-Long version-
1)
I really want to understand how bitcoin works. Please.
Okay, you asked for it. With some severe simplifications and a painfully neutral pov:
Bitcoin is a decentralized "cryptocurrency". It is a network of software that shares a common protocol designed to allow secure transfer of bitcoins between users. It uses distributed cryptography to verify transfers and balances.
Bitcoin is also the subculture that has sprung up around this software, which includes additional software that is not part of the core design. The most high-profile of these are trading services that allow users to buy and sell bitcoins using US dollars and other real-world currencies.
Bitcoins users have files called "wallets". This is sort of a misnomer, because these wallets do not actually contain anything except a cryptographic private key. One's bitcoin balance is actually recorded inside the distributed network, which is why you cannot edit your wallet file to give yourself more bitcoins. Bitcoins can be added to a particular balance using a public bitcoin address, which acts as a cryptographic public key. The private key is contained in the wallet, and bitcoins cannot be transferred
out of a balance without that private key.
(If you don't understand public-key cryptography,
do some reading because you can't understand bitcoin without it. While you're at it, read up on
cryptographic hash functions.)
Transfers between wallets are recorded in "blocks", which are verified by the distributed cryptography system. The act of verifying transactions and then adding those transactions to the historical "blockchain" is called "mining". Transactions are stored in the blockchain using cryptographic hashing methods which allow the entire blockchain to be independently verified for consistency and integrity. In order to make blockchain verification an attractive prospect, the design of bitcoin gives "bitcoin miners" two reasons to tie up their computing hardware to maintain the network, both based around competition.
The first reason is that bitcoin transfers can contain optional transaction fees which are paid to the miner that verifies the transaction. Paying a transaction fee makes it more likely that your transaction will be processed in a timely manner, because those transactions are more attractive to the miners.
The second reason is that mining gives the miner a chance of receiving a batch of newly created bitcoins. The more cryptographic power one brings to bear, the more likely it is that the next batch of new bitcoins will be yours. There are a fixed number of bitcoins which can ever be mined, and the difficulty of the cryptography will continue to increase over time.
An important aspect of mining is that the network is designed to handle one complete block (containing a specific number of transactions) every ten minutes. If more computing power is added to the distributed network, making the blocks take less time to process, the difficulty of the cryptography increases. The inverse is also true. This scaling difficulty is meant to help prevent a single user or group of users from gaining complete control over the network by using more computational power.
The distributed verification process determines the "truth" of a transaction block by whether or not the majority of the network (as measured by contributed cryptographic work) considers it valid. The original designer thought it unlikely that any one user or organization could acquire a majority of the network's cryptographic power and therefore "cheat" the system in some way.
Bitcoin verification power is typically measured in the speed at which a system can perform cryptographic hashes, which are required to verify the blockchain and to add transactions to it. The difficulty of the mining process is determined by the amount of "hashing" required to add a new block to the chain.
These are the core aspects of the original bitcoin design. In short, bitcoins are assigned to "wallet" addresses, with balances stored in a distributed "blockchain". The accuracy of the blockchain is verified by "miners", who have a vested interest in doing so through a reward system. Attacks (such as double-spending) are prevented by the distributed nature of the network, where any invalid transactions will be caught by other mining systems.
