First, what exactly is Bitcoin? Wikipedia describes it as electronic currency that is managed and issued over the Internet. It is “virtual currency” that can be transferred between users through the Internet. It is also known as “online currency”. The best way to describe it is that instead of dealing with a government agency or an institution of finance, when you make an online transaction, you exchange money directly over the Internet and there is no third person involved.
To begin with, let us look at the way a typical “real world” wallet functions. When you transfer funds from your “real world” account to your” bitcoin wallet” it is in essence transferring the money from your wallet to the recipient’s wallet. The transaction is faster and easier since you don’t have 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 exchanging one thing (your email address) in exchange for a thing (your phone number).
Let’s look at how something similar to a real currency works. Let’s say I’m looking to purchase a cup of coffee as I am in town for a meeting. What I would do is to open up an account at the local coffee shop and then use their prepaid card to make the purchase. I could then save my coffee until I get there and pay with my real bank account.
Let’s say I’m going to a place where I’m not connected to an established banking system, like London. What should I do? Simple, as the bitcoin network functions as digital currency, I can purchase my fuel using any digital currency that I prefer. If I want to travel to London using the pound, I can use 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 functions as an extremely secure currency since there are no known threats.
What happens between all these transactions? The transaction is actually between all the entities involved in the transaction, also known as “miners”. These entities are what keep the system running. The “mining” process is what allows transactions to occur and keeps the entire network secure. 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.
So now we know what goes on behind the scenes, how can one determine if one is being “minted” or if their transactions are being tracked? There’s a new technology in place called “blockchain technology” which aims to make the whole mining activity transparent. The basic principle works like this: once someone mines a new block, they add it to the existing ledger which is known as the “blockchain” together with all of the other transactions that occurred during that time. Each transaction is tracked and recorded to the computer system for the particular ledger. This allows you to view precisely how many transactions an individual has made and how they’re spending them.
It sounds great in principle however there’s one important issue with this system that everyone needs to be aware of. Since there’s no physical product, there’s no way for anyone to actually look into a person’s transaction history. If they discover something that is suspicious, they can simply report it, but since the transaction is recorded on the Blockchain the Blockchain, it can’t be confirmed whether or not it’s legitimate. The only way that people can protect their transactions is by executing their transactions on a separate computer, such as an offline paper wallet. There are online sites that can take care of this for you should you not want to perform your transaction from the internet.
The new bitcoin transaction system enables people to track their transactions through the protocol. This makes it almost impossible for someone to duplicate spend or alter the amount of money spent by someone else’s transactions without being seen. This new technology isn’t compatible with all computers, which means that some of today’s most prominent names in the field are missing the chance to make the leap to the next generation of computing power. However, there are a lot of developers working to develop software that will allow even the simplest computers to use the internet to conduct transactions. When the protocols are accessible to the general public, it will be much simpler for people to transfer money from one wallet to another and to use their computing power to travel across the globe using bitcoins instead of traditional currencies.
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