Digital Copy

DEFINITION of 'Digital Copy'

A duplicate record of every confirmed Bitcoin transaction that has taken place over a peer-to-peer network. Digital copy is one of the security features of the Bitcoin platform that was implemented in order to tackle the problem of double spending.

BREAKING DOWN 'Digital Copy'

The rise of cryptocurrencies became prominent in 2009 with the introduction of Bitcoin. One of the catalysts behind the creation of Bitcoin was the desire to operate in a currency that could not be controlled by any central authority. Unlike the U.S. dollar, which can have its value adjusted for inflationary measures by the Federal Reserve, the Bitcoin is independent of any controlling body. In fact, no one controls the Bitcoin. The Bitcoin operates through a decentralized system which means a network of independent computers worldwide communicate and transmit Bitcoin transactions and data to each other. However, transacting in digital currency using a decentralized system brought about a problem known as double spending.

Double spending occurs when a user buys from two sellers using the same Bitcoin. The double spending issue can be illustrated in the investing world with an investor Dave who has $700 in his checking account. His checking account is linked to both his investment accounts with Broker A and Broker B. When Dave completes a buy order, the funds are automatically transferred from his checking account to his investment account where the order was placed. Dave buys one stock worth $700 including the trading fee from Broker A and makes the exact same buy order of one stock with Broker B. In a situation where there is a lag in the system and transactions can be processed at the same time, both brokers will receive information that Dave has the required funds in his account, earning Dave two shares instead of one. Fortunately, spending money more than once is a risk that traditional currencies avoid through institutions like clearing houses, banks and online payment systems like PayPal that update a user’s account balances immediately a transaction occurs. In order to solve this problem in the digital currency platform, the maker of Bitcoin created a process whereby each transaction copied onto a ledger is verified by multiple Bitcoin miners distributed across networks.

Every Bitcoin transaction is recorded in a ledger known as a block chain, and then stored and copied digitally across multiple networks in the decentralized system. To prevent manipulative users from spending digital money twice, digital copies ensure that every bitcoin participant holds an encrypted digital copy of everyone’s bitcoin holdings. Bitcoin miners verify new transactions and add them to the distributed ledgers. The first miner to confirm a legitimate transaction adds it to the queue of new transactions to be included in the ledger and publishes his/her results. Other miners verify the first miner’s results before adding the transaction to the ledger queue of their digital copies. Transactions are finally and permanently recorded in the blockchain after 6 miners have confirmed that the user has the necessary funds to complete the transaction. Using the illustration above, the first miner may mark Dave's order with Broker A as legitimate, and cancel his transaction with Broker B given his insufficient funds. If the other miners follow suit, Dave's transaction with Broker A is finalized and recorded in the ledger. In a way, miners act as the clearing house for Bitcoin transactions.

With digital copies of Bitcoin ledgers, it is highly improbable for a transaction history to be compromised. A user who tries to manipulate a transaction on the ledger for his own gain would do so in vain as he is only able to change his own digital copy. For a transaction input to be changed on the ledger, the user will have to access everyone’s copy which may prove to be highly futile.