Bitcoin

Money exchanged anywhere depends on the “trust-based model”: A payment is never final because a bank can reverse that sum if it’s in dispute, even if it’s for an already rendered service. Because banks’ involvement has a cost, low-value transactions end up being uneconomical. Also, fraud is inherent in the system, so checking for creditworthiness adds even more expense.

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

A “peer-to-peer” system that doesn’t need a third party operates on “cryptographic proof” rather than trust. A bitcoin, a unit of electronic money, is “a chain of digital signatures.” These unique signatures can prove a specific individual or entity owns a particular coin. With bitcoins as electronic currency, sellers would gain from receiving payments that are irreversible, and escrow accounts would assure purchasers.

“The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.”

In real life, you exchange objects, but, in online life, you copy data – be it a document, a music file or a photo. With other e-coins, that could result in “double-spending” if the data were code that represents a unit of currency. With bitcoins, digital signatures of the coin owner along with the “public key” of the next owner added to the string of code creates a “chain of ownership” that anyone can track to verify that the coin hasn’t been double-spent. A “time-stamp server” establishes the chronology of the transaction. A “proof-of-work” protocol furnishes a public record of bitcoin transactions that hackers would find “computationally impractical” to modify. Adding new bitcoins into the supply takes the energy of CPU processing and electrical power, much like “gold miners expending resources to add gold to circulation.” The nature of the open source code means all bitcoin dealings must be visible, but secret public keys keep individual transactors’ identities confidential; that’s similar to stock exchange transactions, where you know the size and timing of securities trades, just not who the buyers and sellers are.

“The network is robust in its unstructured simplicity.”

Bitcoins support electronic sales and purchases through unique digital signatures, thus removing trust and intermediaries from the online commercial equation. Eliminating the possibility of double-spending with complex proof-of-work chains makes for a viable currency that operates on a “consensus mechanism.”