First, what exactly is Bitcoin? Wikipedia describes it as digital currency that is created and managed through the Internet. It is “virtual currency” that can be exchanged between users through the Internet. In simple terms, it’s “online currency”. The best way to explain it is that instead of dealing with a bank or a government agency, or a financial institution when you conduct an online transaction, you’re exchanging money directly through the Internet and there is no third party involved.
Let’s begin by letting us look at how a typical “real world” wallet works. You transfer funds from your “real life” account to your bitcoin wallet. This is basically transferring money from your wallet to the wallet of the recipient. The process is quicker and simpler because you don’t need to deal with intermediaries. A typical transaction would look like this: I give you my email address, you send me your telephone number and you give me your email address. What’s happening is that we exchange a thing (your email address) in exchange for something (your phone number).
Let’s take a look at how something like a real world currency works. Let’s say I want to purchase a cup of coffee since I am in the city for a business meeting. What I would first do is to create an account at the local coffee shop and then use their credit card to purchase the coffee. I could then save my coffee until I arrive and pay with my real bank account.
Let’s say that I’m travelling to a place without access to a traditional banking system, such as London. What do I do? Simply put the bitcoin network works as a digital currency. I can purchase my fuel with any digital currency I like. If I wish to travel to London using the pound, I can use the Euro or the USD. This is the great thing about it. While it could have a higher rate of exchange but there isn’t a central government that can regulate these currencies. It functions as a strong currency because there aren’t any known threats.
What happens between all these transactions? The transaction is actually conducted by all the entities involved in the transaction, also known as “miners”. These entities are the ones that keep the system running. The “mining process” is what allows transactions to happen and secures the network. This is done by inviting users to join the bitcoin mining pool. They pool their resources and increase the speed at the that new blocks are mined.
Now that we have the workings behind the scenes, how can we determine if transactions are being tracked , or if they are being “minted?” There’s a brand new technology being developed called “blockchain technology” that aims to make the entire mining process transparent. The process is this way: when someone is mining a new block they add it to the ledger they already have known as the “blockchain”, along with all of the other transactions that were conducted during the period of time. Each transaction is tracked and logged on to the computer system of the particular ledger. This allows you to view the exact amount of transactions a person has completed and the way they’re spending their money.
Although it sounds great in principle, there’s one problem with the system that everyone must be aware of. There isn’t a physical product which makes it impossible to examine the history of transactions made by a person. If they discover something that is suspicious, they are able to report it, but since the transaction is on the Blockchain the Blockchain, it can’t be verified whether or not it’s legitimate. The only way that people can safeguard their transactions is to conduct their transactions on an offline computer, like an offline paper wallet. There are even some online sites that will do this for you, in case you don’t wish to make your transaction via the internet.
The new bitcoin transaction system allows people to trace their transactions using a protocol. This makes it almost impossible for anyone to change or double spend on another person’s transactions. This new technology is not compatible with all computers, which means that some of today’s most prominent names in the field are missing the opportunity to make the leap into the next era of computing power. However, there are a lot of developers developing software that can let even the simplest of computers to access to the network. When the protocols are made available to the general public, it will be much easier for users to transfer their cash from one wallet to another and also make use of their computing power to drive around the world using their bitcoins instead of traditional currencies.
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