First, let’s define what Bitcoin is. Wikipedia describes it as public electronic money that is issued and managed through the Internet. It is “virtual currency” that can be transferred between users via the Internet. It is also known as “online currency”. It is best to explain it by explaining that you don’t have to engage with a government agency or financial institution when you conduct an internet transaction. Instead of dealing directly with them, you can exchange money online, and there’s no third party.
Let’s begin by looking at the way that a typical “real-world” wallet works. You transfer money from your “real life” account to your bitcoin wallet. This is basically transferring money from your wallet to the wallet of the recipient. The transfer is quicker and more convenient because you don’t have to use intermediaries. An example transaction would be You provide me with your email address, I give you your phone number and you provide me with your email address. What’s happening is that we are exchanging one thing (your email address) for a thing (your phone number).
Let’s look at how something like a real world currency works. Let’s suppose that I’m looking to purchase a cup of coffee because I am in town for a business meeting. To make the purchase, I would first create an account at the local coffee shop. I could then save my coffee until I arrive and pay with my actual bank account.
But let’s say I’m traveling to someplace where I don’t have access to the traditional banking system, for instance, London. What do I have to do? Simply put the bitcoin network functions like a digital currency so I can purchase my fuel using any digital currency I want to use. If I wish to travel to London with the pound, I can choose to use the Euro or the USD. The great thing about this is that, although it might have a high exchange rate, as there is no central government that regulates these currencies, it behaves as a strong currency since there are no known threats to its value.
As for what happens in between all of these transactions? The transaction is actually performed between all the entities involved in the transaction, called “miners”. These entities are what keep the entire system functioning. The “mining process” is the process that makes transactions flow through and secures the network. This is achieved by inviting users to join the bitcoin mining pool. They pool their resources and improve the speed at the which new blocks are mined.
Now we know what goes on behind the scenes, how does one tell if they’re “minted” or whether their transactions are monitored? There is actually a new technology being developed known as “blockchain technology” that aims to make the entire mining process transparent. The basic principle is this way: when someone creates a new block they add it to the ledger they already have, called the “blockchain” and all of the other transactions that occurred during the period of time. Every transaction is monitored and recorded to the computer system of the particular ledger. This allows you to view precisely how many transactions an individual has made and how they’re spending them.
While this may sound good in theory, there’s one flaw with the system that everyone must be aware of. Since there isn’t a physical product, there’s no way to actually look into the history of transactions made by a person. If they find something suspicious, they can simply declare it, but because the transaction is recorded on the Blockchain the Blockchain, it can’t be verified whether or not it is legitimate. The only way people can protect their transactions is by performing their transactions on an offline computer, similar to an offline paper wallet. There are even online sites that can do this for you, in case you don’t wish to perform your transaction from the internet.
This new bitcoin transaction system is essentially an algorithm that users use to let themselves be traced via their transactions. This makes it nearly impossible for anyone to alter or double spend on someone else’s transactions. Unfortunately, not every computer can support this new technology, and some of the most famous names in the field today aren’t taking the leap into the next technological age of computing power. However, there are plenty of developers developing software that will allow 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 people to transfer money from one wallet into another and to utilize their computing power in order to travel around the world using bitcoins as opposed to traditional currencies.
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