The origins of cryptocurrencies go back to the emergence of Bitcoin in 2008, introduced online[1] by an anonymous individual who called himself Satoshi Nakamoto. In the initial whitepaper, the author described the need for an online payment system that operated without relying on any financial institution to act as an intermediary.[2] The proposed solution was Bitcoin, a peer-to-peer payment network, secured by cryptography, obviating the need to depend on a bank or other intermediary to secure the transaction. Users of Bitcoin would benefit from final, irreversible transactions, similar to handing over cash in person.
Existing digital methods for transferring money over the internet already required the sender and receiver to rely on financial institutions to mediate the transaction. For example, in bank or wire transfers, the bank acts as the mediator, while PayPal serves this role in its transactions. While these systems are generally reliable and handle thousands of transactions every second, they necessitate placing trust in a third party. Nakamoto pointed out that existing payment methods lack finality, as intermediaries can reverse transactions, increasing the risk of fraud.[3] This dynamic compels buyers and sellers to trust that the other party will not make fraudulent claims to the mediator, resulting in merchants often requiring additional customer information, such as the sender’s full name and billing addresses, that would not be necessary in cash transactions. Moreover, mediation incurs costs, usually paid by the buyer or seller. Thus, payment systems reliant on trusted third parties involve inconveniences and additional expenses for users, unlike cash-based transactions.
To understand why Bitcoin’s peer-to-peer system is significant, it is useful to examine how traditional bank transfers work and why they involve delays and inefficiencies.[4] In a typical bank transfer, the bank first collects outgoing payment requests from its customers, some of which are sent to other banks. To manage these transactions efficiently, banks process them in batches, settling the total amounts with other banks at predetermined times—often at the end of the day—depending on the payment system in use.[5] Although banks usually make funds available to recipients of the transfer immediately, they do so assuming that official settlement will take place later. For larger transfers or those flagged as suspicious, banks may delay the release of funds to protect themselves from the risks of fraud. Settlement between banks is generally supervised by the country’s central bank, which oversees financial regulation and tries to ensures stability in the banking system.
International transfers are even more complex and time-consuming than domestic ones. Banks must coordinate across borders, often relying on intermediary banks when they lack a direct relationship with the receiving bank. This adds extra steps, requiring clearing houses and central banks to process transactions. Currency exchange introduces further delays due to fluctuating rates. Strict compliance checks for fraud and money laundering mean banks may hold funds until settlement is complete. Time zone differences, bank processing times, and technical issues add to the delays, making international transfers slow and costly—an issue that cryptocurrencies like Bitcoin aim to solve.
For a digital payment system to truly replace traditional banking, it needed to operate without trusted intermediaries. However, without oversight, the system would be vulnerable to fraud by malicious users. The key challenge was to create a system that could maintain security and reliability while ensuring independence.
To illustrate this challenge, consider the following example. Zayd has created a digital asset, such as an application or software, and Amr wishes to purchase full rights to it. However, Amr has no way of verifying whether Zayd has kept a copy for himself or already sold it to someone else. This is because when Zayd sends the software, he is merely sending a copy—while the original remains on his device. Even if Amr insists that Zayd deletes the original, there is no way to confirm that he hasn’t saved a backup elsewhere or transferred it to others beforehand. What Amr needs is proof that ownership of the asset has transferred to him and is no longer linked to Zayd.
This was a fundamental problem in all digital transfers—and especially for digital money. In a system without trusted intermediaries, this flaw becomes critical. A user could potentially duplicate a digital coin and spend it more than once. This issue became known as the double spend problem.[6]
In 2009, Satoshi Nakamoto launched the Bitcoin network, presenting a novel solution to this problem by using a decentralised, timestamped ledger—known as the blockchain—to prevent double spending without the need for a trusted intermediary.[7] The effectiveness of his solution is evident in the continued growth and reliability of the Bitcoin network since its launch.
Every time bitcoins are sent from one person to another, the transaction is recorded on the blockchain—a decentralised public database. The Bitcoin blockchain contains a complete history of all transactions ever made, and this data can be used to determine the balance of any Bitcoin address.
The blockchain is publicly accessible and transparent. Anyone can view the transaction history and the current balance of each address, though the real-world identities behind the addresses are not necessarily known.[8]
Rather than being stored in one central location, the blockchain is maintained by users across the network running Bitcoin software. Each user holds a copy of the blockchain and helps verify transactions by comparing their copy with others. This decentralised model makes the network highly secure and resistant to tampering or hacking—as will be discussed further below.
