The only way to solve this problem seems to be with some kind of ledger: a record book that keeps track of how much digital cash everyone has, and records every transaction. If everyone could just make copies of whatever digital “bills" were in their digital “wallets”, the currency would quickly become useless. Since a “digital bill” would be made up of a series of 1s and 0s (like everything on a computer), I could just duplicate that series of 1s and 0s and counterfeit my money. The serial number is a unique identifier of that single bill, and these days, it’s nearly impossible to create a counterfeit bill that looks the same.īut digital cash should be quite easy to counterfeit. I can’t spend it anymore, and you can do what you want with it. If I take it out of my wallet and give it to you, it’s your dollar. With paper cash, I can only spend each dollar once. But there’s one big problem with digital cash. It requires no third-party to get involved in the transactions, its value is well-known and agreed-upon by everyone. Paper cash, on the other hand, is anonymous and readily transferable from person to person. At the end of the day the “electronic” money in your checking account is represented by dollars (somewhere) and managed by one or more of those institutions that we must put our trust in. Credit and debit cards, as well as services like PayPal and Venmo, seem to be a kind of digital cash, but behind those services are third parties: banks, credit card companies, and other financial institutions. What’s digital cash? Digital cash is an electronic medium of exchange with many of the same properties as ordinary paper cash - easy to transfer without a third party, hard to counterfeit, and anonymous. Bitcoin uses cryptographic hash functions to create a new kind of “digital cash.” To understand how, we’ll need to take a brief detour.
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