First, what is Bitcoin? Wikipedia describes it as a public electronic money that is issued and managed over the Internet. It is “virtual currency” that can be transferred between users through the Internet. It is also known as “online currency”. It is best to explain it by explaining that you don’t have to deal with a government entity or financial institution when you conduct an online transaction. Instead of dealing directly with them, you trade money online and there’s no third party.
To begin with, let us look at how a typical “real world” wallet functions. When you transfer money 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 transfer is quicker and easier since you don’t have to go through intermediaries. A typical transaction is this: I give you my email address, then you give me your telephone number and you send me your email address. What’s happening is that we are trading a thing (your email address) in exchange for a thing (your phone number).
Let’s now take a look at how something similar to a real currency works. Let’s suppose I want to purchase a cup of coffee since I am in the city for a business conference. What I would do is to create an account at the local coffee shop and use their prepaid card to make the purchase. At that point I could keep my coffee until I reach my appointment and then I would pay for my coffee with my real world banking account.
But let’s say that 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 an electronic currency, I can purchase my fuel using any digital currency that I prefer. If I wish to travel to London using the pound, I can do so using the Euro or the USD. This is the great thing about it. Although it may have a higher rate of exchange however, there is no central government to regulate these currencies. It functions as a strong currency because there aren’t any threats to it.
What happens between all of these transactions? The transaction actually takes place by all the entities involved in the transaction, called “miners”. These entities keeps everything running smoothly. The “mining” process is what makes the transactions occur and ensures the security of the entire network. In the case of the bitcoin network, this is done by having users join the bitcoin mining pool, where they pool their resources and together, they boost the speed of new blocks being mined.
Now that we have the details behind the scenes, how can we determine if transactions are being tracked or if they are being “minted?” Blockchain technology, a brand new technology that aims to make all mining activities transparent, is actually in place. The basic principle works like this: once someone creates a new block they add it to the ledger they already have known as the “blockchain” together with all other transactions that occurred during the period of time. Each transaction is tracked and recorded to the computer system for the particular ledger. This allows you to view the exact amount of transactions a person has completed and the way they’re spending them.
It sounds great in theory however there’s a major problem with this system that everyone needs to be aware of. Since there is no physical product, there is no way to look into a person’s transaction history. They can report suspicious transactions, however, it’s impossible to verify whether the transaction is legitimate or not. The only way to ensure that transactions are secure is to use an offline computer like an offline paper wallet. There are even some online websites that will do this for you, in case you don’t wish to make your transaction via the internet.
This bitcoin transaction system is basically a protocol that people use to allow themselves to be tracked via their transactions. This makes it almost impossible for anyone to duplicate spend or alter another’s transactions without being noticed. However, not all computers can handle 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 let even the most basic computers connect to the internet. When the protocols are accessible to the general public, it will be much easier for users to transfer money from one wallet to the next and to utilize their computing power to travel around the world using their bitcoins instead of traditional currencies.
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