Bitcoins are held at Bitcoin addresses, which function similarly to account numbers. Each address is a unique string of letters and numbers. To send bitcoins, a user must use a corresponding private key—a secret code akin to a password. Without this private key, bitcoins cannot be spent. If someone else obtains a user’s private key, they can access and transfer those bitcoins. If the key is lost, the bitcoins stored at the associated address are permanently inaccessible, as recovery is virtually impossible.
Each private key has a matching public key, which allows others to verify that a transaction was authorised by the rightful owner. For example, if someone tried to fraudulently transfer bitcoins from Zayd’s address, the network would attempt to validate the transaction using Zayd’s public key. If it was not signed with Zayd’s private key, it would be rejected.
Because every user running Bitcoin software stores a full copy of the blockchain and verifies transactions independently, the network becomes more secure as more users join. A hacker would have to alter the majority of individual copies simultaneously to alter the ledger—a near-impossible task. To date, the Bitcoin blockchain has never been successfully hacked, and is regarded as one of the most secure networks in the world.[9]
Having explained how the blockchain records transactions and secures the network, we can now turn to the process by which new transactions are added to the blockchain—known as mining.
Mining is a central part of how Bitcoin operates. When a user sends bitcoins, they sign the transaction with their private key and broadcast it to the network. These transactions are then gathered by miners into a collection called a block, which they attempt to add to the blockchain. However, before a block can be added, miners must compete to solve a complex mathematical puzzle.
This puzzle requires immense computational power and electricity, as it involves repeatedly guessing a number that, when combined with the block’s data and passed through a special mathematical function, produces a valid result. The first miner to find a valid solution earns the right to add the block to the blockchain. In return, they receive a block reward consisting of newly issued bitcoins and the transaction fees included with the payments in that block.
This process is intentionally designed to be difficult to perform but easy to verify. In other words, posting transactions to the blockchain requires significant computational effort, while verifying their validity is simple for users. This ensures that fraudulent activity is both hard to carry out and easy to detect, helping prevent manipulation while keeping the system decentralised.
It also serves as a mechanism for regulating the release of new bitcoins, since block rewards—currently the only way new bitcoins enter circulation—are only issued when a block is successfully mined, a task that requires substantial effort. This stands in contrast to inflationary currency systems, where central authorities can increase the money supply at will.
Importantly, mining does not generate bitcoins out of nothing. Rather, it unlocks a portion of the fixed supply of 21 million bitcoins that will ever exist. These coins are released according to a predetermined schedule, with a small amount made available each time a miner successfully posts a block—hence the term mining.
Bitcoin’s mining process relies on a mathematical tool called a cryptographic hash function, specifically the SHA-256 algorithm. This function takes any input—such as a block of transaction data—and produces a unique 256-character output called a hash. Even the slightest change to the input—such as a single character—results in a completely different hash, making it impossible to guess the correct input from the output.
When miners prepare a new block, they must include an additional number, called a nonce, alongside the transaction data. This combined package is then passed through the SHA-256 algorithm to produce a hash. For the block to be accepted, this hash must meet specific criteria set by the network. There is no way to predict which input will yield a valid hash, so miners must continually guess different nonces until one of them produces an acceptable result. This process can take billions or even trillions of attempts.
To perform this task efficiently, miners use specialised hardware chips capable of running the SHA-256 function trillions of times per second, which consume significant amounts of electricity.
If more miners join the network, solutions are found more quickly, since more guesses are being made. To prevent blocks from being mined too rapidly, the Bitcoin network automatically adjusts the difficulty of the puzzle, increasing it when blocks are found too quickly and decreasing it when blocks take too long to mine. This dynamic adjustment ensures that a new block is added to the blockchain, on average, every ten minutes.
Once a miner successfully solves the puzzle, they broadcast the block to the network. Other users running the Bitcoin software can instantly verify whether the solution is valid, and if it is, they add the block to their copy of the blockchain. This mechanism ensures that every transaction is verified by the network as a whole.
This system is called proof of work, because the miner must prove they have done the computational work before their block is accepted. While the process is energy-intensive and seemingly arbitrary, it is essential to the security of Bitcoin. A malicious user would need to expend enormous resources competing with honest miners, only to have their block rejected if it does not meet the required conditions. This makes tampering with the blockchain economically and technically unfeasible.[10]
Bitcoin introduced the concept of a decentralised public database—the blockchain—which has since been adopted by thousands of other cryptocurrencies. While many of these projects build on the same basic idea, they often function quite differently in practice. Bitcoin is deliberately simple and inflexible, making it difficult to change. To introduce new features or design changes, developers have typically copied or “forked” its code to create entirely new cryptocurrencies.
