Bitcoin: A Peer-to-Peer Electronic Cash System — Laymen’s Version

Carl Jensenk
Nov 3 · 3 min read

Puneet

Bitcoin: A Peer-to-Peer Electronic Cash System — Laymen’s Version

September 28th 2019

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A digital version of money should work similar to its physical counterpart i.e. cash. It works without the involvement of any bank or third party payment service. The digital transactions can be protected using a private key or a password, there should be no need to use any central bank to facilitate these transactions. This can be achieved by creating a network of nodes who maintain the network. Every transaction also records the time of transaction. The computers are used to encrypt each transaction into a hash. Every hash will be linked together to form a chain of transactions/hashes. As long as more than 51% of the nodes are honest, the chain of transactions will record true transactions. Every person who is part of the network sees the updated chain and updates their records. Anyone can be part of this network and help create an honest ledger.

Introduction

The number of people who use online transactions is on the rise. Online transactions are not limited to buying clothing or electronics but to book a travel ticket, a hotel, order food, and book a salon. A large part of the society sends money to their near and dear ones digitally via banks and third party financial institutions. They use either a credit card or a digital wallet like Paypal to make these transactions. These payment companies record each and every transaction. They also control how much, at what time and to whom people can send or receive money from.

Earlier internet was primarily used to connect to other person via mail or messages. You could delete a message or email that you have received. You could delete a Whatsapp message for everyone in a group. Also, you can send the same message to different people.

Imagine if the same could be done with the money. A vendor deletes the record of the payment you have made. A customer reverses the money they have paid to the vendor. The most troublesome would be if a customer keeps on spending the same money again and again like sending a Whatsapp forward.

Inherently buyers and sellers do not trust each other. These companies (credit cards and digital wallets or your banks too) bridge this trust gap and act as a supervisor for safe transactions. These companies own payment gateways. They decide who can use the gateway for the transactions and the amount. There are invisible extra costs to manage the payment gateways securely. Physical cash does not have similar issue. Digitally no such mechanism to safeguard transactions had existed earlier.

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