First, what exactly is Bitcoin? Wikipedia defines it as a public electronic money that is managed and issued via the Internet. It is “virtual currency” that can be transferred 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 agency or an institution that deals with money, when you make an online transaction, you are exchanging money directly over the Internet and there is no third party involved.
Let’s begin by letting us look at the way a typical “real world” wallet functions. You transfer money 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. The transaction is faster and easier since you don’t have to use intermediaries. A typical transaction would look like the following: I send you my email address, then you give me your phone number and you send me your email address. What actually happens is that we exchange a thing (your email address) in exchange for something (your phone number).
Now let’s take a look at how something like an actual currency functions. Let’s suppose I want to buy a cup coffee as I’m in the city for a business conference. To purchase the coffee I’d first need to create an account at the local coffee shop. I could then keep my coffee until I get there and pay with my actual bank account.
Let’s say I’m traveling to someplace that doesn’t have access to an established banking system, such as London. What should I do? Simply put the bitcoin network works as a digital currency. I can purchase my fuel using any digital currency I choose. If I wish to travel to London using the pound, I can use the Euro or the USD. The best part about this is that, although it may have a higher exchange rate, since there is no central government that governs these currencies, they function as a highly secure currency since there are no known threats to its value.
What happens between all these transactions? The transaction is actually between all entities involved in the transaction, referred to as “miners”. These entities are the ones that keep the system working. The “mining process” is what makes transactions happen and secures the network. In the case of the bitcoin network, this is done by having users join the bitcoin mining pool, where they pool their resources and together they speed up the rate of new blocks being mining.
So now that we know what happens behind the scenes, how can one know if they’re being “minted” or whether their transactions are monitored? Blockchain technology, a new technology that aims to make all mining activity transparent, is actually in place. The whole thing basically works like this: once someone is mining a new block they add it to the ledger they already have known as the “blockchain” and all of the other transactions that were conducted during the time. Every transaction is then monitored and recorded to the computer system of the particular ledger. This lets you see at a glance exactly how many coins someone has been minted and the amount they’ve spent.
Although it sounds fantastic in theory, there’s one problem with the system that everyone should be aware of. There is no physical item which makes it impossible for anyone to look at the history of transactions made by a person. If they discover something that is suspicious, they can report it, but since the transaction is stored on the Blockchain it is not verified whether or not it’s valid. The only way to ensure that transactions are secure is to use an offline computer such as an offline paper wallet. If you do not want to do your transactions online, there are plenty of websites that can help you.
This bitcoin transaction system is basically an algorithm that users use to allow themselves to be tracked via their transactions. This makes it nearly impossible for anyone to alter or double spend on someone else’s transactions. This new technology isn’t compatible with all computers, and so some of the most prominent names in the field aren’t getting the chance to make the leap to the next generation of computing power. However, there are a lot of developers trying to develop software that will make it possible for even the most basic of computers to transact in the network. When the protocols are made accessible to the general public, it will be easier for people to transfer cash from one wallet into another and to use their computing power in order to drive around the globe using bitcoins instead traditional currencies.
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