What is Bitcoin and how it works?

Bitcoin the new world currency

Bitcoin is basically a new kind of electronic currency. It works on peer to peer network of computers. This currency has no central authority to manage such as Banks. The Network manages the issue of Bitcoin and its transaction.

The Bitcoin platform is fully open source hence anyone can change the software, optimize code and help it do better. There is nobody to control Bitcoins and nobody owns it. Still, you can utilize them to transact between person to person as we generally do in our normal currency.

The transaction time in this type of currency is fast and worldwide. Hence it reduces the hassle of current currency conversions and processing. The cost of the transaction is very minimal as it works between person to person with no central authority. We can say that it’s a currency without boundaries, you can order anything from anywhere in the world with the same currency.

How Bitcoin works?

Bitcoin is a digital currency and works on peer to peer network of computers. The new user can generate a wallet. Every wallet has a specific Bitcoin address. You can share your address with your friends or colleague to receive payments. Similarly, you can pay them by having their wallet address. It works very similarly to an email that we send every day.

The backbone of Bitcoin is a Blockchain. The Blockchain is a shared public ledger. All valid transactions done through wallets are recorded on Blockchain in chronological order by cryptography. Cryptography is a branch of mathematics that will help to create mathematical proof that provides security. We can simply say that Blockchain is a large open balance sheet where all transactions are recorded.

The transfer of Bitcoins between wallets is done by a PrivateKey. The transactions are signed by the private key which provides mathematical proof that they have come from the owner of the wallet. The private key is the cryptographic signature and can be stored on a local computer or remote server. You should not reveal them to anyone.

The Bitcoin software signs a transaction with the proper private key the whole network can see the signature matches with Bitcoin spend but won’t see a private key. The signature also avoids alteration of transactions.

Processing of Bitcoin transactions

The processing of the transactions is done by Mining. Mining is nothing but distributed consensus system. Mining consist of including the valid transaction in blockchain and confirm them by following strict cryptographic rules.

The mining has various advantages. First of all it helps to enforce chronological order in blockchain secondly it protects the neutrality of the network and lastly, it allows different computers on the network to agree on the state of the system. Hence in lay man’s term, this is where your transaction is confirmed.

The strict cryptographic rules prevent the blocks from alteration. If someone alters the block subsequent blocks become Invalid. Hence no one can control what is inside blockchain, alter the blocks and roll back the own spends.

Bitcoin and feature of innovation

Bitcoin opens the immense possibility of new innovations. The Bitcoins provide a high level of security to its users. The counterfeiting of currency is simply impossible. The users can encrypt the wallets making them more secure. Hardware wallets are very difficult to hack giving users more security.

The Bitcoins make the international transaction as simple as current transactions in the same country. It doesn’t need any bank to transact. You can send money across the world any time you want increasing worldwide trade. Similarly, you can avoid costly middlemen while transacting worldwide.

The Bitcoin transactions are public but users behind transactions are private by default. Hence it has flexible transparency. The multiple signature accounts help to transact when multiple users are responsible for single transactions. Bitcoins can also enhance trust in non-profit organizations as donations will be simple and transparent.

The micropayments are simply possible; you can pay for listening song per second, Tipping websites per page for not showing advertisement and buying data in kilobytes. The micropayments simply create a lot more opportunities.

Smart contracts are new ways of contract where the transaction will not be processed until certain conditions are met. The transaction is carried out by the Bitcoin protocol. Such contracts add efficiency and avoid fraud.

The security and safety of Bitcoins

A lot of people are concerned about the safety of Bitcoins. As all transactions are virtual there is no physical evidence. Hence if someone hacks your wallet by no means you can recover the money. Although now hacking the wallet is impossible but still, anything connected to the internet is hackable.

The other important part is the software updates. The mining software needs upgrade time to time. The software update includes bug fixes and performance improvements. Such updates which radically change blockchain working are called hard forks.

The problem behind hard forks is its acceptability. During hard forks, all the nodes in the network should be updated towards new software. If some node keeps running the old software it will cause split in blockchain and new blockchain will be born. The new node continues to mine in a new way while old one continues mining in the old way.

The split will not cause harm to the wallets. The wallet still holds the same currency as before but the value of the currency will diminish resulting in the indirect loss. In addition, you need to transact in two versions of currency complicating the simple way to transact.

In addition, you can’t reverse the transaction. Means if you pay for some goods and goods were not delivered you can’t reverse the transaction or demand refund.

In conclusion, Bitcoin is a new currency which you can use to transact across the globe virtually and it has the same problems as normal currencies have. But we are very sure one day this currency will change the way how we transact bringing new opportunities.

Image and video courtesy: bitcoin.org