Bitcoin is a peer to peer version of electronic cash. It enables payments to be sent from one body to another without using a middleman or financial institution. Where Bitcoin’s peer to peer network differs from other peer to peer networks is the proof of work concept in conjunction with digital signatures and timestamps. Proof of work on this particular network is to stop an issue called double spending. I will give you a short example of double spending but we go into it in detail in this article (See Double spending) double spending happens when a particular set of cryptocurrency coins in this case Bitcoins is spent in more than a single transaction. Without proof of work this would occur all the time. Proof of work (See proof of work) in a nutshell is timestamped transactions that are hashed into a continuous chain of hash-based proof of work.
This creates a chain of work that cannot be reversed unless the work is re-done. The most extensive chain does two things. It proves that the sequence of work done on the chain has been witnessed and verified. It also proves that the longest chain has the greatest share of CPU power. If the majority of distributed CPU powered nodes are not conglomerating to create a 51% attack (see 51% attack) or take control of the network for ill gotten purposes, they will easily out work any attacks to the system. Nodes can leave and join this peer to peer network at will. They can also do so confidently knowing that when they rejoin the network that the longest chain on the network confirms all transactions were true and the proof of work chain proves everything that happened on the chain while they were gone is true and correct.
E-commerce and commerce in general in this time of the internet has become appurtenant to third party platforms and organizations to complete online or otherwise electronic transactions. This system works and people are content with it but due to fees and the fact that transactions are still relatively trust based a solution was needed. Transactions which were final with no chance of interference or reversal was needed and trustless payments also required to move commerce forward for all parties. Due to these third parties, transactions costs were high. Mediation was required, personal information was required which jeopardised personal anonymity and security. Transaction size both small and large were limiting certain areas of commerce for example sending someone $2 would never happen as the fees would eat it up.
With the current system we accept a particular amount of technical errors and fraud but with Bitcoins peer to peer network this is eliminated completely apart from personal user mistakes when conducting the transaction.
Bitcoins peer to peer architecture provide cryptographic proof in place of trust to create an environment where a transaction does not rely on a third party payment system for trust that the transaction will be completed correctly and true. Also the proof of work element would make reversing a transaction computationally impractical but escrow services could still be used on the network if the buyer demands such a requirement. The timestamps within this peer to peer network provide computational proof that all transactions are done and have been completed in chronological order. This provides Bitcoin’s network with a truly trustless, peer to peer, self evaluating, highly secure, non-reversible, low fee, computational and chronological environment in which to process transactions free of any third party engagement. The underlying blockchain technology is what ties all these functions together and will continue to be used as more and more people start to realise the undeniably history making technology.