It was just 1000 years ago, that we, people in the civilization, started using the “paper money”. Before that, we used some precious metals that were melted, cut out into shapes and were used as a currency in the process of the trading system to exchange goods and services. The paper money that we use today is authorized by the Government. It is a legal tender governed by the national centralized bank. Now, the newest form of currency is Bitcoin.
Though Bitcoins are not a legal tender yet, these electronic coins are same as the money that you have in your wallet right now or similar to the precious metals like Gold or Silver. Neither the Government Nor the banks are central authorities or entrusted power. Which means that these can be exchanged with others, over the network, easily without the intervention of the third party authorities such as a credit card providing bank or any other financial institution.
Bitcoin is not an actual currency but it is more of an electronic coin or a number or a token. Bitcoins are known as crypto-currencies because; they are encrypted using complex algorithms before being transacted over the network. These are the assets equivalent to currency which brings a high return on investment. However, they carry potential risk factors too. Only a total 21 million bitcoins can be mined from the market and 12 million bitcoins have already been mined and are in circulation. A bitcoin’s value will become more expensive when these coins become rare and unavailable due to increase in the demand and limited supply system. Bitcoins can be divided up till 8 decimal places.
Bitcoin is a digital file or a ledger that contains a name-value pair. The name is analogous to the account holder name and the value is analogous to the account balance. Any change in this name-value pair of a ledger file indicates a bitcoin transaction over a secure network. In order to maintain this ledger and to ensure that it doesn’t have a fraudulent activity, the system stores all the information about the transactions anonymously and makes it available to the public.
When a person wants to transact a bitcoin, he/she has to broadcast the transaction message to other members. This should include the details such as account id’s, ‘the amount of transaction’ with a digital signature. The digital signature is encrypted to maintain the authenticity of the involved users. This way, each member, who transacts the bitcoin, not only has a synchronized and distributed ledger file but also agrees to keep the network secure by verifying every transaction. All the newly broadcast transactions form a new group of transactions called a “block”. The series of blocks are synchronized, distributed as a ledger, verified and secured over the network. This series of blocks is known as “block-chain”. The units, through which transactions are performed over the network, are known as “Nodes”.
The Bitcoin Wallet
Bitcoin Wallet is a virtual or a software wallet which keeps a record of every single transaction. This wallet is a software program that allows you to send and receive the bitcoins. When a new bitcoin account is created, a private key is linked to that account number. The private key is stored in a bitcoin wallet. This bitcoin wallet uses a cryptographic function, uses the combination of a private key and the transaction messages, to create a digital signature. A bitcoin wallet uses another function, which allows the other members, to verify the authenticity of the signature and the account holder.
These encrypted signatures are unique to each transaction and hence these cannot be copied or re-used. The current ongoing transaction is encrypted using its public key along with the digitally signed previous transaction before it gets passed on further to the next transaction. Thus a bitcoin wallet stores the digital credentials of a bitcoin transaction.
Pooling the Transactions
When a coin is transferred from one person to another and so on, a transaction chain is formed. In order to maintain the order of transaction, the bitcoin system pools up the pending transactions, thus creating a giant transactional block-chain. To select the next transaction, the transaction chain uses a mathematical function/puzzle to sort itself. This mathematical function links a special problem to the end of each pending transaction.
A participant, who wants to finish his/her pending transaction, should solve the linking problem to be the next in the transacting order. A Linking problem is a function based on cryptographic hash and is called as “Proof-of-work”. Every time, when a person solves this “Proof-of-work” to get picked up for the next transaction in the pool, new bitcoins are added to his/her account. The process of solving this problem is known as ‘Mining’ and the participants are known as ‘Miners’. The proof of work protocol is CPU bound and secures the network by creating a hash for each block to make the records on the block-chain immutable.
The Mining system gets the bitcoins into the market for circulation. It also helps all the participants to maintain their ledger balance accurately. The Mining process distributes the bitcoin money randomly into the world. As more coins get into circulation, the amount of computational power needed for the mining process increases. The computation runs at the speed of the processor with varying transactional times. It consumes huge amounts of electricity and works on wide range of systems between the high-end server and the low-end portable devices.
Bitcoin in India
The policy on Bitcoin regulation in India is still evolving. As there is no legal framework, the bitcoin is not a legal tender in India. In the wake of susceptible crimes and financial threats, the Reserve bank of India has cautioned the traders, the investors, and the users, to refrain from the exercising the usage of the bitcoins. Citing its value, potential risk factors, and extreme volatility, the economists and other foreign national governing bodies perceive bitcoin as just another volatile investment asset but don’t appreciate bitcoin to serve the purpose of society as a currency.
To Sum up
Bitcoin is a decentralized transaction payment method. It uses peer-to-peer (P2P) technology. It is considered to be a digital form of money being transacted on an international payment network. The bitcoin can be used either as a virtual currency or as an investment asset. Though Bitcoin has a great value, it also has lots of negative strings attached to it.
The Bitcoin is in the bubbles and ripples of the digital revolution, as the World is experimenting with it.
Authored by Rekha Harish Rao