What is Bitcoin?
Bitcoin is a digital currency that is used for performing transactions and payments online.
Bitcoin technology was first introduced in the year 2008 by an unknown person under the pseudonym Satoshi Nakamoto. He released the software in the public domain in the year 2009.
The bitcoin system process transactions in a peer to peer fashion, i.e, directly between two users directly without any intermediary like a bank, credit card companies, etc. Also, it is not regulated by any central authority and therefore, it is the world’s first decentralized currency.
There are two major issues in designing a decentralized payment system without any intermediary:
- Recording and Verification of transactions
- The problem of double-spending: when we spend money through a debit card, the bank deducts the money from our account so that we cannot spend it again. But without an intermediary, a person after spending bitcoins could possibly have to respend them again if his transaction from the record is deleted.
So, how does the Bitcoin system solve this problem of double-spending?
Blockchain is the technology that helps us verify and record bitcoin transactions. It is a shared public ledger that records every transaction done through the bitcoin system. Most ledgers are private, but blockchain can be accessed by anyone. Everyone can track how much money each wallet has. But, it is not possible to know anything about the sender and the receiver. The parties to the transaction can remain anonymous.
How to use bitcoin for transactions?
A user can acquire bitcoins by accepting them as a payment or through bitcoin exchange but first, the user has to set up a bitcoin wallet.
The wallet has two keys: Private and Public key. The private key is a secure key that a user must use to transfer his/her ownership of the currency. It is confidential and therefore only the owner is able to spend or transfer money from the wallet.
The public key, on the other hand, is available to everyone, and anybody can send money to this public key/ address. It is associated with an email address.
Who records transactions in the Blockchain/ shared public ledger?
Miners are the ones who record the transactions made on the shared public ledger i.e., the blockchain. The individuals possess advanced computer systems having the required processing power to support the blockchain transactions. If any transaction is initiated, information is sent to all miners.
In about 10 minutes mining computers can collect 100 transactions and turn them into a mathematical puzzle. These computers basically take the amount, senders address, receiver address, and private key and turn it into a difficult and unbreakable math puzzle. This is to keep the private key secure and also to make it difficult to tamper with the blockchain.
Then, the mining computers compete with each other to solve the problem. The first miner to solve the complex problem checks whether the sender has the right to spend the money. If there is enough approval (51%) from the rest of the miners that there is no attempt to spend the money twice then the transactions are added to the ledger as a block.
A Block is a group of verified transactions and it is chained to prior blocks.
Any person who wishes to hack into the system to steal the bitcoins will have to rewrite the blockchain completely which requires 50% of the mining capacity which is very expensive to have and requires concreted effort by many miners and thus it is impossible to hack.
What is in it for the miners?
The miner who solves the puzzle first gets awarded with newly generated bitcoins.
Hence, the blockchain is the technology behind bitcoin. It is used for verifying and recording transactions. It protects the record from deletion, tamper, and revision. This technology also serves the purpose of mining new bitcoins.
Only about 21 million bitcoins will be issued on the Bitcoin network.
Mining was initially easy bu now has designed specialized computers specifically for Bitcoin mining known as Application Specific Integrated Circuits (ASICs).
Is the blockchain technology completely secure?
Even though miners can pool their computing power and consolidate to seize control of the blockchain, it is extremely difficult. Thus, Blockchain has remained resistant to hacking so far.
What are the advantages of Bitcoin?
- Even though Bitcoin as an online currency has not become that popular, it has definitely set the foundation for future revolutions to create much faster, cheaper, and secure payment systems.
- It is quite useful in performing international transactions.
- It could be used to provide affordable financial services in emerging countries such as Nigeria and Africa that have a dysfunctional financial system.
- Blockchain technology can be used to transfer ownership fo a property, debt, or shares as it eliminates intermediaries involved in these transactions.
What are the disadvantages of Bitcoin?
- It has become a medium of transaction in illegal trade and drug dealing as it is anonymous.
- It can be easily used in money laundering.
- It is difficult to store bitcoin safely as the wallet can be hacked.
- The transaction once done and recorded on blockchain cannot be rolled back
- If you lose your private key, you lose all bitcoins. There is no way of getting the key and the coins back
- Bitcoin is a highly volatile currency.
Conclusion: Bitcoins have both advantages as well as shortcomings of its own that can be resolved over time as it is still developing. It has definitely set foot our payment system into the digital era. And, the technology behind bitcoin (blockchain) can have applications in many areas and have profound implications for commerce.