Bank Transaction
In a bank transaction, Bob logs into his bank account to send money to Alice’s bank account. A username and password controls access to his account.
- Your bank account is a ledger.
- A ledger is a type of recordkeeping system.
- Mental Model #1: Money is recordkeeping.
Bitcoin Transaction
In Bitcoin, your private key acts as the login (username and password) for your bank account. And your public key acts as your bank account number (with routing information included).
Just as your bank login and account number are related, your public and private keys are also related. Just as your bank login cannot be derived from your bank account number, your private key cannot be derived from your public key. For this reason, it is safe to share your public key — as you would your bank account number — in order to receive payments. In practice you would share a wallet address, which is derived from your public key and shorter.
Above is an example of a Bitcoin transaction. Bob sends money to Alice’s Bitcoin address, and receives his change at a new Bitcoin address (newly created by your wallet as a privacy benefit).
In a bank transaction, Bob’s transactions are processed by his bank acting as a central authority. Bob’s bank physically maintains the ledger corresponding to Bob’s account on its private servers.
By contrast, Bob’s Bitcoin transaction is processed by the Bitcoin network in a peer-to-peer manner, with no central authority, by a globally decentralized network of servers (nodes) that anyone can run.
Traditional Finance
Bitcoin
Bob’s bank account records only his transactions and is private. By contrast, Bob’s bitcoin transactions are recorded on a shared ledger — the Bitcoin blockchain — that records all Bitcoin transactions and is public.
- Bitcoin is a public ledger.
- Bitcoin is a decentralized ledger.
| Ledger Characteristics | Bank Transaction | Bitcoin Transaction |
|---|---|---|
| Access | Username + password | Public and private keys |
| Visibility | Private | Public (pseudonymous) |
| Records | Your transactions only | All bitcoin transactions |
| Maintained by | Your bank (central authority) | Bitcoin network (no authority) |
| Distribution | Centralized | Decentralized |
Each server in Bitcoin maintains a copy Bitcoin's ledger and rules to broadcast, relay, and verify transactions. Shown below, anyone can run a “read-only” server. However, to write a new transaction to Bitcoin’s ledger, significant energy must be expended by specialized servers called miners. This requirement (”proof”) of costly energy expenditure (”work”) prohibits the arbitrary creation of new Bitcoin. This is in part how Bitcoin solves the napkin problem from What is money?
| Read Only | Write |
|---|---|
 |   |
- New bitcoin cannot be created without work.
- Bitcoin is hard to create.
- Mental Model #1: "What is money?" 👉 Recordkeeping
So what is Bitcoin?
Bitcoin is an:
- physically indestructible
- planetary-scale
- unforgeable
- supply-capped
- digital recordkeeping system
- synchronized at (nearly) the speed of light
- verified by math
- secured by energy and rules
- with no central authority or "rulers" who can corrupt its integrity (e.g., inflation)
Connection
- Mental Model #1: Money is recordkeeping.
- Mental Model #2: Bitcoin is an extraordinarily robust recordkeeping system
- Mental Model #3 Bitcoin is extraordinarily robust money.