Originally, the motivation behind Bitcoin encompassed replacing trust-based electronic payment transactions with cryptographic proof-based transactions. Until the invention of cryptocurrencies, processing any electronic payment relied exclusively on financial institutions serving as trusted third parties.
Resolving Common Misconceptions
- Bitcoin is just one type of cryptocurrency. Ever since its creation, many different types of cryptocurrencies have come into existence, each of which is distinguishable in terms of their consensus mechanism, protocol parameters, hash algorithm, just to name a few properties.
- Bitcoin is not a physical asset. Instead, there is only a transparent distributed ledger (transaction book) - accessible by anyone - which lists the amount of Bitcoin held by every wallet. Imagine a long list of transactions of Bitcoin, grouped into blocks, which are chained together - thereby creating a blockchain.
- Bitcoin is not issued or backed by any government.
- The word Bitcoin can actually imply two different meanings depending on the context it is used in. On one hand, there is Bitcoin, sometimes also abbreviated as BTC, which is the unit of account of the network - meaning, “Bitcoin” is the currency’s name. On the other hand, it is also the name used for the computer network itself, which is constantly verifying transactions and adding new information to the Bitcoin blockchain.
- Lastly, Bitcoin is not fully anonymous - it’s pseudo-anonymous! Even though today there are so-called privacy coins, encrypting every piece of information on the blockchain. This way, outsiders are not capable of viewing transactional relationships such as how much money was transferred, or which parties were involved. Bitcoin does not belong to the group of privacy coins.
So what makes Bitcoin “pseudo-anonymous”? It makes use of asymmetric encryption for its wallets, meaning every wallet generated comes with a public and private key. The public key is used for sending coins to the wallet, whereas the private key is used for sending coins from the wallet. Since public keys are required to be published on the blockchain in order to ensure network security, Bitcoin’s privacy is only derived from the missing link between the identity of a wallet owner and their public key.
Only the information that a wallet is sending an amount to another wallet is visible to the public eye. However, linking the transaction to any natural person is not possible, unless their public key is published someplace on the Internet in association with their respective owner. Financial institutions usually link identities to their wallets through exchanges, which require new customers to verify their identity via government identification documents.
Bitcoin Today & Tomorrow
Bitcoin has become the first system able to create, store and secure digital value with no trust parties involved, purely based on mathematical principles.
In a world of ever-growing skepticism around financial inequality, political corruption and a global financial system excluding a large number of people from participating, Bitcoin and other cryptocurrencies could become a stepping stone to further the impact of how the Internet can benefit every human on earth, creating equal access to financial means, education and a fair value system.
What is Bitcoin?
by William Wolff
by William Wolff
by William Wolff