Challenges in Bitcoin Transactions and the resolution

Before starting with Challenges in Bitcoin Transactions, in the previous session, we dealt with the various characteristics of Bitcoin and the way ledgers are handled. Today we delve a little deeper into those complex territories and explore the world of Cryptocurrency.

Topics to be covered

  1. Account Permission Problems
  2. Managing the account and decentralization
  3. Book Keeping Problems
Challenges in Bitcoin Transactions
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Challenges in Bitcoin Transactions – Account Permission Problems

It is the administrator’s job to assign you an unused account number and then set you up with some sort of username (which may be your own name) and password so that when you ask the administrator to make a payment on your behalf, the administrator knows it is really you making the request. The Challenges in Bitcoin Transactions is setting up your account the administrator has granted permission for you to open the account, and may, equally, choose to refuse that permission. Any time you have an entity that can approve or deny something, you have a point of third-party control. We are trying to eliminate third-party control.

Managing the account and decentralization

Instead of names or account numbers and passwords, we can use public keys as the account number, and digital signatures instead of passwords. Hence the Challenges in Bitcoin Transactions can be resolved by using public keys as account numbers, anyone can create their own accounts with their own computer without having to ask an administrator for an account number. Remember, a public key is derived from a private key, which is a number picked at random.

So you create an account by picking a random number (your private key) and doing some maths on it to get your public key. In Bitcoin and most other cryptocurrencies, the Challenges in Bitcoin Transactions account numbers are mathematically derived from public keys (not public keys themselves), and are called addresses.

Challenges in Bitcoin Transactions – Book Keeping Problems

We have now eliminated the role of the third-party administrator in creating accounts. But we still have the third-party administrator in the role of a central bookkeeper—the coordinator who maintains the list of transactions and balances and who both validates and orders the transactions you request against some business and technical rules. This single point of control ultimately decides what is reflected in your account, whether your transaction goes through or not. As a single point of control, it is classified as a financial institution and has the regulatory burden of having to identify you and all other customers, a process known as Know Your Customer or KYC. It can also be coerced to censor transactions.

In the next session of Challenges in Bitcoin Transactions, we take a look at the other challenges that have been coming up and the way to design a solution for the same.


Suggested Topic

Understanding Bitcoins and its attributes in a digital era


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