First, let’s clarify what Bitcoin is. Wikipedia defines it as a public electronic currency that is controlled via the Internet. In simple terms, it’s “virtual money” that is transferred over the Internet between users. It is also known as “online currency”. The best way to explain it is that instead of dealing with a government or an institution of finance, when you make an online transaction, you are exchanging money directly on the Internet and there is no third party involved.
Let’s begin by looking at the way that a typical “real-world” wallet functions. You transfer money from your “real life” account to your bitcoin wallet. This is essentially transferring money from your wallet to the wallet of the recipient. There is no need to go through any intermediaries, making the transaction quicker and more convenient. A typical transaction is the following: I send you my email address, you send me your telephone number and you send me your email address. So, what’s happening is that we are trading one thing (your email address) for a thing (your phone number).
Let’s now take a look at how something similar to an actual currency functions. Let’s say I’m looking to purchase coffee since I am in town for a meeting. To purchase the coffee I’d need to first open an account at the local coffee shop. I could then hold my coffee until I get there and pay with my real bank account.
But let’s say that I’m going to a place that doesn’t have access to the traditional banking system, for instance, London. What should I do? Simply put, the bitcoin network acts as a digital currency. I can purchase my fuel using any digital currency I want to use. If I wish to travel to London using the pound I can do so using the Euro or the USD. The best part about this is that while it might have a high exchange rate, as there is no central government that regulates these currencies, they function as a strong currency because there aren’t any known threats to its value.
What happens between all of these transactions? The transaction is actually between all entities involved in the transaction, referred to as “miners”. These entities are what keep the system running. The “mining” process is what makes the transactions happen and ensures the security of the entire network. In the case of the bitcoin network, this is done by allowing people to join the bitcoin mining pool, where they pool their resources and together they increase the speed at which new blocks are mined.
Now that we know the specifics behind the scenes, how do we determine if transactions are being monitored or if they are being “minted?” There is actually a new technology in place known as “blockchain technology” which aims to make the entire mining process transparent. The process works like this: once someone creates a new block they add it to the existing ledger known as the “blockchain” together with the other transactions that occurred during that time. Every transaction is monitored and recorded to the computer system of the particular ledger. This lets you see precisely how many transactions an individual has made and how they’re spending their money.
It sounds great in theory however there’s a big issue with this system that everyone needs to be aware of. There is no physical product which makes it impossible for anyone to scrutinize the history of transactions made by a person. They may report suspicious transactions, however, it’s impossible to verify whether the transaction is valid or not. The only way people can safeguard their transactions is by performing their transactions using an offline computer, similar to an offline paper wallet. If you do not want to do your transactions online, there are many websites that can help.
This new bitcoin transaction system is essentially a protocol that people use to ensure that they can be tracked through their transactions. This makes it almost impossible for anyone to duplicate spend or alter the amount of money spent by someone else’s transactions without being noticed. This new technology isn’t compatible with all computers, so some of the most prominent names in the field have missed the opportunity to make the leap into the next era of computing power. There are, however, a lot of developers trying to create software that will allow even the most basic of computers to use the internet to conduct transactions. When the protocols are made accessible to the public it will be much easier for people to transfer cash from one wallet to another and to utilize their computing power in order to travel around the globe using bitcoins instead traditional currencies.
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