First, what is Bitcoin? Wikipedia describes it as a electronic currency that is managed and issued through the Internet. In layman’s terms, it is “virtual money” that is transferred via the Internet between users. 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 of finance when you conduct an online transaction, you are exchanging money directly over the Internet and there is no third person involved.
To begin with, let us take a look at the way a typical “real world” wallet functions. You transfer money from your “real life” account to your bitcoin wallet. This is basically transferring money from your wallet to the wallet of the recipient. You don’t have to deal with any intermediaries, which makes the transfer quicker and more convenient. A typical transaction would be: You give me my email address, I send you your number, and you give your email address. So, what’s happening is that we are trading a thing (your email address) for a thing (your phone number).
Let’s look at how something like an actual currency functions. Let’s say that I’m looking to purchase coffee since I’m in town for a business event. What I would first do is open an account at the local coffee shop and then use their card that is prepaid to purchase the coffee. I could then hold my coffee until I get there and pay with my actual bank account.
But let’s say I’m going to a place where I’m not connected to a traditional banking system, like London. What should I do? Simply put the bitcoin network works as a digital currency, so I can buy my fuel using any digital currency I like. If I want to travel to London using the pound I can use the Euro or the USD. The good thing about this is that, although it might have a high exchange rate, since there is no central government that regulates these currencies, it behaves like a very strong currency as there are no known threats to the value.
What happens between all these transactions? The transaction is actually conducted by all the entities involved in the transaction, also known as “miners”. These entities keeps everything running smoothly. The “mining” process is what makes transactions happen and keeps the entire network secure. In the case of the bitcoin network, this is accomplished by having people 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 have the specifics behind the scenes, how do we know if the transactions are being tracked , or whether they are “minted?” There’s a brand new technology being developed known as “blockchain technology” that aims to make the entire mining process transparent. It works as follows: Once someone mines a block, they add it to the ledger, referred to as the “blockchain” together with all other transactions that took place during that time. Every transaction is recorded and uploaded to the computer system of the particular ledger. This allows you to be able to see in a glance the amount of money that coins someone has been minted and the amount they’ve spent.
This sounds good in principle however there’s one big issue with this system that everyone needs to be aware of. There isn’t a physical product therefore it is not possible for anyone to look at the transaction history of a person. If they find something suspicious, they are able to report it, but since the transaction is recorded on the Blockchain, it cannot be confirmed whether or not it is legitimate. The only way that people can ensure their transactions are by performing their transactions on an offline computer, such as an offline paper wallet. If you do not want to make your transactions online, there are plenty of websites that can assist you.
This bitcoin transaction system is essentially an application that allows users to let themselves be tracked through their transactions. This makes it nearly impossible for anyone to alter or double spend on someone else’s transactions. Unfortunately, not every computer can handle this new technology, so some of the most prominent names in the field today are missing out on making the leap into the next technology of computing power. However, there are many developers working on software that can let even the simplest computers to access the network. When the protocols are accessible to the general public it will be easier for users to transfer their cash from one wallet to another and to make use of their computing power to travel across the globe using bitcoins instead of traditional currency.
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