PRICING

HELP

BLOG

APPSTORE

COMPANY

LEGAL

LOGIN

This article explains the necessary things you need to know about cryptocurrencies in your business. The crypto world could be intimidating, since the subject matteris rather complex.

Token Based Payment Systems: The Basics

Token Based Payment Systems allow parties to exchange valuable goods. The system provide the following:

• Owners: the parties identified as wanting to get involved in the transaction and will 'own' or hold on to the tokens.
• Tokens: monetary units that can be used to quantify and measure the value of goods and will exchange owners.
• Ledger: system for recording transactions in terms of who owns token (monetary unit) and making sure that double spending does not occur.

So in the cash based money system the tokens are the dollar bills and the ledger is the aggregation of the money in people's wallets. Double spending is prevented by the difficulty in forging paper money. A transaction occures by sender physically giving the money to reciever.

Our current banking system, account balances are the tokens and the deposit banks are the ledgers. A transaction occurs by the sender writing a check frmo an account he owns to the reciever, signing it and instructing the ledger (bank) to record the transaction. The banking system will internally update its records (the banks settle and send checks to each other) to reflect the account balance for each 'owner'. Double spend would be the equivalent of writing a 'bad' check.

In the bitcoin system, the token is a historical record of transactions that capture ownership changes. The Ledger is distributed time stamp server network that publicly announces and verifies the transactions. To do a transfer, the owner holder pays the reciever by digitally signing (using the holders private key) a hash of the previous transaction and the public key of the owner and adding these to the end of the coin and submitting the result to the ledger 'network'. The payee can verify that the payment is legitimate by:

• verifying the signatures to verify the chain of ownership.
• wait for the miners that run the ledger network to 'confirm' and record the transaction.

Double-spending

double-spending is the problem that any payment system that uses a token of exchange must solve. A token of exchange is subject to counterfeiting. While with a non digital system such as paper money counterfeiting problem could be mitigated without involving more than the two parties involed the transaction settlement (by simply making the physical token hard to replicate -- bits are easier to copy than bills), with digital payment systems the token can be easily duplicated and the prevention would entail involving trusted third party systems.

Trusted Thirdparty Systems

The system would verify whether a token has been involved in a transaction which can then determine ownership of the token. One example of this today is the banks that process transactions. Ultimately the processing bank is in charge of recording the transaction and detemining who owns the payment token (cash money).

Another approach taken is to verify and record the transactions in a public ledger system and then use the public ledger system to determine the transaction history and in turn ownership of payment tokens.

The Transaction BlockChain

A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. The designers created a protocol with the goal of accomplishing the following:

• Verifying transactions by detecting preventing duplicates (solving the double spend problem)
• Transactions can not be modified once recorded
• System can be deployed on a public peer-to-peer network

On a purely technical note, the paper says:

Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers. In this paper, we propose a solution to the double-spending problem using a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions. The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes. ... Proof-of-work is essentially one-CPU-one-vote.

Perhaps the most challenging aspect is the verification phase: how does the network prevent double spending?

Transaction Verification

Just to review, the owner public/private key pair is generated by the owner. The public ledger system is the place that determines who owns what. What ends up in the public domain is the public keys of the parties involved in the transaction and the signed contents (using the owner's private keys) from the previous transactions.

In order for a requested transaction to become an official part of the public ledger (transaction verification), all transactions go into the unconfirmed pool of transactions the need to get verified by the miners who run server farms around the world. These miners earn bitcoin for the transactions they verify on the network.

Transactions don't start out as irreversible. Instead, they get a confirmation score that indicates how hard it is to reverse them. Each confirmation takes between a few seconds and 90 minutes, with 10 minutes being the average. If the transaction pays too low a fee or is otherwise atypical, getting the first confirmation can take much longer.

Bitcoin is slow. It can take up to 45 minutes for the bitcoin network to confirm a transaction. Since there is no way to instantly convert bitcoin to fiat currency [cash] via a transaction, merchants must speculate holding the bitcoin until it arrives in the wallet and they can move it to the exchange and liquidate it.

Ecosystem and Players

You first need to obtain the tokens (bitcoins) to get involved in transactions. This is typically done by creating your private/public key pair and using a wallter software to engage in transactions.

Payment Wallets

The wallet keeps your public key and private key. The public allows the entire world (the public) to see what you own. The private key allows you to transfer the stuff you own to others in exchange to goods, etc. any transaction I issue from my bitcoin address needs to be áœsignedᝠwith my private key. To do that, I put both my private key and the transaction details (how many bitcoins I want to send, and to whom) into the bitcoin software on my computer or smartphone.

Digital Currency Exchanges (DCE)

Businesses that allow customers to trade cryptocurrencies or digital currencies for other assets, such as conventional fiat money, or different digital currencies.

• coinbase

paper: https://bitcoincore.org/bitcoin.pdf

Izyware Blog