Bitcoin payment vs. Regular bank payment
The Bitcoin is the first decentralized cryptocurrency ever created, enabling its users to transact on a peer-to-peer network without the need of a middleman. Fundamentally, the core of Bitcoin is digital file listing transactions between people on the network, which are essentially transfers of property.
To guarantee the integrity of property ownership over the network without the presence of a central authority, the system consists of a distributed network where every peer holds a copy of the ledger listing all the transactions ever made since its creation. The ledger is maintained by every peer connected to the system guaranteeing that the money does not get used twice.
The main innovation behind Bitcoin relies on the fact that it is a decentralized money system with the Bitcoin being the currency. But Bitcoin is also the software and protocol that allows users to issue a digital currency and operate transactions securely and anonymously.
Bitcoin is born from the idea to create a digital currency independent of any institution, a currency people would trust and that is hedged against financial crisis because it would not be likely to be manipulated by any governments through monetary policies. The bitcoin exists since 2009 and has gained in popularity since then.
How does Bitcoin payment varies compared to a regular banking payment?
Regular banking payment
In the traditional banking system, when Alice sends money to Bob, she will first send an order to the server of the bank, which will then process the request and send the money to Bob. In such a situation, there is a single point of failure, meaning that in the case the bank gets hacked, Alice’s account will be hacked.
The bank system works with a set of intermediaries that each communicate via a banking network such as the SWIFT network, which stands for the Society for Worldwide Interbank Financial Telecommunications and it allows any banks or other financial institutions to transfer money overseas in a secure and fast manner.
Every intermediary works with its database that has to be updated when a transaction occurs, which adds a lot of friction to transactions.
Bitcoin payment
The Bitcoin system is different on two sides:
- First, transactions are public rather than privately held on centralized databases. This implies that you can exchange value over the Internet in a way that doesn’t need to involve a third party like a bank
- Secondly, there are no intermediaries in the middle, but rather a decentralized network of computers working together to secure the ledger, also referred to as “miners”. That the model does not rely on a mandatory fee on every transaction since miners are being rewarded through the issuance of new Bitcoins
PS: Although the fee is optional, the majority of miners now require a fee to be attached to the transaction, otherwise they don’t accept it. This is due to a reduced coinbase reward on the one hand, and on the other hand to the increased difficulty of mine.
The figure below gives you a short overview of how this works for both systems.
“Bitcoin will do to banks what email did to the postal industry” — Rick Falkvinge, Founder of the Swedish pirate party
Drop me a message if something is not clear!
