Suppose you’re buying an Ellsworth 2-drawer Night Stand on Overstock.com. Since the retailer began accepting Bitcoin last week, you choose to pay with the volatile and enthralling virtual currency. Great! What actually happens behind the scenes? And how does Overstock know your Bitcoins are real?
The transaction is not run through a bank, or credit card company, or any single well-defined entity at all. Instead, it is distributed to every computer on the Internet that’s running the Bitcoin software. These computers check the public global record of transactions to confirm that your anonymous Bitcoin address (a really, really long number represented below by fake regular-people names) has the Bitcoin it’s trying to send. If it does, a new record is added showing that that amount is transferred to Overstock. If you then try to spend that same Bitcoin with Zynga on FarmVille crops, it will see that you no longer have that “money”—Overstock does—and your new transaction will be rejected.
The process of validating transactions is essential. So the Bitcoin system has a way of rewarding people who make the effort: It gives them new Bitcoins. The whole process is called “mining.” Click on the line labelled “Nonce” below to see how it works.
