Bitcoin Blockchain Technology
How does a bank work and how does Bitcoin work? At the end of the day, a bank is a company, just stop to think a little about how it works when compared to companies that are our line of business and, therefore, have different assets and processes.
And we are going to explain all this because once we understand it, we will go into the details of how cryptocurrencies work and this is the easiest way to understand, as they actually operate in a very similar way.
But Bitcoin and other cryptocurrencies offer the advantage of not being centralized and therefore not controlled by a central institution, which makes them more reliable and, in fact, more secure.
And the first thing is to compare a bank with other types of companies. And is that while companies that are in the processing industries usually have to purchase large amounts of various raw materials, in addition to expensive machinery to transform them into finished products. The truth is that the raw material of banks, simply our money and basically everything, is controlled by computer systems. This is part of the reason why no one understands why the high fees they charge us as users of their services have not gone down. And you have to deal with everything like ones and zeros in computer systems. The costs are reduced, a fact that should reduce the tariffs charged by the consumer.
For now, we want to focus on how a bank keeps track of your account details, how can a bank, when you check your account balance, tell you exactly how much money you have and how much money can they spend? How much can they withdraw?
A simplified way of explaining it is that we imagine a spreadsheet program file on one of the sheets of this great book. The bank is putting on each line the details of every movement you make on your account. For example, when you open your account with the minimum deposit required by the institution, you register an increase in that first line, which is an account deposit. As we see here, a few days later, you receive your salary payment and, at that very moment, immediately deposit it into your account. Well, according to the second line of the worksheet, the bank registers an increase in money in your account by the exact amount deposited and updates the balance. So we think they go to an ATM and withdraw half of their funds. Well, this will register as the third line actually, and it will also change your balance with the withdrawal so that only half of it is something available that you have in your account to withdraw later. In general terms, this is how the financial institution takes care of controlling how much money you have in your account and, of course, how much you can spend.
An important point that we would like to mention at this moment and that you may never have stopped to reflect on is that you are giving your bank enormous trust and enormous responsibility, as they are the ones who will be responsible for keeping this great book with the details of the your account, as well as all other customer accounts you have. But what happens if that big bank you have an account with suddenly makes a mistake on the balance you have? You probably think it would be a problem, but far from being an inconvenience you can solve it, as you would have to file a complaint at the nearest branch and if there was a clarification process with which we hope that in the end you will be favored and you would regain its balance.
Of course this is doable, but think if all bank accounts made this kind of mistake, there would be a lot of upset customers and the bank would likely go bankrupt without you being able to recover any of your assets, as there is a domino effect in which each customer gets worried and goes to the bank to withdraw his money. But this means that the bank doesn’t have enough funds to fulfill the request of all its customers, because in fact, most of them lend and don’t have it available to give us if all the customers request it. And, of course, this can happen due to a panic reaction, it can be for several reasons.
For example, if the bank was hacked or suffered damage to its infrastructure. In fact, there are other issues that can cause the bank to fail. It could simply be mismanagement or problems in the loans they make, which only lead to bankruptcy. And once again, you want to recover. Not a penny of your property.
There are many possibilities, but for now we just want you to focus on something that could be a bank failure and the mishandling of this big book that has all the details, the movements of the different customers’ accounts.
Because the bottom line is that this book is of immense value, and therefore you are relying too much on one institution to carry this great book.
Now, let’s imagine a way in which there can be many responsible for this great book, making the medium in which you store your value, that is, in which you save, much safer. Also, this information does not need to be exposed. That is, although there are many responsible, no one can really know that you are the holder of an account. Nobody can easily identify them.
Of course, I’m sure we already see a lot of benefits from this. And is that if there is only one entity to whom you entrust all your life savings and that entity goes bankrupt, you will lose everything. In fact, some people who are aware of this problem choose, for example, to have several accounts in different banks with the idea of mitigating the risk.
This is a valid approach as we think we can split our savings exactly in half and one of those halves we put in one bank and half in another. If we manage to do that and one of the two banks fails, we will only lose half of our assets.
So we are effectively reducing this risk that we have discussed since the beginning of this lesson. Someone might be thinking of another option where we continue to increase the number of banks and accounts and in fact you are correct. As we spread our savings across more and more banks, that risk disperses more and more.
However, this brings several disadvantages first of all, the fact of having to personally go to each bank when it is necessary to carry out a procedure. And well, eliminating this fact, since many consider it not really a significant problem, since only the face-to-face act is usually just the beginning of the account opening and the vast majority of transactions can be carried out, for example, with internet portals.
The big disadvantage is that the more accounts we have in different banks, of course it progresses and I have to pay more fees that at the end of the day are commissions, annuities and monthly fees that will reduce our income.
So there must be a better way. And that is exactly what Bitcoin achieves.
But to understand it, it is necessary to review how the protocol works and how its technology makes it safe to use, so that anyone can trust to place value on these cryptocurrency units.
Once we have seen it more deeply, we understand it. It will be very easy to accept the fact that it is even safer than having money in traditional financial institutions such as setting up a bank.
And at this point it is necessary to talk about the concept of blockchain, which is nothing more than the big book in which all Bitcoin transactions that are carried out in the world are carried out. Basically, the technology that helps in this record.
In fact, this technology is known as a block chaining trend where each block is confirmed in an average of 10 minutes and precisely what each of these large blocks contains are all the transactions that were made during that period of time.
We have an entire blockchain section that we invite you to review at the following link: https://watercoinacua.com/en/fundamentals-of-blockchain-technology/
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