Question

a) Talk about Bitcoins, how does it work in terms of blockchain. and talk about the cons and pros of bitcoins.

Answer 1

Bitcoin is a virtual currency or cryptocurrency. It is a type of unregulated digital currency, that means there is no single authority to control the transaction of bitcoins as in the case of real currency. It is controlled by a decentralized network of users. One can use bitcoin to buy products and services, but only a limited shops accept bitcoin yet and some countries have already banned it.

Bitcoin transactions are stored and transferred using a distributed ledger network which can be open, public and anonymous. Bitcoin transaction ledger is maintained by a technology called Blockchain.

The bitcoin blockchain is a database of Bitcoin transaction records. This database is distributed across a network of users and there is no central authority to control the transaction, so due to this reason network participants must agree on the validity of transactions before entering into the transaction. This agreement is done by a process called mining. The bitcoin chain grows continuously, there is no limit to it. Miners create a new block chain in every 10 minutes.

When someone uses bitcoins, it is the task of miners to verify the authenticity of the transaction. Through mining, a "proof of work", that is a piece of data, that meets certain requirements is created to verify the transaction. In order to make a transaction valid on the blockchain, an individual record must have a proof of work. This ensures a secured and tampered free transaction.

A bitcoin transaction occurs only when it is added to the block chain. Bitcoin doesn't have any standards that can facilitate refunds.

Pros of Bitcoins:

1. High Liquidity relative to other cryptocurrencies: Bitcoin has greater liquidity than others. It retains its inherent value when converting to fiat currencies. On contrary, other cryptocurrencies lose substantial value when exchanged for fiat currencies.

2. Wide acceptance as a payment method: Many shopkeepers accept bitcoin as a medium of exchange. One can buy virtually any physical item using bitcoin units.

3. Makes International Transaction Easier: Bitcoin makes international transaction easier without any extra fee. One do not have to pay any extra fee for international transaction as is the case with credit card payments, ATM cash withdrawals and money transfers.

Cons:

1. High Exposure to Bitcoin-Specific Scams: Bitcoin users sometimes face scams, fraud and attacks from anti-social people. There is greater possibility of fraud, scams in case of bitcoins which can't be posecuted by law enforcement agencies as in the case of real currencies.

2. No refunds: One of the greatest drawback of bitcoins is, there is no standard policy for chargebacks or refunds, as all traditional online payment methods have.