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 a 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.
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.
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.
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.
The ledger corresponding to Bob’s bank account is maintained by his bank’s private servers, acting as a central authority. The ledger corresponding to the bitcoin blockchain is maintained by a globally distributed network of servers, acting without any central authority.
- Bitcoin is a shared ledger.
- Bitcoin is a distributed 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’s network maintains a copy of the bitcoin ledger to 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 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:
- indestructible
- planetary-scale
- supply-capped
- digital recordkeeping system
- operating at the speed of light
- guaranteed by math
- secured by energy
- with no central authority to manipulate it (e.g., censorship, 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.