Credits: 3D illustration courtesy of Quince Media
Almost everybody has now heard of bitcoin. In fact, the bitcoin wallet app is now a trending app on both the Play Store and the App Store. Yet, few people really do understand exactly how the process of bitcoin works. Let’s take a look!
How the Bitcoin Wallet App Works
If you make a transaction using the bitcoin wallet app, three components are created:
- A reference that shows the buyer is able to make a payment.
- The recipient’s digital wallet address.
- The amount that has been agreed.
It is also possible to add any other conditions for the transaction. If agreed, the buyer adds their digital signature, and the transaction is finalized. This digital signature is made of up of a private and a public key. The private key is used for encryption, sending it to be verified to the network. The public key, meanwhile, decrypts the message. Doing this stops people from double spending their currency.
Cryptocurrencies have safety measures in place to stop abuse. Each message is placed into the block, and volunteers, known as miners, verify these. Miners compete with each other, trying to authenticate a block and making sure it fits in with the overall flow of the blockchain. If there is a fault, then the transaction will not get authorized. Usually, it takes around 10 minutes to validate a block. However, a buyer (or seller) can add a little “tip” to their transaction for the first miner to validate it, which means they will do it quicker.
Anyone can become a miner, which also means there is no central authority looking into the system. There is no middleman, in other words, and this leads to a range of other savings. Some say that this is what makes the whole system sound too good to be true. Of course, there are risks. The greatest risk is the 51% threat. Because it is quite complex to validate a transaction, miners are creating pools in which they work together. Theoretically, it would be possible that a single pool comprises 51% or more of all miners on the network. If that happens, there is the potential (not guarantee) for fraud as well.
This risk is very real, although it hasn’t happened yet. The fact that the cryptocurrency world is aware of the threat and discussing it openly, however, means that it is also less likely for it to actually happen. The strength of cryptocurrency lies in the fact that it is supposed to be for everybody, which means people will do all they can to stop trust from being lost. So far, mining pools seem to act in very responsible ways, meaning that they voluntarily have put steps in place to stop groups from monopolizing the market. Indeed, it is in everybody’s best interest to have a trustworthy, stable system in place. However, the risk is always there and it is important to be aware of that as well.
Is bitcoin the way forward? It seems to be!