Bitcoin aims to get rid of the central entity, the bank. In order to understand how it does that, we first need to understand what purpose a bank serves and what features it provides to users, then understand the parallels in Bitcoin.
The first thing that banks do for us is manage accounts. Banks verify that we are the legitimate owner of the bank account and only we can spend the money or the funds.
How does a bank do that?
Banks will ask us to provide identification before any activity can take place. Every transaction we conduct can be traced back to our identity. On top of that, banks transfer and redeem money on your behalf. We send money to each other through banks. We rely on banks to honestly record our account balances.
This way, we do not need to send money through envelopes to relatives -- we let these central institutions move money in safe and , established ways on our behalves.
To keep track of all this information, we rely on banks to keep track of our account balances. Banks update our account balances whenever we make a new transaction. They also let us see statements so that you are aware of your past history of activity. But most importantly, banks provide trust: banks are run by educated professionals from top-tier universities and under the constant regulation of the government.
If you trust the quality of education and standards of the government, then you can trust the bank. But if you do not, then you start looking for alternatives. And this is where Bitcoin comes in.
So, let's take a look at how Bitcoin can fulfil a bank's functions. In Bitcoin, identity and account management are completely autonomous. Each user of Bitcoin creates their own identity instead of asking a bank to create one. Anyone can generate a Bitcoin identity on their own.
This identity is disconnected from their real world identity, providing a high degree of privacy. On top of that, transactions are also peer-to-peer: instead of talking to a bank which will talk to another bank which will eventually talk to the recipient of some money, we can make transactions directly to be made between with our peers and be confident that they are confirmed by the rest of the network.
Therefore, in Bitcoin, users can send funds to each other directly knowing that their transactions will be validated by the entire network without the presence of a trusted third party.
To store all this information, each Bitcoin user gets to possess their individual copy of the ledger. This decentralised approach of record keeping ensures the integrity of data despite the presence of faulty nodes who might record the information dishonestly.
The decentralised nature of bitcoin also prevents the risk of single point of failure. In the event that a particular node is hacked in bitcoin, because everyone is a record keeper, the rest of the network can still ensure the integrity of the transaction record and keeps running.
But finally, there is still a need for trust in Bitcoin: instead of trusting people in suits, we trust maths and logic. We trust that the Bitcoin protocol is correct, allowing us not to trust the users and still have certainty that transactions are being validated correctly. We trust in the incentive alignment and publicly verifiable, tamper evident ledger instead of our fellow users.
All of these pieces together make Bitcoin the technological revolution that kicked off the Cryptocurrency Movement.
Questions: Which of the features of banks does Bitcoin emulate?
(1) Identity authentication
(2) Financial services (transactions, asset storage)
(3) Record-keeping
(4) Trustability
(5) All of the above correct
Feel free to answer in the comment section.
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