Moving on, let’s learn more about the set of parameters that differentiates this digital currency from previous ones!
Bitcoin Protocol: Out of thin air?
Bitcoin protocol was not created with instruments that magically appeared out of thin air. Rather, it combines two to three already existing concepts and weaves them together into an exceptional product known as bitcoin. One of these concepts, that make bitcoin phenomenal, is the blockchain technology.
Blockchain is basically a decentralized public ledger which records all the transactions taking place on a peer to peer platform. Bitcoin protocol uses blockchain technology as its backbone. Each transaction that happens on the bitcoin network are stored on this public ledger and can be viewed by any person on the network. These transactions are stored in blocks which are linked to each other. So, changing any data on any one of the blocks, would subsequently, also change data of all the other blocks (preceding it). Hence any kind of transaction/data/information, once stored inside blockchain, is impossible to reverse, modify or tamper.
Additionally, this technology allows the whole ledger to be stored on the nodes, all over the globe, using the bitcoin network; instead of any centralized server. Hence, there is no single point of failure. This means that even if all the nodes across Asia suddenly fail, the bitcoin network will still be up and running (as the network is present on the nodes operating across other parts of the world).
The key innovation of this technology is that it allows any kind of information to pass across a network of nodes, without the need of any centralized third party. Because of blockchain technology, flow of transactions across bitcoin network without the need of third party like banks or government, is possible. Bitcoin is just one of the applications of blockchain. The disruptive technology has the power to reform various sectors including finance, governance, cultural and commercial.
Another already existing concept which makes bitcoin different from the previous versions of electronic/digital currency is the inclusion of cryptography into its protocol. Instead of relying on a third party (to verify), bitcoin uses cryptographic proof to ensure that the source of transactions is legitimate and that the bitcoins have not been previously used before.
The biggest issue with digital money is the ‘double spending’ problem. Since anything digital, is relatively easy to replicate, virtual money can also be duplicated easily i.e. already used digital token can be reused. This issue of double spending has been one of the main hurdles of digital money and which is why, many previous attempts at introducing virtual money have failed. Bitcoin succeeded in overcoming the problem of double spending by incorporating cryptographic proof into its protocol thereby ensuring that one bitcoin can never be used twice.