Even if the exact definition eludes you or the concept is difficult to understand, it would be hard to live in today’s highly connected social environment without having heard something about bitcoin. Every trading blog, social media site, and newspaper has covered the topic in one way or another. The official site defines Bitcoin as a payment network that is developing a new type of currency. However, what exactly does that mean? Without delving into the technical details and simply giving it a definition, Bitcoin is a payment system where a sender and recipient avoid the use of a central gateway, such as a bank, to send and receive a payment that is held electronically. Instead of it being a printed currency, such as a United States dollar, the coin is digital and handled by software.
A Brief History
In 2009, someone who called himself Satoshi Nakamoto developed an electronic cash system that lacked centralization or a specific authority, such as a bank or central entity. The concept was a result of the anger toward the banking system and its role in the global financial crisis. Nakamoto wrote the source code to circumvent the predatory and manipulating nature of bankers and politicians and their exploitation of the financial system in different countries, including the United States. To create the perfect coin, the developer limited bitcoins to 21 million units that would be released over the span of 20 years. This is different from paper money, such as the euro or dollar, where banks simply print currency. Given that the United States abandoned the gold standard in 1971, a commitment between countries where currency is backed up by gold, the value of paper currency is largely dependent on trust. Bitcoin’s limit in the availability of digital coins created a system where trust is not part of the algorithm and cannot be manipulated by politics.
Overview of Bitcoin
The term bitcoin can refer either to the virtual currency or the underlying technology. This technology is important because it provides users with the assurance that the transactions are safe and cannot be manipulated by third parties. For example, when a payment is made using a standard currency, the physical aspect of the process limits the potential to use the same bill with a different transaction. Meaning, if someone pays for an article with a $100 bill, the exchange limits the original person from having possession of that same exact bill and paying for another item with the legal tender. In the realm of electronic transactions, this can be a possibility. However, cryptocurrencies solve this problem by using a combination of mathematics and full record-keeping where the network includes a list of all transactions that occur over time, called a block. Computers record these transactions that are collectively known as blockchains, and this avoids fraudulent scenarios. Although transactions are anonymous, specific operations regarding the coins are still accessible and visible.
Components and Future
The backbone and fundamental aspect of all cryptocurrencies is the cryptography that runs the technology. These are advanced encryption algorithms that use certain techniques to keep hackers from manipulating transactions. The cryptographic keys create blockchains that are immutable, thus protecting the infrastructure. These complex techniques build a security platform around digital currencies that ensure a future. The fact is that these transactions are safer than the transactions offered by standard banking practices. This is why Bitcoin is so important. Although the legal ramifications of the coin are still in question, there is no doubt that the adoption of blockchain technologies is the future of banking. Furthermore, while some countries try to ban the use of digital currencies, other will appear using similar technology that may adapt to the legal requirements of countries. Therefore, the concept of digital coins is here to stay.