This means that the Bitcoin network can only process a maximum of 2,000 transactions every 10 minutes, which translates to a processing speed of 3 to 5 transactions per second.

Despite the vast number of Bitcoin transactions worldwide, the blockchain can only process a maximum of 5 transactions per second, which has become a bottleneck restricting Bitcoin's development.

There have long been calls for reforming the Bitcoin protocol to increase its processing speed. This progress began to gain traction in August 2017, when a blockchain fork resulted in the creation of a new protocol called [Bitcoin Cash](https://en.wikipedia.org/wiki/Bitcoin_Cash "Bitcoin Cash") (BCH for short). This new currency is otherwise identical to Bitcoin, with the exception of a block size increase from 1MB to 8MB, resulting in an eightfold increase in processing speed and significantly lower transaction fees. This protocol represents a fork of the original blockchain, so every Bitcoin holder at the time effectively received an equivalent amount of BCH.

![7.png](https://moer.si/usr/uploads/2025/09/4200584087.png)

BCH effectively created a new currency. There are also proposals to increase the original Bitcoin block size to 2MB, known as [SegWit2x](https://en.wikipedia.org/wiki/SegWit2x "SegWit2x") . This proposal was originally scheduled for November 2017, but was scrapped at the last minute due to a lack of consensus and is currently under discussion.

##7. Peer-to-Peer Network
Bitcoin is a global, open network. Anyone with a server can join and become a node. Each node contains the entire blockchain (currently over 100 GB), and nodes are constantly synchronizing information with each other.

![8.png](https://moer.si/usr/uploads/2025/09/3067273984.png)

When you make a payment, your node will share the transaction with another node until it has spread throughout the network. Miners collect new transactions from the internet and bundle them into the blockchain. Once successfully written, the miner's node's blockchain becomes the latest version, and other nodes replicate the newly added blocks to ensure consistency across the entire network.

Finally, your node also obtains the latest blockchain and knows that your earlier transaction is included there, confirming the transaction.

##8. One More Question
This concludes my introduction to the basics of Bitcoin. I hope you now understand what Bitcoin is all about. However, there's one fundamental question I haven't answered: What is the true nature of Bitcoin?

After all, Bitcoin is just a record on the blockchain, generated out of thin air. Why can it be used as money? For example, when a miner receives a reward of 12.5 Bitcoins, it is actually a record on the blockchain: "xxx address received 12.5 Bitcoins." It is this line of record that leads to the miner receiving a large sum of money. If the blockchain suddenly adds a record that records that your address received 1,000 Bitcoins, you will really There will be 1,000 bitcoins. Why is this happening?

This article is already long enough, so I'll leave this question for another time. Stay tuned for the final article in this series, "The Essence of Cryptocurrency."

##9.References
[How Bitcoin works](https://arstechnica.com/tech-policy/2017/12/how-bitcoin-works/ "How Bitcoin works") , by Timothy B. Lee
[Bitcoins the hard way: Using the raw Bitcoin protocol](http://www.righto.com/2014/02/bitcoins-hard-way-using-raw-bitcoin.html "Bitcoins the hard way: Using the raw Bitcoin protocol"), by Ken Shirriff
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Author: Ruan Yifeng

Authored by moersi. Please keep the original link when sharing: Even a novice can understand the principles of Bitcoin and blockchain.
This is not investment advice, and we are not liable for any losses.