First, let’s define what Bitcoin is. Wikipedia defines it as a public electronic money that is issued and managed over 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 explain it is that instead of dealing with a government agency or an institution that deals with money when you conduct an online transaction, you exchange money directly over the Internet and there is no third person involved.
Let’s begin by looking at the way that a typical “real-world” wallet works. When you transfer money from your “real world” account to your” bitcoin wallet”, you are basically transferring money from your wallet to the recipient’s wallet. The transaction is faster and easier since you don’t have to deal with intermediaries. An example of a transaction is: You give me my email address, I give you your phone number, and you give your email address. What’s happening is that we are trading one thing (your email address) in exchange for something (your phone number).
Let’s look at how something that resembles a real currency works. Let’s say that I’m looking to purchase coffee since I’m in town for a meeting. What I would do is to open up an account at the local coffee shop and use their prepaid card to make the purchase. At that point I could put off my coffee until I get to my meeting, at which time I would pay for my coffee using my bank account in the real world.
Let’s say I’m travelling to a location where I don’t have access to a traditional banking system, such as London. What do I do? Simple, as the bitcoin network functions as a digital currency, I can pay for my fuel using any digital currency that I want to use. If I want to travel to London using the pound, I can choose to use the Euro or the USD. This is the great thing about it. Although it may have a high currency rate, there is no central government that can regulate these currencies. It functions as a solid currency since there are no known threats.
What happens to all these transactions? The transaction takes place between all the entities involved in the transaction, known as “miners”. These entities ensure that everything is running smoothly. The “mining” process is what allows transactions to occur and ensures the security of the entire network. In the case of the bitcoin network, this is done by having people join the bitcoin mining pool, where they pool their resources, and together they increase the speed of new blocks being mined.
So now that we know what’s happening behind the scenes, how can one tell if they’re “minted” or if their transactions are being tracked? Blockchain technology, a new technology that seeks to make mining activities transparent, is actually in place. It works as follows when someone mines a block, they add it to the existing ledger, which is known as the “blockchain” along with all other transactions that were performed during the period of time. Every transaction is then tracked and logged on to the computer system of the specific ledger. This makes it possible to know in a glance how many someone has been minting and how much they’ve spent.
While this may sound fantastic in theory, there’s one flaw with the system that everyone must be aware of. There isn’t a physical product therefore it is not possible to examine the transaction history of a person. If they discover something that is suspicious, they can make a report, but as the transaction is recorded on the Blockchain it is not confirmed whether or not it’s valid. The only way people can safeguard their transactions is by executing their transactions on a separate computer, like an offline paper wallet. There are online sites that will take care of this for you if you don’t want to make your transaction via the internet.
This new 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 support this new technology, which means that some of the most prominent names in the field today aren’t taking the leap to the new era of computing power. However, there are many developers working on software that will allow even the simplest computers to connect to the internet. When the protocols are accessible to the general public, it will be much easier for users to transfer their cash from one wallet to another, as well as to make use of their computing power to drive across the globe using bitcoins instead of traditional currencies.
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