Let’s first define what Bitcoin is. Wikipedia defines it as a”public electronic currency that is managed via 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 the concept by saying that you don’t need to deal with a government entity or financial institution when you conduct an online transaction. Instead of dealing directly with them, you can exchange money online, and there’s no third party.
Let’s begin by letting us take a look at how a typical “real world” wallet works. You transfer money from your “real life” account to your bitcoin wallet. This basically means that you transfer money from your wallet to the wallet of your recipient. The transaction is faster and more convenient since 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 is happening is that we exchange something (your email address) for something (your phone number).
Let’s now take a look at the way something similar to a real currency works. Let’s say I’d like to buy a cup coffee because I am visiting the city for a business conference. To purchase the coffee, I would first sign up for an account at the local coffee shop. I could then keep my coffee until I arrive and then pay using my actual bank account.
Let’s say I’m going to a country that doesn’t have access to a traditional bank system such as London. What do I do? Simply put the bitcoin network functions as a digital currency, so I can buy fuel with any digital currency I like. For example, if I would like to travel to London using the pound, I could do so with the Euro or the USD. This is one of the advantages about it. Although it may have a higher rate of exchange but there isn’t a central government to regulate these currencies. It acts as a strong currency because there are no known threats.
What happens between these transactions? The transaction is actually conducted between all of the entities involved in the transaction, called “miners”. These entities are what keep the entire system working. The “mining” process is what makes transactions go through and also what keeps the whole network safe. This is done by inviting individuals to join the bitcoin mining pool. They pool their resources and increase the speed at the which new blocks are mined.
Now that we have the specifics behind the scenes, how do we determine if transactions are being tracked or whether they are “minted?” Blockchain technology, a new technology that aims to make mining activities transparent, is actually in use. The basic principle works like this: once someone is mining a new block they add it to the existing ledger known as the “blockchain”, along with all of the other transactions that occurred during the time. Each transaction is recorded and uploaded to the computer system of the specific ledger. This lets you know in a glance how much money people have been making and how much they’ve spent.
This sounds good 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 people to look into a person’s transaction history. They may report suspicious transactions, however, it’s impossible to determine whether the transaction is valid or not. Only way to protect transactions is to use a computer that is offline like an offline paper wallet. There are online sites that can take care of this for you in case you don’t wish to make your transaction via the internet.
The new bitcoin transaction system enables people to trace their transactions using an encryption protocol. This makes it nearly impossible for anyone to change or double spend on another person’s transactions. This new technology is not compatible with all computers, so some of the most prominent names in the field are missing the chance to take the leap into the next generation of computing power. There are, however, many developers trying to create software that can enable even the most basic computers to transact in the network. Once the protocols are available to the general public it will be simpler 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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