First, what is Bitcoin? Wikipedia defines it as a public electronic money that is issued and managed via the Internet. It is “virtual currency” that can be transferred between users through the Internet. It is also referred to as “online currency”. The best way to describe it is that instead of dealing with a bank or a government agency, or an institution of finance when you conduct an online transaction, you exchange money directly through the Internet and there is no third party involved.
Let’s begin by looking at how a typical “real-world” wallet functions. When you transfer funds from your “real world” account to your” bitcoin wallet” it is basically transferring money from your wallet to the recipient’s wallet. The transfer is quicker and simpler because you don’t need to go through intermediaries. A typical transaction is that I provide you with my email address, you give me your phone number , and you provide me with your email address. Therefore, all that is happening is that we are trading one thing (your email address) in exchange for a thing (your phone number).
Let’s take a look at how something like the real world currency functions. Let’s say that I want to buy a cup of coffee as I’m in town for a business event. The first thing I’d do is open an account at the local coffee shop, and then use their card that is prepaid to make the purchase. At that point I could keep my coffee until I arrive at my appointment, at which time I would pay for my coffee using my bank account in the real world.
Let’s say I’m traveling to a location that is not connected to a traditional banking system, such as London. What do I have to do? Simply put, the bitcoin network acts as a digital currency, so I can purchase my fuel with any digital currency I like. If I wish to travel to London using the pound, I can choose to use the Euro or the USD. The good thing about this is that although it might have a high exchange rate, since there is no central government that governs these currencies, they function like a very strong currency since there are no known threats to its value.
As for what happens in between these transactions? The transaction actually takes place between all entities involved in the transaction, also known as “miners”. These entities are what keep everything running smoothly. The “mining process” is what allows transactions to flow through and keeps the network secure. This is accomplished by inviting individuals to join the bitcoin mining pool. They pool their resources and improve the speed at the which new blocks are mined.
So now we know what goes on behind the scenes, how can one know if they’re being “minted” or whether their transactions are tracked? There’s a new technology in place called “blockchain technology” which aims to make the entire mining process transparent. The process is as follows: when someone creates a new block they add it to the existing ledger, called the “blockchain” together with all other transactions that took place during that time. Every transaction is monitored and recorded 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 are spending them.
Although this sounds great in theory, there’s one flaw with the system that everyone should be aware of. There is no physical product so it is impossible for anyone to scrutinize the transaction history of a person. If they find something suspicious, they can simply make a report, but as the transaction is on the Blockchain, it cannot be verified whether or not it is legitimate. The only way to safeguard transactions is to use an offline computer like an offline paper wallet. If you don’t wish to do your transactions online, there are many websites that can help.
The new bitcoin transaction system allows people to track their transactions via the protocol. This makes it nearly impossible for anyone to change or double spend on another person’s transactions. Unfortunately, not every computer can support this new technology, which means that some of the biggest names in the field right now aren’t taking the leap into the next era of computing power. There are, however, many developers trying to create software that can enable even the most basic computers to make transactions on the internet. Once the protocols are available to the general public it will be easier for people to transfer money from one wallet to the next and to utilize their computing power to drive around the globe using bitcoins instead of traditional currency.
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