Even if you missed the recent hype in digital money or more precisely the cryptocurrencies, you would undoubtedly have heard of the Bitcoin. Cryptocurrency is the technical term for bitcoin-like digital currencies. Further, blockchain is the underlying technology of Bitcoin and all other cryptocurrencies. Bitcoin was first introduced in 2008 by a software developer or group of developers supposedly known as Satoshi Nakamoto in their white paper titled, Bitcoin: A Peer-to-Peer Electronic Cash System.
Bitcoins differ from traditional currencies (dollar, pound, euro etc.) in many ways, but for one significant feature. Generally, intrinsic to all the blockchain technology based cryptocurrencies, Bitcoins excludes a third party involvement in online transactions. This means Bitcoin allows to do peer to peer transactions without the participation of banks or financial institutions. Therefore, participants are not subject to follow the rules and regulations of any country except the Bitcoin network. Banks and financial institutions charge high fees for online transactions and transaction time is much longer because of the use of conventional processes. However, Bitcoin allows the relatively faster and low-cost transaction, because of its ‘no intermediary’s’ policy.
In traditional digital transactions, transactions data can be altered and mostly, only updated data is available for view. However, blockchain technology provides permanent records of data. Once data is entered to the Bitcoin network, it is impossible to alter them again and all the transaction details visible to the network participants. How is this possible? In the Bitcoin network, transaction data are stored in units called blocks, and these blocks in the Bitcoin network are interconnected. Blockchain uses hash values to connect the blocks, and this hash is unique to the block because it depends on the content of the block. Each block takes the hash value of the previous block as a reference. Once the content of one block is changed, its hash value also changes accordingly. However, the reference of the next block is not changed and as a result, the connection between blocks get broken. This makes the bitcoins transactions immutable, and it’s become a unique feature to cryptocurrency.
There is no centralised authority to control the Bitcoin network. Usually, traditional digital transactions are regulated by banks or government authority. In contrast to that, there is no centralised authority to control the Bitcoin transactions. Groups of volunteer network participants known as miners validate the transactions, and no node can validate a transaction on their consent.
In traditional electronic payments, all parties required to present their identity in a transaction. However, in the Bitcoin network, the true identity of network users bind to the Bitcoin address. When you create a Bitcoin wallet to do transactions, it does not require your details. Users can effectively transfer bitcoin to any address on the network without revealing their personal information. All users in the Bitcoin network identify themselves through Bitcoin address, and these addresses are a combination of numbers and letters (ex. 1BvBMSEYstWetqTFn5Au4m4GFg7xJaNVN2.). Therefore, it doesn’t make sense as regular user addresses.
By Dihan Keeriyawatta
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