How the Bitcoin Network Actually Works

Bitcoin gets called a lot of things: digital gold, internet money, a scam, a revolution. This guide skips all of that. It is not about what Bitcoin is for. It is about what Bitcoin is: the parts, how they fit, and why they work.

We are going to build the idea up in layers, because that is genuinely how Bitcoin is put together. Each layer sits on top of the one below it. If you skip a layer, the ones above look like magic. If you take them in order, the magic turns into something more satisfying: plain engineering.

A quick note on numbers. The rules in this guide (how often blocks appear, the coin limit, how a block is structured) are fixed by the software and do not change. The live figures (how much computing power is on the network, how busy it is, the price) change all the time. Where I mention one of those, treat it as "roughly true in mid-2026" and check a live site for today's value.

What we are actually looking at

Here is the one-sentence version of the whole thing:

Bitcoin is a way for a huge group of strangers, who do not trust each other and have no boss, to agree on a single shared list of who owns what.

That is harder than it sounds. Normally, when a group needs to agree on something, someone is in charge. A bank keeps the official record of your balance. A referee makes the call. Bitcoin has no one in charge, and some of the people taking part may be actively trying to cheat. Somehow it still ends up with one agreed answer.

By the end of this guide you should be able to explain, in your own words, why a coin cannot be spent twice, why sending Bitcoin costs a fee, why the mining difficulty keeps adjusting up and down, why "running a node" and "mining" are two completely different jobs, and what actually happens in the roughly ten minutes between tapping send and the payment becoming permanent.

The one problem Bitcoin was built to solve

Everything starts here, so it is worth slowing down.

The problem is called double spending, and it only exists for digital money.

Think about a physical $20 bill. When you hand it to a shop, you no longer have it. The object moved from your hand to theirs. You physically cannot be in two shops spending the same bill at the same time.

Now think about anything digital: a photo, a song, a file. Copying it is free and perfect. You can send the exact same photo to a thousand people at once, and each copy is flawless. That is great for photos. It is a disaster for money. If a "coin" were just a file, you could send the same coin to a thousand different people, and each one would see a perfectly real coin. Only later would everyone realise they were all paid with the same money.

The usual fix is to put someone in charge. A bank keeps one official list. When you pay, the bank subtracts from your row and adds to someone else's row. Because there is only one list, controlled by one company, the same dollar cannot be in two places. This works, and most of the world runs on it. But it comes with a cost. You have to trust that company. It can freeze you, reverse payments, get hacked, go under, or simply charge you for the service.

So the question that led to Bitcoin was very specific:

Can you keep one official list of who owns what, without anyone being in charge of the list?

Two pieces of math hold up everything else

Almost every surprising thing about Bitcoin comes from one of two tools. Neither was invented for Bitcoin. Both are decades old and used all over the internet.

Tool 1: the fingerprint machine (a hash)

A hash function is like a machine that takes anything you feed it (a word, a file, an entire book) and spits out a short jumble of characters. Bitcoin uses one called SHA-256, whose output is always 64 characters long. Feed in a single letter or the complete works of Shakespeare, and you still get exactly 64 characters back. People often call this output a fingerprint, and that is the word I will use.

Three things make it special, and the whole security of Bitcoin leans on them:

1. Same input, same fingerprint, every time. Anyone, anywhere, feeding in the same thing gets the same result. No coordination needed.
2. Change the input a tiny bit, and the fingerprint changes completely. There is no "close." Change one letter and about half the output flips, with no pattern connecting the two.
3. You cannot run it backwards. Given a fingerprint, there is no way to figure out what was fed in, other than guessing. And there are so many possible fingerprints that guessing is hopeless. (For scale: the number of possible outputs is far larger than the number of atoms on Earth.)

Point 2 is the one people underestimate, so here it is made concrete. These two inputs differ by a single letter:

"Bitcoin"  ->  b4056df6691f8dc72e56302ddad345d65fead3ead9299609a826e2344eb63aa4
"bitcoin"  ->  6b88c087247aa2f07ee1c5956b8e1a9f4c7f892a70e324f1bb3d161e05ca107b

One lowercase letter, and 62 of the 64 characters came out different. Underneath them, about half of the 256 bits flipped. There is no pattern connecting the two results.

