Bitcoin is a peer-to-peer electronic payment system that is anonymous, decentralized and scalable.
Centralized vs Decentralized
For example, PayPal is also a peer-to-peer payment system, which allows one PayPal user to transfer money to another PayPal user. But the centralizing authority here is the company which makes sure that the transfer happened as expected and the money is debited from the User A and is credited to User B. This part of the clearing system is important because it avoids double spending.
It’s the same with banks where the central authority is the central bank, which settles transactions between various entities. While it works properly, for now, it has two problems,
Since the central authority settles transactions, it takes time
To tackle various risk scenarios and maintain the whole ledger (record), it takes the money and so the banks charge a transaction fee.
As you see the existing system works great but has a lot of overhead to it and that’s just for domestic transactions. Imagine international transactions, for example
Chandler and Joey are friends. Chandler lives in the United States while Joey lives in Italy. Joey needed help and he asked Chandler to send him some money. The current process of transferring money overseas involves going to the bank or using a third party website where they decide the currency conversion rate from USD to Euro and charges chandler some % of the money he sends as the fee. It usually takes 4 hours to 4 days depending on the type of transfer.
If you see this, there’s a fee and then there’s conversion rate which both together add up to a considerable amount.
Enter Bitcoin, the solution that involves cryptography to solve the central authority issue. In August 2008, Satoshi Nakamoto, the inventor of Bitcoin has published a whitepaper outlining the current problems and how his solution will not need a central authority, which is the main issue with the current model.
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In this model, every user will have a public key and private key. Think of a public key as an email which you anyone can use to send an email to you. But if you have to send mail to someone, you need your password to the account. In Bitcoin system, the public key is what you will use to receive money and a combination of public key and a private key is what you will use to send money.
Bitcoin Wallet Apps:
- Mycelium Bitcoin Wallet
- Bitcoin Wallet
- Samourai Wallet
- Bitcoin Checker