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BITCOIN AND THE INFRASTRUCTURE OF CRYPTOCURRENCY

The banking system laid down the necessary infrastructure that could make monetary transactions across the world more efficient and more accessible. One can make payment on the other side of the world through an intermediate institution, without physically having to go there. The role of the existing financial networks is to make transactional activities more time-efficient and secure.

Bitcoin and the world of cryptocurrency, in general, is a new milestone along the path towards attaining higher transnational efficiency. The underlying infrastructure of the cryptocurrency uses blockchain technology, a distributed ledger, that has the potential to make transactions way more efficient than what it is in the existing system. There is lots of skepticism, lots of hope regarding the role of cryptocurrency. Despite differing opinions, the world has slowly embraced crypto technology. MNC’s like IBM, Tesla have already invested in currencies like Stellar and Bitcoin. With the proliferation of decentralized applications (dApps) and trading platforms like crypto trading, traders from all strata are taking interest in the world of crypto. 

But the question is, can cryptocurrencies like Bitcoin be a feasible substitute to legal tender? To understand this we need to understand the infrastructural difference between the banking system and cryptocurrency.

How does the Banking system work?

The banking system uses a traditional ledger system that is used to keep an account of the transactions made using legal tender. The legal tender and the banking system are under the authority of the federal government of the respective country. It is the government that regulates and controls the currency that is circulated in a country. The value of the legal tender of any country depends on the prevailing economic conditions.

The traditional ledger system is manually maintained by the dedicated workforce of the banking system. Their task is to keep an accurate record of transactions made so that they can prevent errors such as double-spending. Double-spending is a significant problem that concerns digital transactions, as it may result in the spending of a currency token twice due to unverified transactions. This is often abused to create counterfeit digital tokens, which results in inflation. Thus the online banking system is prone to errors that might affect the entire economy.

Bitcoin and the blockchain infrastructure

Bitcoin has eliminated the intermediate authoritative body that can cause accounting errors by the use of blockchain technology. Now is that good? What happens if no regulative body is there to oversee transactions? 

Bitcoin has replaced the intermediary body with an automated ledger system that encrypts and registers transactional data into blocks. Here is some primary information regarding Bitcoin infrastructure.

• Smart contract technology- the blockchain works on a smart contract technology, where new blocks can be updated only when all the founding parameters are met. “if/when” certain conditions are met “then” a transaction will be sanctioned as legitimate. This reduces the chances of an accounting error.

• Data encryption and Merkle trees- all the transactional data are encrypted. These data are used to generate hexadecimal numbers known as ‘hash’. The hash is digits that can be referred, to verify transactional data. 

• Blocks and their timestamps- the hash from multiple transactions are stored as a root hash in a block. Along with the root hash, other data such as previous block relation, timestamps, and software information are registered in the block. Any change to any of the blocks will affect the integrity of the entire blockchain. This makes tampering virtually impossible.

• The general consensus- changes can be made to the blockchain only when all the systems within a network come to an agreement. This makes it impossible to alter data from a single system without the authorization of the entire network.

Conclusion: Bitcoin has changed the way money is circulated around the transaction networks across the world. The role of networks is to make movements faster and more efficient. Networks are routes that are utilized to transport anything- starting from intangible data in binary, to tangible goods.

 

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