Try it live: type any word and watch the diff highlight, character by character

This matters a lot later. Because there is no "getting warmer," you cannot be clever and steer a fingerprint toward a shape you want. Your only option is to try, check, and try again. Remember that.

A good way to build intuition is to feel it yourself.

Try it live: a SHA-256 playground that rehashes on every keystroke. Type something, delete one character, and watch the whole 64-character output rearrange.

One more detail for the curious: Bitcoin usually runs this machine twice in a row, taking the fingerprint of the fingerprint. You do not need to remember why. Just know that when you hear "the block's ID" or "the transaction ID," that is one of these fingerprints.

Tool 2: a lock only you can close, that anyone can check

The second tool answers a different question: how do you prove you are allowed to spend a coin, without giving away a secret that would let anyone else spend it too?

The answer is a matched pair of keys:

• A private key, which is basically a giant secret random number that only you know.
• A public key, which is calculated from the private key and which you can share freely.

Like the fingerprint machine, this only runs one way. It is easy to make the public key from the private key, and effectively impossible to go backwards.

With this pair you can do two things:

• Sign. Using your private key, you can stamp a specific message (a payment) with a unique signature. The signature only works for that key and that exact message.
• Verify. Anyone with your public key can check that the signature is real, which proves you made it, without ever seeing your private key.

A helpful picture: think of a special wax seal that only your ring can press, but that anyone in the world can recognise on sight. You never hand over the ring. You just stamp things, and everyone can confirm the stamp is yours.

This is the entire idea of owning Bitcoin. A coin is not sitting "inside" a wallet like a file in a folder. To own Bitcoin simply means you know a private key that can produce a valid signature to move that coin. Lose the key and the coins are stuck forever. There is no support line and no reset button. That is what people mean by the phrase "not your keys, not your coins."

From a secret number to an address

You have probably seen a Bitcoin address, one of those long strings starting with bc1. Here is where it comes from, and it is just the two tools from the previous section (the fingerprint machine and the key pair) chained together.

The path runs in one direction only:

private key -> public key -> address

Each arrow is easy to walk forwards and practically impossible to walk backwards. You make the public key from the private key using the key math. Then you make the address by taking the fingerprint of the public key.

Because of that one-way street, two everyday facts fall out:

• Sharing your address is safe. It is downstream of everything secret, so it gives nothing away. People can send you money, and that is all.
• Sharing your private key is a catastrophe. It is the thing at the very start of the chain. Anyone who has it can sign, which means they can spend everything.

You may notice addresses start with different prefixes. A quick key:

They all do the same basic job: they are a safe-to-share destination for money. As a quick rule of thumb, Taproot addresses commonly start with bc1p, and the older native SegWit addresses start with bc1q.

Blocks, and why they form a chain

Now we can build the record itself.

A block is simply a batch of transactions bundled together, plus a small label on top called the header. Think of a block as one page in a shared notebook. The page has a body (the list of payments) and a heading (the summary info). New pages are added roughly every ten minutes, and each page can hold a few thousand payments.

The header is small but it is where the clever part lives. The whole thing fits in 80 bytes:

Notice that two fields eat 64 of the 80 bytes, and both of them are fingerprints. That tells you what a header is really for.

Try it live: tap through the header drawn to scale, where each field's width matches its byte count.

The single most important field is the previous block's fingerprint. Every block's header contains the fingerprint of the block right before it. That one detail is what turns a pile of separate pages into a connected chain.

Here is why that chain is so powerful. Imagine a cheater wants to secretly change a payment in an old block. The moment they change anything in that old block, its fingerprint changes (that is the fingerprint machine from earlier). But the next block was carrying the old fingerprint. So now the next block does not match, and its own fingerprint would need to change too, which breaks the block after that, and so on all the way to the present.

In other words, you cannot quietly edit page 400 of the notebook. Editing it visibly wrecks every page after it. To make the change stick, the cheater would have to redo every single page from 400 to now, faster than the rest of the world is adding new pages. The section on proof of work explains why that is effectively impossible.

