Bitcoin

In the year of 2008, around the month of October, an anonymous blog posted under the pseudonym of Satoshi Nakamoto proposed an electronic peer-to-peer payment system. The system primarily sought to decentralise the process by which people make transactions and solve additional problems of trust, anonymity and security of electronic payment systems.

THE DOUBLE SPENDING PROBLEM:

“Double–spending is the result of successfully spending some money more than once.”

The Double Spending Problem is a unique problem that arises in digitalizing currency. Let us consider three parties A, B and C such that two transactions of the same amount X are requested i.e., from A to B and A to C. What stops A from spending the same funds twice? After all, it’s easier to duplicate a file and use counterfeit digital currency. With respect to such online payments, trusted third parties such as financial institutions and services (eg: Paypal, Mobiwik) predominantly mediate between parties by authenticating each party involved and verifying each transaction requested based on arrival time of the request. Trusted third parties safeguard against double spending but also prove disadvantageous due to mediation costs, reversibility of transactions, high processing time for transactions, et all. An alternative to this are cryptocurrencies such as Bitcoin which have low mediation costs, low processing time for transactions and reversibility of transactions impossible to prevent fraud.

BITCOIN:

Bitcoin is a cryptocurrency which implements the proof-of-work technology proposed by Satoshi Nakamoto in his paper. In recent years, the Bitcoin network has grown rapidly with more and more people entering the Bitcoin network as well as indulging in the act of “mining” Bitcoins.

TECHNOLOGY BEHIND BITCOIN:

Similar to a trusted third party, Bitcoin also solves the double spending problem by timestamping transactions. Much like trusted third parties maintain a ledger (a file that documents all the transactions with their timestamps), a public ledger called the BLOCKCHAIN is maintained by the Bitcoin network. Unlike in the former system, where the ledger is private, this technology proposes a ledger where every node (each computer participating in the Bitcoin network) possesses a copy of the ledger such that every transaction is made public and updated of every single transaction. On the face of it, a public ledger sounds counterintuitive to our notions of security but the technology behind cryptocurrencies is based on cryptographic tools such as cryptographic hash functions which provide a considerably high degree of anonymity and security.