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What are the differences between bitcoin and the traditional banking system. Introduction. This article is going to discuss the differences between bitcoin and the traditional banking system. There are many differences between the two in the fundamentals of how they operate, how money is distributed and ‘created’, and how the units of account are stored. The Traditional Banking System. The traditional banking system works on regular Fait money. The U.S Dollar is the reserve currency, at https://en.wikipedia.org/wiki/Reserve_currency and can be printed at will as/when needed, the supply is not ‘capped’. Bitcoin works in a fundamentally different way to the fait system. They work by banks keeping units of account between them of how much has been transferred. Before, it was quite a local system and in times gone by, it was bartering with coins made of precious metals. The banking system is open to manipulation of figures, exchange rates, and tampering by high profile bankers and governments, and due to the ease at which traditional money is printed slowly loses its value. Many banks operate on ‘fractional reserve banking’, at http://www.investopedia.com/terms/f/fractionalreservebanking.asp where they only have a supply of cash at any one time for a certain percentage of customers at once, if all customers attempted to withdraw their money at once, the bank would fail. The banks have certain legal obligations to customers and have the ability to reverse payments in many cases in the event of fraud among other things.
The traditional banking systems at https://en.wikipedia.org/wiki/Bank networks have been worked on for decades, allowing reasonable reliability for digital transactions although clear times can be long. It is well established around the world. The advantages and disadvantages of the traditional banking system are below: Advantages. Already an established system. Bank Cards are accepted nearly everywhere. Ability to charge your money back in the event of fraud (although this feature can also be used for fraud). Use of cash does not require a network connection or electricity. Disadvantages. Open to manipulation of figures. Fractional reserve banking makes this a higher risk option. Inflation slowly can erode value of held cash. Lack of transparency about how the system runs. Bank fees can be expensive, especially for businesses. Banks in different countries often work differently and linking them can be tedious, and many use different currencies. Summary. The traditional banking system is already established, and payments from all major debit/credit cards and cash are accepted almost everywhere although must be exchanged in different countries. Use of cash does not also require an internet connection or any other technology. Manipulation in the banking system has caused incidents such as the financial crash of 2008, bitcoin actually being created due to the manipulation of the banking system and the need for something in the control of the people. The creator left a clue of this intention embedded in the very first block of transactions on the bitcoin ledger.
Bitcoin and other blockchain based currency. What is bitcoin? Bitcoin was created as a digital currency, by an entity only known as Satoshi Nakamoto. It has a fixed maximum supply of coins and rules on how it operated. It was created to solve the problem that banks can be manipulated by governments and bankers alike, and also to give people freedom of privacy in their transactions, although all transactions are public on the ledger, provided sending/receiving addresses are kept private and new ones used for different transactions a certain degree of privacy can be expected. How it works. Bitcoin works in a fundamentally different way to the fait system. The bitcoin network has many nodes. These nodes are distributed around the world, run by bitcoin enthusiasts, major mining pools, etc. These nodes are all attempting to solve mathematical problems, while at the same time holding a memory of all the recent transactions that just occurred after the previous problem was solved and the previous memorized transactions are written into a ‘block’ and recorded on the blockchain, at https://en.wikipedia.org/wiki/Blockchain_(database) which is a distributed ledger. This is the clever part about bitcoin, the distributed ledger is a type of database called the blockchain at https://en.wikipedia.org/wiki/Blockchain_(database). The system is designed where all the full nodes hold a full copy of the entire blockchain, currently 7 years old at the time of writing. The system is designed where most of the nodes must agree that a transaction was valid, or in reality 51% of nodes must do this. The idea being that if at least 51% of the networks computing power is honest and well distributed, the ledger is tamper-proof even by people with wealth and power.
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