Merkle trees: summing up thousands of payments with one fingerprint

You may have spotted a field in the header called the Merkle root. It sounds fancy. The idea is simple and genuinely elegant.

A block might hold thousands of transactions. The header does not want to store all of them, but it does want a way to lock them in so none can be swapped out later. The trick is to squash all of them down into a single fingerprint, built like a knockout tournament.

Pair up the transactions and take a fingerprint of each pair. Then pair up those fingerprints and hash them. Keep going until only one fingerprint is left standing. That final winner is the Merkle root, and it goes in the header.

Two nice things come out of this:

• Nothing can be swapped. Change any single payment and its fingerprint changes, which changes its pair, which changes the root, which changes the whole block. The root locks everything in.
• You can prove one payment is in a block without downloading the whole block. This is how a phone wallet can confirm your payment landed without storing the entire history of Bitcoin. It only needs a short trail of fingerprints up the tree, not the thousands of other payments.

Coins are not a balance, they are more like cash

This is the part that trips up almost everyone, because it works differently from a bank.

Your bank account has a single number: your balance. When you spend, the number goes down. Bitcoin does not work that way. Bitcoin is more like a wallet full of actual bills and coins of odd sizes.

In Bitcoin, when you receive money, you receive it as a distinct chunk, like being handed a specific bill. The proper name for one of these unspent chunks is an unspent transaction output, usually shortened to UTXO. You do not need the jargon. Just picture bills of random sizes sitting in your wallet.

Now, here is the cash-like rule: you cannot spend part of a bill. If you have a 0.4 coin chunk and a 0.25 coin chunk, and you want to pay someone 0.6, you hand over both chunks, the seller keeps 0.6, and the leftover comes back to you as change, as a brand new chunk. Written out, that payment looks like this:

coins going in                0.65 BTC     a 0.4 coin plus a 0.25 coin
to the seller                 0.6 BTC      the payment
back to you, as a new coin    0.049 BTC    your change
left for the miner            0.001 BTC    the fee

Try it live: pick which coins to spend and drag the payment amount to watch the change and the fee resolve.

The tiny bit that does not come back as change is the fee, which the miner who includes your payment gets to keep. There is more on fees in the section on the waiting room below.

Two everyday consequences of this design:

• Your "balance" is not stored anywhere. Your wallet app just scans the record, finds every chunk that belongs to your keys, and adds them up to show you a number. Nobody wrote that number down.
• Privacy is fiddly. Because change comes back as a new chunk, following the trail of chunks is how blockchain analysts try to trace activity.

Two different jobs: nodes and miners

People mix these up constantly. They are separate roles, and most participants only do one of them.

Nodes are the referees. A node is a computer running the Bitcoin software that keeps a full copy of the record and checks every single rule. Is this signature valid? Does this person actually own the coins they are trying to spend? Is this block properly formed? If anything breaks a rule, the node rejects it and refuses to pass it on. There are tens of thousands of these referees around the world, and crucially, anyone can run one on ordinary hardware. This is the real backbone of Bitcoin. The rules are enforced by thousands of independent copies, not by any authority.

Miners are the record keepers who compete for the right to add the next page. Their job is to bundle waiting transactions into a new block and win the right to add it. This takes serious specialised equipment and a lot of electricity. The next section is all about what they are actually doing.

The key thing to take away: miners propose, nodes decide. A miner can build any block it likes, but if that block breaks the rules, every honest node simply throws it away and the miner wasted its effort for nothing. Power in Bitcoin is split on purpose.

Proof of work: the guessing game you cannot cheat

This is the heart of Bitcoin, and thanks to the two tools from earlier it is now easy to explain.

To add the next block, a miner has to win a guessing game. Remember the header has a field called the nonce, which is just a number the miner is free to change. The game is this: find a nonce so that when you take the fingerprint of the whole header, the result is small enough.

To be precise: a fingerprint is really just a very large number written in hex. The header also carries a target value (packed into a small field called nBits). A block only counts as valid if its fingerprint, read as a number, comes out below that target. The lower the target, the fewer fingerprints qualify, and the harder the puzzle. The easy way to picture "below the target" is "the fingerprint has to start with a certain number of zeros," and that is the mental model I will use, but keep in mind the real rule is the numeric comparison against the target.

