First, what is Bitcoin? Wikipedia describes it as a public electronic money that is issued and managed via the Internet. In simple terms, it’s “virtual money” that is transferred via the Internet between users. It is also referred to as “online currency”. It is best to explain the concept by explaining that you don’t have to deal with a government or financial institution when you conduct an online transaction. Instead of dealing directly with them, you can exchange money online, and there’s no third party.
Let’s first look at how a typical “real-world” wallet functions. You transfer money from your “real life” account to your bitcoin wallet. This is basically transferring money from your wallet to the wallet of your recipient. The process is quicker and more convenient because you don’t need to use intermediaries. A typical transaction is this: I give you my email address, you send me your phone number and you give me your email address. What is happening is that we exchange something (your email address) in exchange for something (your phone number).
Let’s now take a look at how something similar to an actual currency functions. Let’s say that I want to buy coffee since I’m in town for a business meeting. To purchase the coffee, I would first sign up for an account at the local coffee shop. From that point I could keep my coffee until I arrive at my meeting, at which time I would pay for my coffee with my real-world bank account.
Let’s say I’m traveling to someplace where I don’t have access to a traditional banking system, like London. What should I do? Simply put the bitcoin network works as a digital currency, so I can purchase my fuel with any digital currency I like. For example, if I intend to travel to London using the pound, I could make the trip using the Euro or the USD. This is the great thing about it. While it might have a high currency rate but there isn’t a central government that can regulate these currencies. It is a solid currency since there aren’t any threats to it.
What happens between all these transactions? The transaction is actually conducted by all the entities involved with the transaction, referred to as “miners”. These entities keeps everything running smoothly. The “mining process” is what makes transactions flow through and secures the network. In the case of the bitcoin network, this is accomplished by having users join the bitcoin mining pool, where they pool their resources and together they speed up the rate at which new blocks are mining.
Now we know what goes on behind the scenes, how does one determine if one is being “minted” or if their transactions are being tracked? There is actually a new technology being developed known as “blockchain technology” which aims to make the whole mining activity transparent. It works this way once a person creates a block, they add it into the existing ledger, referred to as the “blockchain” along with any other transactions that were performed during that period of time. Each transaction is tracked and logged on to the computer system of the particular ledger. This lets you see at a glance exactly how much money coins someone has been minted and how they’re spending them.
While this may sound good in theory, there’s one flaw with the system that everyone should be aware of. There is no physical item so it is impossible to examine the transaction history of a person. They may report suspicious transactions, however, it’s impossible to verify whether the transaction is legitimate or not. Only way to protect transactions is to use an offline computer such as an offline paper wallet. There are even online websites that will take care of this for you should you not want to perform your transaction from the internet.
This bitcoin transaction system is essentially a protocol that people use to ensure that they can be tracked via their transactions. This makes it nearly impossible for anyone to alter or double spend on another person’s transactions. This new technology is not compatible with all computers, so some of today’s most prominent names in the field are missing the chance to take the leap to the next phase of computing power. There are a lot of developers trying to create software that can enable even the most basic of computers to use the internet to conduct transactions. Once the protocols are made accessible to the general public, it will be easier for people to transfer money from one wallet to another and to use their computing power in order to drive around the globe using bitcoins instead traditional currencies.
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