Bitcoin: A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.

                                          – From Bitcoin Whitepaper by Satoshi Nakamoto

Means Bitcoin is nothing but an Electronic Cash(Cryptocurrency) that allows online payments to be done between two parties directly without going through financial institutions.

Problems with Financial institutions:

  • The system works well enough for most transactions but it still suffers from the inherent weaknesses of the trust based model.
  • Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes.
  • The cost of mediation can increases transaction cost.
  • There is also a limitations in the transaction size.
  • There is also a chance in cutting off the possibility for small casual transactions.
  • There is also a broader cost in the loss of ability to make non-reversible payments for non-reversible services.
  • Incase of reversal transactions, a certain percentage of fraud is accepted as unavoidable.

To overcome these problems Bitcoin uses Digital Signatures for transferring currency from one party to another and a Peer-to-Peer Distributed Timestamp Server to avoid double spending problem.

Timestamp server:

The Timestamp server hashes the transactions in to an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work.

Proof-of-work:

Proof-of-work in short is the work considered as the proof for generating records(blocks). It utilizes CPU power. The policy in Bitcoin is 1-CPU:1-vote(i.e, it consider the CPU rather than accounts).

Bitcoin network

Bitcoin network contains the nodes which are responsible for the transactions. Messages are broadcasted on a best effort basis between these nodes. Nodes can leave or join the network as a wish at any point in time.

The transactions are hashed into a block and these blocks are linked in the form of a chain forming a Blockchain. Incase if there are multiple chains, then the longest chain is considered for linking the next block because the longest chain not only serves as proof of the sequence of events witnessed, but also the proof that the large number of work has done to create it.

The system is secure as long as the honest nodes collectively control more CPU power(that are required for the work to create blocks), than any cooperating group of attacker nodes.

Neetha
WhatsApp chat