Is it risky to use?
A problem that has puzzled mathematicians for a long time is how different parties can know if information exchanged online represents the consensus, without the need to rely on a third party. Until recently, this was considered impossible.
In a system involving third party intermediaries, there is a possibility of information being changed or filtered, both consciously or unconsciously. It therefore makes sense that the solution to this problem must be a system where trust is not needed and the entire network acts as the trusted party. This requirement can only be met by decentralised systems such as Blockchain.
The foundation of Bitcoin is a block chain. For Bitcoin, the block chain is what a ledger is for a bank e.g. a complete record of financial transactions. However, in contrast to a bank’s ledger, the block chain can be inspected by anyone. Bitcoin transactions are completely transparent which allows for complete financial openness.
Bitcoin account numbers, also known as addresses, are added anonymously to the block chain in order to keep details safe and secure. However, bitcoin users can choose for their details to be transparent and this allows a direct view of their money flows within the blockchain.
Bitcoins at a particular address can be spent by providing a corresponding unique key code. In normal use, this isn’t visible, because the wallet software manages it. However, it should be pointed out that it is possible to copy, print, or share the codes.
That said there are checks and balances in place to ensure that bitcoins are not spent twice and that only valid transactions are added to the block chain. As mentioned previously, the entire network acts as a trusted party and computers within that network compete with each other to complete a complex calculation. It’s a first come, first served basis as the first computer to find the solution is able to add the transaction to the end of the block chain.
As more computers confirm the solution and start using the new block chain to add new transactions, the found solution will increase in probability. If the majority of the computers are searching for the same, correct solution, invalid transactions will automatically end up in a dead branch of the block chain which will become extinct due to a lack of consensus.
In practice, a transaction is safe after six or more confirmations. All this cryptography gives Bitcoin its classification as a ‘cryptocurrency’.