These alternatives are usually created and maintained by identifiable teams or companies that oversee development and promote adoption. Unlike Bitcoin—which has no central authority and operates according to fixed rules—these newer cryptocurrencies may be centrally managed, with more flexible policies around supply limits, consensus mechanisms (such as using proof of stake[11] instead of proof of work), and even transaction validation. As a result, while they share Bitcoin’s foundational technology, their underlying systems, governance structures, and degrees of decentralisation can differ significantly.[12]
Antonopoulos, Andreas M. Mastering Bitcoin. O’Reilly Media, 2014.
Bier, Jonathan. The Blocksize War: The Battle for Control over Bitcoin’s Protocol Rules. BitMEX Research, 2021.
Narayanan, Arvind, Joseph Bonneau, Edward Felten, Andrew Miller, and Steven Goldfeder. Bitcoin and Cryptocurrency Technologies. Princeton University Press, 2016.
[1] Bitcoin P2P e-cash paper. Cryptography Mailing List, October 31, 2008. metzdowd.com.
[2] Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, 2008. bitcoin.org.
[3] Satoshi Nakamoto, Bitcoin.
[4] The following explanation of Bitcoin’s inner workings is based on the author’s understanding drawn from a range of sources. While care has been taken to ensure accuracy, readers are encouraged to notify the authors of any factual errors so corrections may be made.
[5] A payment system refers to the protocol used to process and settle financial transactions. In the UK, payment systems include Faster Payments (FPS), BACS, and CHAPS. These differ mainly in settlement speed. Faster Payments allow instant transfers, while BACS may take up to three days. See Payment information: BACS, CHAPS and Faster Payments. Barclays UK, accessed May 5, 2025. barclays.co.uk.
[6] Double-Spending. Investopedia, updated May 15, 2024. investopedia.com. There were many attempts to solve the double-spend problem before Bitcoin. Bitcoin was developed building on these earlier efforts. See Arvind Narayanan and Jeremy Clark, Bitcoin’s Academic Pedigree: The concept of cryptocurrencies is built from forgotten ideas in research literature. Communications of the ACM, December 2017. doi.org/10.1145/3134434.313655.
[7] Bitcoin v0.1 released. Cryptography Mailing List, January 8, 2009. metzdowd.com. See also: The Satoshi Nakamoto Institute archive of his writings. satoshi.nakamotoinstitute.org
[8] The entire blockchain can be downloaded and verified on your personal device using Bitcoin Core software; see bitcoin.org. Alternatively, online block explorer can be used to view all current and past transactions, for example mempool.space. A practical guide to using block explorers is available at bitcoinbriefly.com.
[9] Can Bitcoin Be Hacked? River, accessed August 4, 2024. river.com. Although the Bitcoin network itself has never been hacked, users can lose funds if their private keys are compromised.
[10] For a clear and accessible explanation of how Bitcoin works, see the animated video by 3Blue1Brown, But how does bitcoin actually work? YouTube, 7 July 2017. youtu.be/bBC-nXj3Ng4. For more detailed technical reading, see Andreas M. Antonopoulos, Mastering Bitcoin; and Arvind Narayanan et al., Bitcoin and Cryptocurrency Technologies.
[11] In proof of stake systems, validators are selected based on how much cryptocurrency they hold and lock in as “stake,” rather than performing energy-intensive calculations. This contrasts with Bitcoin’s proof of work system, where miners expend computational power to validate transactions. For a defence of Bitcoin’s energy use and its trade-offs, see Lyn Alden, Bitcoin’s Energy Usage Isn’t a Problem, updated January 2023. lynalden.com.
[12] The Bitcoin network has no central authority. After its anonymous founder stepped away, it continued to grow organically without the influence of any individual or group. This decentralisation makes Bitcoin highly resistant to change. During the “blocksize wars,” major corporations, miners, and influencers attempted to impose changes to the protocol, but ultimately failed. See Jonathan Bier, The Blocksize War: The Battle for Control over Bitcoin’s Protocol Rules (BitMEX Research, 2021). A summary of these events is also available in: The Blocksize Wars Revisited. Coindesk, May 17, 2023. coindesk.com.
Around the same time, Ethereum underwent a controversial rollback to return stolen funds after the DAO hack, highlighting its centralised decision-making. See How the DAO Hack Changed Ethereum. Coindesk, May 9, 2023. coindesk.com.