The 5 transactional properties of cryptocurrency

13 February, 2019

You are an online gambler who appreciates being able to visit to find online casinos that accept bitcoin deposits. You appreciate those casinos as well. Being able to gamble with bitcoins just makes the entire experience so much more enjoyable. But here's a question: do you understand what really goes on behind the scenes every time you conduct a transaction with bitcoins?

Cryptocurrency platforms like Bitcoin and Litecoin can act as monetary systems, assets, or even properties. For every token you purchase through an online exchange, there are investors purchasing many more coins than you can afford. Some of them purchase coins as an investment they intend to eventually sell. Others purchase them as properties they intend to use for other purposes.

Regardless of the reason for purchasing bitcoins, there are certain transactional properties that govern sending and receiving. Those transactional properties are what separate cryptocurrencies from their fiat counterparts. There are five transactional properties in all.

1. Transactions are permissionless

All cryptocurrency transactions are facilitated through the use of a blockchain. A blockchain is essentially a digital ledger that keeps track of who owns coins and who sends and receives them. Blockchains can be both permissioned and permissionless. Cryptocurrency block chains are permissionless. So, what's the difference?

A permissioned blockchain is a closed blockchain with controlled access. Only those with the right permission can establish accounts and facilitate transactions. Permissioned blockchains are generally the domain of large corporations and government entities with a need to restrict access.

Permissionless block chains are open to anyone and everyone. Anyone can download a copy of the Bitcoin blockchain at any time. Anyone can create a digital wallet for the purposes of buying and selling digital tokens. Anyone who holds digital tokens can use them to transact business with others willing to accept those tokens.

Because cryptocurrency blockchains are permissionless, so are the transactions related to them. You do not need permission from a bank, government authority, or company to establish a digital wallet and purchase bitcoins. You don't need the approval of outside authorities to deposit bitcoins at an online casino just so you can play Mega Moolah.

2. Transactions are irreversible

Next, any and all cryptocurrency transactions you conduct become irreversible once confirmed and added to the blockchain. Let's compare this to fiat currency transactions through your bank.

If you were to deposit fiat at an online casino using a direct bank transfer, that transaction could be halted by your bank for a variety of reasons. It could also be reversed. The same is true when the time comes for you to withdraw from your casino account. This creates a problem in that transactions can be easily hijacked by scammers. If a transaction can be stopped or reversed, it can also be hacked.

Cryptocurrency transactions cannot be changed once they are confirmed. So your bitcoin deposit is permanent once it is added to the blockchain. No one can reverse the transaction, no one can eliminate it from the ledger, and no one can steal the tokens you sent to your online casino. And by the way, you cannot get your tokens back if you change your mind.

This particular transactional property is one of several things that make platforms like Bitcoin and Litecoin more secure. On the other hand, irreversible transactions require coin holders to be diligent about protecting their wallets. If you lose your wallet and the information it contains, you also lose your coins. There is no way to retrieve them.

3. Transactions are pseudonymous

Perhaps you have heard that cryptocurrency transactions are anonymous. That is true in spirit, but not in technical reality. The truth is that they are pseudonymous rather than anonymous. There is a significant difference, though that difference is not critical to the security of a crypto platform.

Crypto transactions cannot be truly anonymous for the simple fact that ownership of digital tokens has to be established within the blockchain. But rather than requiring identifying personal information, blockchains identify coin owners through digital pseudonyms.

For you to buy your first round of bitcoin, all you would need is an e-mail address. No one needs to know your name, mailing address, government ID number, bank number, etc. Buying coins would generate a random address along with a secure code that pertains only to that transaction. The address is linked to your digital wallet to determine ownership.

Buying something with your bitcoins involves pushing coins from your wallet to the recipient's wallet. Transaction data includes your wallet address, the recipient's address, and the tokens themselves. You do not know the identity of the recipient and that person doesn't know yours either.

While it is technically possible to obtain a copy of the Bitcoin blockchain and crack it in order to learn the identities of coin holders, the amount of work involved isn't worth it. By the time you figured everything out millions of coins would have already traded hands and rendered the information useless.

As an added benefit, users can (and should, by the way) use new and separate addresses for every transaction. That way, even if someone did figure out the address pertaining to one of your transactions, your entire wallet would not be exposed. Only the coins related to that address would be in danger.

4. Transactions are secure

Cryptocurrency platforms utilize two important tools above and beyond pseudonymity to maintain security. The first is cryptography. Simply put, all of the data in the Bitcoin blockchain is encrypted using a public key system. Such a system is known as asymmetric cryptography.

Asymmetric cryptography involves a private key held only by the sender of cryptocurrency and the public key available to everyone else on the network. Only the sender has access to his own private key through his digital wallet. When he pushes tokens to a recipient along with that private key, the recipient's wallet can then decrypt the information in order to complete a transaction.

If no one else on the network can intercept and decrypt the information, what's the point of the public key? The public key is that which allows the transaction to go through. It acts as the key that carries the information across the network to each node processing the transaction. In essence, the public key is used to record the information relating to a transaction. But only sender and receiver can actually use that information to trade coins.

The second tool is known as proof-of-work. When a transaction is sent out across the Bitcoin network for verification, all of the nodes on that network must decrypt the transaction in order to verify its legitimacy. Doing so requires completing a complicated mathematical equation. This is known as proof-of-work.

Proof-of-work prevents someone from creating a bogus transaction or attempting to alter a legitimate one. How so? Because changing a transaction in any way also alters the results of the proof-of-work equation. If proof-of-work results do not match on every single node in the network, the transaction is rejected.

5. Transactions are fast

Finally, cryptocurrency transactions are incredibly fast compared to electronic transactions with fiat currency. About the only transaction faster than crypto is exchanging cash in person. For electronic transactions though, nothing beats crypto.

A transaction on the Bitcoin network can take up to 10 minutes to complete. However, that is on the high side. Most cryptocurrency transactions are completed nearly instantly. There is no waiting for checks to clear, no waiting on banks to transfer funds across borders, etc. You simply push coins from your wallet to the recipient's wallet and you're done.

The beauty of this system is that it is global. Let's say you want to send fiat currency to pay for services you received from an overseas vendor. If you were to make the payment using an electronic transfer from your bank, it would likely be several days before the vendor actually received the money. Pay that same vendor with bitcoins and he will have his payment in mere minutes.

Transacting business across cryptocurrency networks is also location-neutral. In other words, there are no borders to worry about. The network doesn't care whether you're located somewhere in Europe, North America, or Asia. It doesn't care where the recipient is located either. Transactions are nearly instantaneous regardless of the location of sender or recipient.

A Viable alternative to fiat

These five transactional properties are among the many things that separate cryptocurrency from fiat currencies. As you can see from each property, cryptocurrencies operate in a world that is vastly different from traditional banking systems. To some, that world is a superior one.

If nothing else, the five transactional properties of cryptocurrency make it a viable alternative to fiat. People no longer have to rely on banks and credit card companies to do business electronically. They no longer have to rely solely on cash when dealing with merchants who accept cryptocurrencies.

Is crypto right for everyone? No, but then neither are bank accounts and credit cards. For people who prefer the security, speed, and pseudonymity of crypto, platforms like Bitcoin and Litecoin are the better way to go. Those who really aren't on board with cryptocurrency still have fiat and their bank accounts available to them.