That is it. Because of the fingerprint machine's "no getting warmer" rule from earlier, there is no smart way to find such a nonce. You cannot calculate it. You cannot nudge the number in the right direction. You can only try a nonce, take the fingerprint, check if it has enough leading zeros, and if not, add one and try again. Over and over, billions of times per second.

You can feel exactly how this works by doing it yourself. Choose how many leading zeros you want, hit start, and your browser runs the same dumb loop a real miner does, just far slower. On my machine, asking for 4 leading zeros took 99,664 guesses and about 1.7 seconds. Ask for 5 and the work multiplies by roughly sixteen.

Try it live: mine a block by hand, with real SHA-256

Now, why is this pointless-looking effort actually useful? Because of a beautiful lopsidedness:

• Very hard to do, instant to check. Finding a winning nonce takes the entire network huge effort. But checking someone else's winning block takes any referee a split second: take the fingerprint once, count the zeros, done. Making the proof is expensive. Verifying the proof is free.
• Lying costs real money. A winning block represents real electricity that got burned. To rewrite an old block, a cheater would have to burn all that electricity again, plus redo every block since, plus keep outrunning the entire rest of the world adding new blocks in real time, forever. It is not that cheating is banned. It is that cheating is wildly more expensive than playing fair.

That last point is the whole security model in one line: behaving honestly pays better than attacking.

Why almost nobody mines alone

Winning a block is a lottery. If you mine by yourself, you might go months or years without ever winning, then win once, then nothing again. That wild unpredictability is unbearable for most operators trying to pay an electricity bill.

So miners team up into pools. A pool has thousands of miners all working on the same block and splitting any reward in proportion to how much work each one did. This turns a wild lottery into a steady, paycheck-like income. The downside is that it concentrates a lot of decision-making into a handful of large pools, which is one of the genuine worries about Bitcoin today.

Keeping blocks ten minutes apart, forever

Bitcoin aims for a new block roughly every ten minutes. But the amount of computing power aimed at the network is always changing. More miners join, better machines arrive, prices swing and some switch off. So how does the gap stay near ten minutes?

The network retunes the difficulty automatically. Every 2,016 blocks (which at ten minutes each works out to about two weeks), every node does the same simple check: did the last stretch of blocks arrive faster or slower than the ten-minute target? The difficulty then adjusts up or down accordingly. If the last period was mined too fast, the puzzle gets harder (the target drops, so more leading zeros are needed). If it was too slow, the puzzle gets easier. It can and regularly does move in both directions.

A good mental image is a treadmill that speeds up as more runners jump on, so that a runner still crosses the line about every ten minutes no matter how many are racing. This is why you cannot make Bitcoin produce coins faster by throwing more machines at it. Add more power and the puzzle simply gets harder to match.

Every node calculates this adjustment independently and arrives at the same answer, because they all follow the same rule on the same shared record. No committee, no announcement. Just math everyone runs.

New coins, the halving, and the 21 million limit

So where do new coins come from, and who gets them?

Whoever wins a block gets to include one special payment at the top that creates brand new coins out of nothing and pays them to the winner. This is the reward, and it is the incentive that makes people spend money on mining in the first place. The winner also collects all the fees from the transactions in that block.

Here is the famous twist. That reward cuts in half every four years (more precisely, every 210,000 blocks). It started at 50 coins per block in 2009. It dropped to 25, then 12.5, then 6.25, and in 2024 to 3.125. This is called the halving.

Each halving releases half of whatever is still left, so the total creeps toward 21 million without ever quite arriving. New coins trickle out more and more slowly until, sometime around the year 2140, the reward rounds down to zero and no new coins are ever made again.

Try it live: the supply curve, with tappable halving markers

This fixed limit is a large part of why supporters compare Bitcoin to gold. There is a hard cap, and no one can vote to print more. As of mid-2026, roughly 20.06 million of the 21 million already exist. (That figure keeps ticking up slowly, so treat it as a snapshot and check a live source for today's exact number. The 21 million cap itself never moves.)

