First, let’s clarify what Bitcoin is. Wikipedia describes it as a public electronic money that is created and managed over the Internet. It is “virtual currency” that can be exchanged between users over the Internet. It is also referred to as “online currency”. The best way to describe it is that instead of dealing with a government or an institution that deals with money when you conduct an online transaction, you’re exchanging money directly through the Internet and there is no third party involved.
Let’s first look at the way that a typical “real-world” wallet works. You transfer funds from your “real life” account to your bitcoin wallet. This basically means that you transfer money from your wallet to the wallet of the recipient. There is no need to go through any intermediaries, which makes the transaction quicker and more convenient. A typical transaction would be this: I give you my email address, then you give me your phone number , and you send me your email address. Therefore, all that is happening is that we are trading one thing (your email address) for a thing (your phone number).
Let’s take a look at how something like a real currency works. Let’s say I’d like to purchase a cup of coffee since I am in the city for a business conference. To purchase the coffee I’d first need to sign up for an account at the local coffee shop. From there, I could hold my coffee until I get to my meeting at which point I would pay for my coffee with my bank account in the real world.
Let’s say I’m going to a place where I’m not connected to an established banking system, for instance, London. What do I do? Simple, as the bitcoin network acts as an electronic currency, I can buy my fuel using any digital currency that I want to use. For example, if I intend to travel to London using the pound, I can make the trip using the Euro or the USD. This is the great thing about it. While it might have a higher rate of exchange, there is no central government that can regulate these currencies. It acts as a strong currency because there aren’t any threats to it.
What happens between all these transactions? The transaction is actually performed between all the entities involved in the transaction, referred to as “miners”. These entities are what ensure that everything is running smoothly. The “mining process” is what makes transactions happen and keeps the network secure. In the case of the bitcoin network, this is accomplished by allowing people to join the bitcoin mining pool, where they pool their resources and together they speed up the rate of new blocks being mined.
So now that we know what happens behind the scenes, how does one determine if one is being “minted” or whether their transactions are tracked? Blockchain technology, a brand new technology that aims to make all mining activities transparent, is actually in place. The whole thing basically is this way: when someone creates a new block they add it to the ledger they already have known as the “blockchain”, along with all other transactions that were conducted during that period of time. Every transaction is recorded and then logged into the computer system that is for the specific ledger. This allows you to see precisely how many transactions an individual has completed and how they’re spending their money.
While this may sound great in principle, there’s one flaw with the system that everyone must be aware of. There isn’t a physical product therefore it is not possible for anyone to look at the history of transactions made by a person. They may report suspicious transactions, but it is impossible to prove whether the transaction is valid or not. The only way that people can protect their transactions is by executing their transactions on a separate computer, similar to an offline paper wallet. There are online sites that can perform this for you, if you don’t want to perform your transaction from the internet.
The new bitcoin transaction system allows users to trace their transactions using a protocol. This makes it nearly impossible for anyone to alter or double spend on other people’s transactions. This new technology isn’t compatible with all computers, so some of the biggest names in the field are missing the chance to make the leap to the next generation of computing power. However, there are many developers working to develop software that will enable even the most basic computers to make transactions on the internet. When the protocols are accessible to the general public it will be simpler for people to transfer their cash from one wallet to the next and to use their computing power to drive around the globe using bitcoins instead of traditional currencies.
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