What is Bitcoin and how it changed concept of money forever

May 10, 2017 04:48 PM IST moneycontrol

A revolution of sorts, bitcoin is a currency system based on Mathematics, and hence, is completely devoid of authority and the commodities of the physical world.

Sathvik Vishwananth

CEO and Co-Founder, Unocoin

For a very long time, all the world’s currencies have been subject to either commodity or political authority, until 2009. That was the year when someone under the pseudonym of Satoshi Nakamoto introduced bitcoin to the world.

A revolution of sorts, bitcoin is a currency system based on Mathematics, and hence, is completely devoid of authority and the commodities of the physical world.

Bitcoin prices are derived based on pure free market dynamics of demand and supply, through a number of independent exchange platforms. Hence, like all currencies, the worth of bitcoin is also evaluated on the basis of people’s willingness to pay for the same.

Trustless payment network can be considered as the intrinsic use case of bitcoin, which gives rise to its value, along the lines of adoption levels.

What does Mathematics based Currency Systems, aka Cryptocurrencies, mean to the system? 

To understand the current techno-revolution of bitcoin, let us consider some of the conceptual facts of the bitcoin network from a currency perspective.

Bitcoin transactions are fundamentally computed with the process of mining. At a process-level, mining involves a computer (or a user) solving a mathematical challenge. A block of bitcoin is processed each time the problem is successfully solved and a 64-digit solution is reached. Moreover, the miner earns new set of bitcoins.

Bitcoin’s predictive supply curve is built on a mining algorithm rewarding the most competitive miner (aka transaction verifier) for every batch of transactions called blocks, which keeps the system robustly secure and immutable.

The degree of difficulty of these mathematical puzzles can be varied, in order to ensure consistent production of bitcoins on a daily basis. While as of today, there are about 15 million bitcoins in existence, the number of bitcoins that ever could be in circulation is hard limited to 21 million units. Hence, bitcoin reduces the uncertainty of money flowing in the system mathematically.

Furthermore, peer-to-peer payments in the network are facilitated by autonomous mathematical proofs rather than human-aided programs. Each of the transactions is verified and validated by pre-programmed rules which make it impossible for transaction reversibility.

In fact, with the introduction of ‘irreversible transactions,’ there is now no need for a trusted intermediary or third parties. With third-party dependency no longer being a limitation, one can generate, store and transact with this evolved form of currency on one’s own.

Also, the mathematically supported transaction system enables pseudonymous ownership of money, thus increasing the privacy and security by relying on proof-of-ownership.

In order to receive Bitcoin, the person only need to have a Bitcoin address that is fundamentally a 27 to 34 characters long string of numbers or letters. The same string acts as a virtual address of users, where the bitcoins are shipped off. However, since the address need not have any tangible existence, the same safeguards the identity of users transacting online via bitcoins.

Although there is a chance of money laundering, Bitcoin predominantly seems to be a favourable choice for spreading financial inclusion, especially in a country like India.

The Proof-of-ownership system, as put to practice in the digital world of cryptocurrency, has proven to be more robustly scalable and inclusive than the proof-of-identity frameworks. The same must be leveraged by the Government bodies and private sector for banking the unbanked section of any nation’s economy.

In essence, Bitcoin provides a new and upgraded foundational architecture for global currency systems. At the same time, it also reduces the cost and infrastructure requirements for the fragmented financial systems that can completely rely on this new, advanced and superior protocol for money.

(The views expressed by the author are his own and don't represent Moneycontrol.com's. This website contains material in the form of inputs submitted by users and writers and it accepts no responsibility for the content or accuracy of such content.)