Bitcoin is the world’s first successful decentralized cryptocurrency and payment system, launched in 2009 by a mysterious creator known only as Satoshi Nakamoto. The word “cryptocurrency” refers to a group of digital assets where transactions are secured and verified using cryptography – a scientific practice of encoding and decoding data. Those transactions are stored on a network of computers distributed all over the world via a type of ledger technology called blockchain.
Bitcoin can be divided into smaller units known as “satoshis” (up to eight decimal places) and used for payments, but it’s also considered a store of value like gold. That is because the price of a single bitcoin has increased considerably since its inception – from less than a cent to tens of thousands of dollars. When discussed as a market asset, bitcoin is represented by the ticker symbol BTC.
The term “decentralized” is used often when discussing cryptocurrency, and simply means something that is widely distributed and has no single, centralized location or controlling authority. In the case of bitcoin, and indeed many other cryptocurrencies, the technology and infrastructure that govern the creation, supply and security of it do not rely on centralized entities, like banks and governments, to manage it.
What does the blockchain do?
As noted by P. Ryan most people agree we do not need to know how a television works to enjoy using one. This is true of many existing and emerging technologies. Most of us happily drive cars, use mobile phones and send emails without knowing how they work. With this in mind, here is a tech-free user guide to the blockchain – the technology infrastructure behind bitcoin, and many other emerging platforms.
The blockchain is software that stores and transfers value or data across the internet.
What can I store and transfer using the blockchain?
To use the blockchain, you will need to set up an account or address (a virtual wallet). At this time, the most popular use for the blockchain is to make micro-payments with virtual currencies. For example, you can buy bitcoin with real money and then spend it on the internet using the blockchain.
Authorising a payment using the blockchain is similar to using a credit card to buy something online. Instead of a 16-digit credit card number, you provide the vendor with a unique string of numbers and letters generated for each transaction. With this unique identifier, the blockchain can verify and authenticate the transaction.
Can I use the blockchain to transfer real money?
Not yet. Some companies are using the blockchain to make international financial transfers, but most of these transactions are enabled by bitcoin or other digital currencies. Exchanging real money for bitcoin incurs fees for the sender, but the benefit is speed, security and convenience.
How is transferring value or virtual currency on the blockchain different from transferring money from my bank account?
Depending on the amount and the destination, when you transfer money from your bank account, your bank will limit the amount you can transfer. Most banks impose daily limits for all transactions. When you use virtual money on the blockchain, there are no limits.
When you transfer value or currency from your bank account to an account with a different bank or other financial institution, the transfer can take days. When you use the blockchain, the transfer is immediate. If a transfer from your bank account puts your account into debit, your bank will charge you a fee. The blockchain will not allow a transfer in excess of your balance and so your virtual wallet will never be in debit.
How is storing value using the blockchain different from keeping my money in a bank account?
Bank accounts and credit cards are vulnerable to attack from fraudsters and hackers. The blockchain is a more secure way to store and transfer funds, particularly if you keep a modest value in your virtual wallet. Hacking the blockchain is difficult, time-consuming and expensive. No one breaks into Fort Knox for just $500. Of course, value stored on the blockchain will not earn you interest or improve your credit rating; and the blockchain will not lend you money to buy a house or car. The blockchain does not replace your bank, but very soon banks will be using the blockchain too.
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