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Bitcoin, The Technology Behind Cryptocurrency

Escrito por Marjorie DeHey el 14/10/2017 a las 10:41:36
3585

(Co-founder of MediaMojos)

Marjorie DeHey

 

"Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us.” – Thomas Carper, U.S. Senator


Cryptocurrency, specifically Bitcoin, has received a lot of press as it had huge gains (then losses then gains) that have captured headlines around the world.  To many, cryptocurrency is either a futurist concept of money, or a solid financial investment.  To better understand the nuances of cryptocurrency, this article will outline the technology behind cryptocurrency, and will help novices to better understand why many think cryptocurrency is the wave of the future.

 

Cryptocurrencies came about when “Satoshi Nakamoto” created a “Peer-to-Peer Electronic Cash System” (think Napster for cash) in 2008.  Nakamoto developed the most popular cryptocurrency, Bitcoin, to create a completely decentralized system that prevents double-spending.  To understand cryptocurrency, it is important to understand the differences between how digital currency is tracked using both a centralized system, and a decentralized system.  In a centralized system, such as the current banking system, digital cash is recognized through accounts, balances and transactions where double spending (the same account making the same purchase multiple times) is prevented through a central system recording these transactions.  Decentralized software, called decentralized applications or dapps, was made possible by an innovative technology known as Blockchain.

 

bitcoin

(Image courtesy of Huffington Post) 

Blockchain is “a massively replicated database of all transactions in the Bitcoin Network” (think of it as an incredibly large ledger of all Bitcoin transactions).  Bitcoin transfers are validated through a consensus mechanism known as “proof-of-work,” which prevents double-spending.  Blockchain technologies prevent bad actors from “gaming” the system and creating double transactions.  Additionally, the technology behind cryptocurrency allows electronic transactions to occur in a much quicker manner and less expensively than traditional banking.  Anyone who has paid excessive bank fees can appreciate the ease of a decentralized banking system.

 

According to Bitcoin, at the end of April 2017, “the total value of all existing Bitcoins exceeded 20 billion U.S. dollars, with millions of dollars’ worth of Bitcoins exchanged daily”.  A recent article in Forbes, Bitcoin- The Case for a $10,000 Coin, had many investors seriously looking at the cryptocurrency and its future, when the author noted that “just $1,000 invested in 2010 would be worth $70 million today”.  The article notes that the scarcity of Bitcoins helps increase the value and interestingly, that Bitcoin could have a global impact by helping to stabilize currency in developing or emerging markets that are unstable due to political turmoil, and in countries where banking is more geographically challenging (all you need is a smart phone for transactions).

 

 So, how does one acquire Bitcoins?  There are numerous ways:

           

            1)  Purchase Bitcoins on a Bitcoin Exchange.

           

            2)  Exchange Bitcoins.

           

            3)  Accept Bitcoins as payment for goods or services.

 

            4)  Mine for Bitcoins.

 

Mining for Bitcoins is probably one of the more interesting and technically challenging ways to acquire Bitcoins.  Mining is a computationally intensive task which requires extensive processing power – basically, the computer is rewarded for solving highly-complex mathematical equations. The vast network of computers required to make mining practical can be very costly and the electric bills are reportedly astronomical.  Thus, miners tend to be experienced computer gurus with the resources to make mining profitable.

 

As the desire for ease of currency exchange and global transactions increase, cryptocurrencies represent a new banking system that could revolutionize how people view “money.”