Many people still do not fully understand the concept of bitcoin and cryptocurrencies. Therefore, the purpose of this article is to help you get up to speed on proper research when it comes to this specific field.
A cryptocurrency user is a natural or legal person who uses coins: (i) to buy real or virtual goods or services (from specific merchants), (ii) to make electronic payments between the parties (P2P), or (iii) to store them for investment purposes (in a thoughtful way).
The other player is a “miner” who is involved in verifying transactions on the blockchain network by solving the “cryptographic puzzle.” The mining process refers to cryptocurrencies that are based on the PoW consensus mechanism (proof of operation).
Cryptocurrency exchange offices
The third group of crucial players consists of the so-called “cryptocurrency exchange offices.” Cryptocurrency exchange offices are persons or entities that provide cryptocurrency exchange services. It usually implies specific compensation (i.e., commission). They allow cryptocurrency users to sell their crypto coins for fiat currencies or buy crypto money fiat money.
Trading platforms are market places that bring together the various cryptocurrency users they want to buy or sell coins. Those marketplaces provide users with a platform where they can trade directly with each other (like eBay for cryptocurrencies). Also, you can visit ImmediateBitcoin to find out more regarding this subject and gather some valuable information.
Application Wallet (for storing crypto money)
Wallet providers are the entities that provide digital wallets or e-wallets
cryptocurrency to their users. Their purpose is to hold, store, and transfer coins.
Bitcoin is conceived as a transparent, decentralized (peer-to-peer), electronic transaction system that relies not on trust but complex cryptographic algorithms. Unlike traditional methods, there is no central bank here that issues money or processes and stores transactions, nor is there a single owner of the Bitcoin network as a whole. How, then, a secure exchange is possible in a system like this?
Let’s say Alice wants to send Bob 5BTC. Information about this transaction is automatically broadcasted to all online users, i.e., each user has an insight into their own and the purchases of all other Bitcoin users. That is another crucial difference in comparison with a centralized system. The first question that arises is, how do other users know that the information about the initiated transaction is valid? Each sale contains a digital signature of the user who started it. A digital signature is, without going into the details of the algorithm, generated from the combination of the transaction message itself and user private key. It is easy to conclude that the signature is different every time. Each user also has a public key that is in some mathematical relation with the private key.
A triplet (message, signature, public key) is used as the input of a particular mathematical function that determines whether a given combination is possible or not. This way, other nodes in the network can verify the validity of the transaction without private key information.
Cryptocurrencies are stored in digital wallets. A digital wallet is a software that contains a collection of owners’ private and public keys. One user can generate any number of Bitcoin addresses or private-public key pairs. The likelihood of generating the same Bitcoin address is negligible, so no checks are performed, which means that the whole process can be done without connecting to the network (offline), which is also the safest way. The user bitcoin balance is not explicitly saved in the form of final value. Still, instead, it is necessary to go through the whole series of all confirmed transactions (throughout the network) and add up amounts of available bitcoins that refer to users’ public keys. Bitcoins are not being sent (in a strictly formal context); they are just changing ownership. By losing information about the private and public key, the users lose their reference to their bitcoins, and they remain irretrievably lost. Therefore, it is essential to make regular backups of your wallet, and it can be further encrypted for more reliable protection. Although the files that hold the crucial data are not large, Bitcoin wallet can take up considerable space, since constant synchronization with the network involves storing data on all transactions ever performed. An alternative to local is web-based wallets, which do not require keeping a local copy of the purchase, but, intuitively, the degree of security is much lower. Bitcoins can also be stored in physical forms such as coins and papers with QR codes, but these types of storage and distribution are poorly handled.
We have already mentioned that transaction information is spread (copied) to every node in the network. As a large number of transactions are initiated at any given moment, they may arrive in a different order to the individual node, depending on the time of propagation through the network.
That opens up the possibility of various scams, and an adequate mode of synchronization requires the order of transactions between all nodes. The simple solution would be to pass on the information about the timing of the sale. However, the originator of the transaction can easily fake this information, and the collision in that solution is certainly still possible.
The bitcoin system stores transaction history in the so-called blockchain where each block contains a reference to the previous one, down to the first generated block of transactions. All transactions within one block are considered to have occurred at the same time.
When a group of unconfirmed transactions arrives at one node at a time, they will be placed in one new block, and the node will broadcast its proposal for the new block to the other nodes.
However, as the order of transactions varies from node to node, different nodes will have various suggestions for a new block at the same time – which block to choose as the official new block?
The solution to this problem is of fundamental importance for both Bitcoin and all other cryptocurrencies. Also, the basic idea behind the solution is that each block contains an answer to a specific cryptographic question. The content of a potentially new block, along with a randomly generated number, is hashed by the SHA-256 algorithm. The other nodes then collectively guess when a randomly generated number is trying to get a hash value that is below some target value. The node that has found such a number is declared as “the finder” of a new block. Besides, its proposal is added to the Bitcoin blockchain. This kind of randomization mechanism allows for a normal distribution of likelihood to find a new block. The Bitcoin network, on average, finds (solves) one block every 10 minutes.
Cryptocurrencies, as a relatively new concept, are still in the process of being fully understood and accepted by consumers, merchants, and financial institutions. Besides the controversy and skepticism that accompany cryptocurrencies, it is clear that their emergence and ability to survive marks the beginning of a new chapter in the digital and financial world.