Differences between Bitcoin and existing payment systems

Started by metallexportprom, Aug 11, 2022, 12:23 PM

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metallexportpromTopic starter

Dissimilar the traditional fiat money-based, government-monopolized and monopolized monetary system, Bitcoin is a decentralized monetary system and is governed by rules (protocol) hardwired into its program code.
This fundamentally changes the three main components that underlie this system - money emits a program code, not the state; proceedings between counterparties are carried out directly, without intermediaries; only the owner of their private keys can manage money on bitcoin addresses, no one else can access them.

But besides this, Bitcoin, as a payment system, has a number of other unique features that are either not known or do not attach importance to them.

There are no accounts on the Bitcoin network

Dissimilar other payment systems, Bitcoin users do not have their own account; account, which would be somehow tied to the user. Bank users have accounts in the form of bank accounts identified by the customer's passport and/or tax number. Bank cards of Visa and MasterCard payment networks are also linked to the accounts of their users.
PayPal customers have accounts associated with their email address. In all other payment systems, there are some ways to identify a person and their accounts. This is not the case with Bitcoin!

On the one hand, this makes the use of Bitcoin pseudonymous. On the other hand, in case of loss of private keys, it is not possible to restore access to bitcoin addresses. In Bitcoin, only a private key gives the right to use the money stored in the corresponding bitcoin address. No key - no bitcoins! Or, as they say in a popular saying among Bitcoiners - "Not your keys, not your coins".

It follows from this that the entire responsibility for storing money in Bitcoin lies just with the owner of the private keys from the Bitcoin address. No one can help him regain access if the keys are lost!

This problem is partly solved by third-party top-level services that provide access to the client's account and through it to private keys that are stored on the servers of these services. This is done due to the loss of anonymity - the user must provide their details to restore access to the account, usually - e-mail and / or phone number. And according to the requirements of KYC / AML, and your personal data - first and last name, residential address, etc.

For instance, in the popular Blockchain.info web wallet, private keys of clients from bitcoin addresses are stored in encrypted form on the servers of the service, and clients get access to them by logging into their account on a website or smartphone application with a password and using two-factor authentication for security.

Bitcoin wallets do not store bitcoins

This paradoxical phrase confuses many novice (and not only) Bitcoin users. But in reality it is! Bitcoin wallets store the private keys to bitcoin addresses, not the coins themselves. Moreover, see item 3...
 Bitcoins do not exist as entities

Sounds like a pun, but it's true! Earlier, in paragraph 1, for ease of understanding, I wrote that "bitcoins are stored on a bitcoin address." In reality, this is not entirely true.
Bitcoin (coin) is not an object, not even a digital one. It cannot be represented as a dataset. And, since it's not an object, it can't be stored in the way we usually think of it as "storage".
Bitcoin (coin) exists just in the context of a transaction. And the proceedings themselves in the Bitcoin network are different from the bank records in the ledgers. And this is the next feature of the Bitcoin network, which can completely confuse many.
4. Bitcoins are not sent to or from addresses

Dissimilar bank transactions, which are the transfer of funds from one bank account to another, a transaction in Bitcoin is implemented differently - it is unlocking the unspent means of exit of a previously completed transaction (UTXO) using the private key of the sender's bitcoin address and blocking the transferred amount when using the public key of the recipient's address. Since you can just
 use the entire amount on the unspent output, the remainder (change) is blocked by the public key of the sender's address.

After that, the recipient can unlock the unspent output of this new transaction (UTXO) with his private key in the same way and block the amount transferred to him with the public key of the new recipient, making a new transfer.

The sender (commonly called Alice) has 10 BTC in the unspent output (UTXO) of an early transaction. Alice transfers 8 BTC to the recipient (commonly referred to as Bob), and the balance (change) of 2 BTC is returned to the sender's bitcoin address (Alice).
At the same time, the output with 10 BTC becomes spent and two new unspent outputs (UTXO) are created - with 8 BTC and 2 BTC. But the first can now be unlocked only by Bob, and the second can just be unlocked by Alice.

It follows that the balance of any bitcoin address is the sum of all unspent transaction outputs (UTXOs) that are locked by the public key of the owner of that address.

Don't let this complexity scare you, Bitcoin uses cryptographic algorithms and, from a cryptographic point of view, it is a fairly simple scheme. In addition, it allows you to track the entire chain of transactions up to the first issue.

Actually, it looks like a transfer from one bitcoin address to another with the balance (change) returned to the sender's bitcoin address (not necessarily the one from which the transfer was made). But, as you now understand, in reality this is done by unlocking the sender's private key and blocking the transferred amounts again with the public keys of the recipients. From this follows another feature:
5. Bitcoins never travel

Bank proceedings imply real movement of transfer amounts between accounts. Firstly, the amount to be transferred is deducted from the sender's account and it is reduced by this amount. The funds then move through banking and interbank channels, passing through transit accounts, until they reach the recipient's account, which increases by the amount transferred. Those. for some time there is a situation in which money has already been withdrawn from the sender's account, but has not yet been credited to the recipient's account.

There is no such thing in Bitcoin! Until a bitcoin transaction is written to the blockchain as part of a new block, the money remain on the sender's bitcoin address. In fact, there is no movement itself, there is a simultaneous act of transferring coins from address to address at the time of writing a block with a transaction to the blockchain.

What about double spending, you ask? Yes, certainly, if I send funds to the address of the recipient, but they are not immediately debited from my address, then I can send them again to the address of another recipient. Buy pizza and beer with the same coins!

In fact, most software wallets do not allow this. But no one bothers to do this directly by sending a signed order to transfer funds to the Bitcoin network. What will happen in that case? Yes, everything is simple! One of the two proceedings will fail. And it doesn't have to be the second one. There are two possible cases here:

    Both transactions ended up in the same mempool. The miner will skip one and refuse the second due to lack of funds.

    Transactions ended up in disparate Mempools (to different miners). A block with just one transaction will be written to the blockchain. After that, the second transaction will become not valid.


Wonderful information with technical details. I just do not have enough experience in programming to understand that.
I will retell in even simpler words for completely non-IT people on my blog! I really look forward to the continuation.