Digital Currency: Where Does It Come From

Digital Currency: Where Does It Come From

Nowadays all we meet more and more economic terms, for example, «bail-in» and «bail-out». Even those people who are not connected with financial system understand that local banks and other financial organizations are now more successful than central ones. That`s why speaking about the state of the country we should mention the state of the economy which is of great importance. There is a special structure where banks act as an intermediary in the customer-trader relationship. Their role is to accomplish all the financial transactions. Here the factor of trust means a lot because bank customers do not need any problems or fraudulence.

Traditional Trust System

Traditional Trust System

 

This type of bank is a really productive and diligent one, even if there may be some troubles with frauds. Anyway, the system is made on the principle of justice, so these banks solve the disputes and fight against illegal activities. But it is not entirely beneficial for banks to eliminate problems with the transactions, they got more unnecessary tasks to do and consequently lose their time and money. In such cases, the smaller transactions do not worth the costs the banks do. The fraudulence also gives a lot of financial troubles. So traditional trusts are not completely successful in their practice.

Actually, trust is the greatest benefit of a bank, and the best proof of this is the income bank gets.

New Trust System

New Trust System

 

There is one more system of transactions which is called P2P, or peer-to-peer network. You may have understood from the name that this system is connected to the internet. It is noteworthy that using this system you do not need the third party to carry out the transactions, so you can do your payments directly. The P2P system needs two or more devices connected to each other to send any sort of digital information. For example, everyone ever used the torrent system to download films or songs from the internet.

The benefit of these networks is that they are fault-tolerant. At first, they were created for transferring military messages excluding the danger of an impact on people or nature.

Peer-to-peer networks can easily work without any control, and it is an advantage for people who have to watch out for this system.

You may connect the network and disconnect it, working with any computer. It does not interfere with the general system tasks.

If you would like to send someone money, you just need to transmit the digital payment to the receiver. In the P2P system everything, including money, has a form of bits so that the files are kept in 0s and 1s on computers.

 

Double Spending Phenomenon

Double Spending Phenomenon

 

The P2P system was made in 1960-s, but it is still hard to create a system which will work autonomously and will let you easily send your payments to anyone. The trouble is in the phenomenon of double spending.

Double spending is the case when a user who is willing to send 50$ to one account, sends this payment twice, at the same time to two different users. It is obvious that solving the problem of double spending is the most important task for the P2P networks.

Speaking about banks and other financial institutions based on trusts, they do not have such problems in their practice.

Bitcoin and Its Origins

Bitcoin and Its Origins

 

In 2008, by Satoshi Nakamoto, there was created a project which had to take away double spending troubles without any trusted intermediaries. This new system was called Bitcoin, and each of these digital coins had to be kept on a special public platform established on all of the devices involved in the system.

The Bitcoin system registers all the operations being made with digital coins, including spending and receiving them. In this system, you cannot reverse the fact of the transaction you already made.

The fraud is excluded while you have got all the necessary digital documentation – signatures, timestamping for transactions and so on. Therefore, the transactions in the Bitcoin system are veritable.

Summary

Well-known events of the financial crisis in 2008 became the reason why so many new financial trust systems appeared. One of them, of course, was cryptocurrency system made by Satoshi Nakamoto. And this system now has a real success as it is full of advantages for the users. The most valuable of them is that the Bitcoin system works without any connection to the actual financial system. It is also a great benefit that this system guarantees the confidentiality of transactions and excludes the double spending.

 

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