There is an obvious question hiding here: if the reward eventually falls to zero, why would anyone keep mining? The intended answer is fees. As the new-coin reward shrinks, transaction fees are meant to become the main thing miners earn. Whether fees alone will be enough to keep the network secure that far out is a real and openly debated question. Nobody knows for certain.

The waiting room and why fees exist

When you send Bitcoin, it does not go straight into a block. First it waits in the mempool as an unconfirmed transaction until a miner picks it up. It is tempting to picture one single worldwide queue, but that is not quite how it works. Each node keeps its own local pool of the valid, unconfirmed transactions it has heard about. These local pools overlap heavily, so they look similar, but there is no one official global waiting room. Think of it as many nearly-identical waiting rooms rather than a single one.

Here is the catch: a block only has room for so many transactions. When more people want in than there is space, miners have to choose. And they choose the way you would expect anyone paid by tips to choose: they prefer the payments offering the highest fee for the space they take up.

Think of a miner as a taxi with limited room and a line of passengers, each waving a different tip. The driver naturally picks whoever pays the most per seat. If you attach a generous fee, you get into the next block. If you attach a stingy fee during a busy period, you wait, sometimes a long time.

One important detail: the fee is not based on how much money you are sending. It is based on how much space your transaction takes up in a block. That space is measured in virtual bytes (also called weight), a size measure introduced by the 2017 SegWit upgrade. What miners actually rank by is the fee rate: the fee divided by that virtual size. So a payment moving a fortune can be cheap if it is small and simple, and a payment moving pocket change can be expensive if it is large and complicated. You are paying for room on the page, not for the value being moved.

Two features exist to help when you guess the fee wrong:

• Bumping the fee lets you resend a stuck transaction with a higher fee to jump the line.
• Child pays for parent lets a follow-up transaction attach a big fee to drag a stuck earlier one along with it, since a miner has to include the earlier one to collect the juicy later fee.

What happens when two miners win at once

Sometimes two miners find a valid block at nearly the same moment, in different parts of the world. For a short while, the network disagrees. Part of it heard about block A, part of it heard about block B. This is called a fork, and it is normal and expected, not a crisis.

The tie does not last. Miners keep working, and soon someone builds the next block on top of one of the two. Say the next block lands on top of A. Now the "A" side of the record is longer, and the rule everyone follows is simple: the version with the most work built on it wins. Everyone switches to the longer branch. Block B, the loser, is abandoned, and its transactions (which are almost always also in A) go back into the waiting room to be included normally.

This is exactly why people say to wait for a few confirmations on a big payment. One confirmation means your payment made it into a block. Each additional block stacked on top makes it exponentially harder to ever reverse, because a cheater would have to redo that block and all the ones after it faster than the whole network. For large amounts, waiting for about six blocks (roughly an hour) is the traditional comfort zone.

The "51 percent attack," in plain terms

You may have heard that if someone controlled a majority of the network's mining power, they could attack Bitcoin. That is true, but it is worth being precise about what they could and could not do.

Could do: with the majority of power, an attacker could out-build the honest network and rewrite recent history, which would let them undo one of their own recent payments and effectively spend the same coins twice.

Could not do, even with all that power: steal coins from an address they do not have the key for (they still cannot forge a signature), create coins out of thin air beyond the rules, or change the rules everyone else's nodes enforce. The referees would simply reject anything invalid.

So even the scariest attack is limited, expensive, and easy to notice. It cannot quietly drain your wallet.

Upgrading a system with no boss

If nobody is in charge, how does Bitcoin ever get updated? Carefully, and with the agreement of the people running nodes. There are two flavours of change:

• A soft fork tightens the rules in a way that older software still accepts. It is backwards compatible, so it can roll out smoothly. The 2017 upgrade known as SegWit and the 2021 upgrade known as Taproot were both soft forks. They made transactions more efficient and more private without forcing everyone to upgrade on the same day.
• A hard fork changes the rules in a way older software will reject. If some people upgrade and some do not, the network can split permanently into two separate coins. This is a much bigger deal and much rarer, because it needs near-universal agreement to avoid a messy divorce.

The short version: Bitcoin can improve, but only by broad agreement, and it strongly prefers changes that do not break anyone who has not upgraded yet.

