Bitcoin can be used to pay for things electronically if both parties are willing. But it differs from fiat Digital Currencies in Several Important Ways: 1. Decentralization 2. Limited Supply 3. Pseudonymity 4. Immutability 5. Divisibility
3. Bitcoin
Bitcoin can be used to pay for things electronically if
both parties are willing.
In this sense, it's like current dollars, Euros, or yen,
which are also traded digitally.
But it differs from fiat Digital Currencies in Several
Important Ways:
4.
5. 1. Decentralization
Bitcoin's is the most important characteristic is that it is
decentralized.
No single institution controls the bitcoin network.
It is managed by a group of volunteer coders and run by an
open network of dedicated computers spread around the
world.
It attracts the individuals and groups that are uncomfortable
with the control that banks or government institutions have
over the money.
6. Bitcoin solves the "double spending problem" of
electronic currencies through an ingenious
combination of cryptography and economic incentives.
In electronic fiat currencies, this function is fulfilled by
banks, which gives them control over the traditional
system.
The integrity of the transactions is managed by a
distributed and open network, owned by no-one.
7. 2. Limited Supply
Fiat Currencies have an unlimited supply: Central
banks can issue as many as they want and can attempt
to manipulate a currency value relative to others.
Holders of the currency bear the cost.
On the other hand, supply is tightly controlled by the
underlying algorithm.
8. A small number of new bitcoins trickle out every hour
and continue to do so at a diminishing rate till a
maximum of 21 million has been reached.
It makes bitcoin more attractive as an asset - in theory
if demand grows and the supply remains the same, the
value will increase.
9. 3. Pseudonymity
While senders of traditional electronic payments are
identified, users of bitcoin, in theory, operate in semi-
anonymity.
Since there is no any central validator, users do not need to
identify themselves when sending bitcoin to another user.
When the transaction request is submitted, the protocol
checks all the previous transactions to verify that the sender
has the necessary bitcoin as well as the right to send them.
10. The system does not need to know his/her
identity.
In practice, each user is identified by the address
of his/her wallet.
Transactions can be tracked in this way.
Also, law enforcement has developed methods to
identify the users if necessary.
11. Furthermore, the most exchange is required by law to
perform identity checks on their customers before they
are allowed to buy or sell bitcoin, promoting another
way that the bitcoin usage can be tracked.
Since the network is transparent, the progress of a
particular transaction is visible to all.
It makes bitcoin not an ideal currency for the
criminals, terrorists or money-launderers.
12.
13. 4. Immutability
Bitcoin transactions cannot be reversed, unlike the
electronic fiat transactions.
If a transaction is recorded on a network, and if more
than an hour has passed, it is impossible to modify it.
While it may disquiet some, it does mean that any
transaction on the bitcoin network cannot be tampered
with.
14. 5. Divisibility
The smallest unit of a bitcoin is called a satoshi. That
is one hundred millionth of a bitcoin (0.00000001) - at
today's prices, about one-hundredth of a cent.
It could conceivably enable microtransactions that
traditional electronic money cannot.
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