Going faster: layers on top

Every payment we have described so far gets written into the shared record, checked by every referee on Earth. That is wonderfully secure, but it is not built for buying a coffee. It is a bit like asking the whole world to witness and file paperwork for a $3 purchase.

The common solution is to add a faster layer on top, the best known being the Lightning Network. The idea in plain terms: two people (or a chain of people) open a private tab between them, make as many instant, nearly free payments back and forth as they like, and only write to the main record twice, once to open the tab and once to close it and settle the final total.

It is the same instinct as running a bar tab instead of paying the bank for every single sip. The slow, heavily witnessed main chain becomes the final settlement layer, and the fast layer on top handles the everyday small stuff.

The machines and the electricity question

Early on, people mined Bitcoin on ordinary computers. That did not last. Because mining is just the same fingerprint calculation repeated as fast as possible, hardware makers built chips that do only that one calculation and nothing else, insanely fast. These are called ASICs, and today serious mining happens in warehouses full of them.

This is where the well-known energy debate comes from, and it is worth stating both sides fairly rather than picking one:

• The concern: all that guessing burns a genuinely large amount of electricity for a task that, from the outside, produces no physical product. Critics argue that is wasteful and adds to carbon emissions.
• The response: supporters argue the electricity is the point, since that real cost is exactly what makes cheating too expensive. They also point out that miners chase the cheapest power, which is often surplus, stranded, or renewable energy that would otherwise go unused, and that plenty of other industries use comparable amounts of energy with less scrutiny.

Both sides have real arguments. Where you land tends to depend on how much value you think a boss-free, tamper-resistant global record actually provides. This guide is not going to settle that for you, and honest people disagree.

A few myths worth clearing up

• "Bitcoin is anonymous." Not really. Every payment is public and permanent. Names are not attached directly, but the trail of coins can often be followed and linked to real identities. It is more like writing in a public ledger under a pen name than being invisible.
• "A bitcoin is a coin sitting in a file somewhere." No. There is no coin object. There is only the record of which keys control which chunks of value. Owning Bitcoin means holding a key that can sign.
• "You have to buy a whole bitcoin." No. Each coin divides into 100 million tiny units, so you can own and send a very small slice.
• "Miners approve or reject your payment based on who you are." No. Miners mostly just take the highest fees. The rules are enforced by the referee nodes, not decided by miners' opinions of you.
• "If the price crashes, the coins vanish." No. Price is what people will pay. The record of who owns what does not care about the price and keeps working exactly the same either way.

The whole life of a payment, start to finish

Let us tie every layer together by following one payment from the moment you tap send to the moment it is permanent.

Look back at what each step used:

• Step 1 is the UTXO model (coins as cash): whole coins in, payment and change out.
• Step 2 is a digital signature: the wax seal only you can press.
• Steps 3 and 4 are the nodes doing their referee job.
• Step 5 is the mempool and fees: the waiting room and the tip.
• Steps 6 and 7 are proof of work: the guessing game.
• Step 8 is the chain and confirmations: each new block locks the ones below it.

That is the entire machine. Fingerprints at the bottom. Signatures for ownership. Transactions built from signatures. Blocks built from transactions. A chain built from blocks. Agreement built from work. And an economy built on top of all of it.

None of it needs a boss. It needs only a rule that everyone can check for themselves, and a game that makes honesty the cheapest option. That is the quiet, stubborn idea at the centre of Bitcoin.

Next in this series

We have covered why mining works and what the guessing game is. In the next post we will get our hands dirty and actually watch proof of work happen on a real machine, using a mining program called XMRig to make the loop visible and tangible.

Small but important heads-up for later: XMRig cannot mine Bitcoin. Bitcoin mining today needs those special ASIC chips from the hardware section above, not a regular computer's processor. XMRig mines a different, processor-friendly coin. We are using it purely as a clear, hands-on window into the same guess-and-check idea you met here. See you there.

Reference figures (network size, coins mined) reflect roughly mid-2026 and drift over time. The protocol rules (ten-minute target, the halving schedule, the 21 million cap, the block layout) are fixed by the software. When in doubt about a live number, check a public block explorer.

Originally published at devarshi.dev, where all six demos are interactive.