In the previous article we explored the concept of Bitcoin wallets—the digital storage mechanism for this emerging asset class. At first glance, this may not seem particularly groundbreaking; after all, we are already familiar with digital wallets offered by banks, PayPal, or Paytm for managing traditional fiat currency. However, to truly appreciate the innovation behind Bitcoin—and to meaningfully compare it with conventional money and banking systems—we must delve deeper into how Bitcoin transactions function under the hood.
Let’s begin by considering a basic money transaction. When you want to give someone cash—or even gold—you simply hand it over. That’s a direct, peer-to-peer exchange.
But what happens if you’re in Mumbai and the recipient is in Delhi? Physically delivering money becomes inefficient, expensive, and time-consuming. That’s where intermediaries like banks, payment gateways, or money transfer services come in. These third parties facilitate transactions on our behalf because we trust them. This trust is built over time through regulatory safeguards, historical reliability, and the institutions’ reputations.
The same concept applies when exchanging goods over distances. Imagine trying to sell a watch to someone in another city. What if you send the watch but the buyer never pays, or vice versa? To avoid this risk, we use trusted platforms like Amazon or Flipkart, which act as neutral parties to protect both sides of the transaction.
Now let’s look at what happens behind the scenes when you transfer money from your bank account to someone else’s. First, your bank checks whether you have sufficient funds. If yes, it debits your account and credits the recipient’s account. This action is recorded on the bank’s internal database or ledger, which you can see reflected when you log into your bank account online. This method of recording and updating balances is known as the “accounts model.” Security is critical here. The bank ensures that only authorized transactions occur. If anyone could manipulate the ledger and transfer funds without your permission, trust in the banking system would collapse. Maintaining all this is a costly procedure.
In India, transfer is done through systems like RTGS (Real-Time Gross Settlement) or IMPS (Immediate Payment Service), while in the U.S., systems like ACH or Fedwire are used. After this ledger update, banks still need to clear and settle the transaction between their institutions. This means ensuring that the actual money—digitally or physically—moves from the sender’s bank to the receiver’s bank. Finally, if the receiver wants to withdraw the cash in Delhi, the bank must ensure that the physical money is available at an ATM or branch. Even then, withdrawal limits and liquidity constraints come into play—an ATM may not dispense very large amounts, and smaller banks may have their own cash limitations.
In essence, traditional money movement depends on trusted intermediaries, digital ledgers, settlement systems, and physical infrastructure. While the system works well overall, it remains dependent on central oversight, infrastructure efficiency, and institutional trust.
End of the day, the key here is the ledger or database that the centralized bank maintains.
A ledger was a handwritten book or collection of accounts in which all accounting transactions were recorded. Today it has become digital. Prior to the internet all banks had a passbook where these transactions were entered. All the transaction records are now in a database.
For instance, when purchasing an item from Amazon, the company ensures the transfer of ownership of the item to the buyer. This involves updating their database, charging the buyer’s credit card, compensating the seller (after deducting fees and shipping costs), and arranging for the product’s delivery. Maintaining such a comprehensive ledger, which documents countless transactions, incurs significant costs.
A customer’s trust in these companies stems from the company’s commitment to managing these databases accurately, allowing customers to verify transaction histories whenever needed and responding to customer needs fairly and justly.
Every transaction in any system alters the state of the system. Each change is recorded in the company’s database. Adding a new product on Amazon, a user posting a review, or a customer completing a purchase – all these actions modify the system’s current state. Similarly, on social media platforms, activities like uploading an image or liking a post result in updates to the database, reflecting a new system state.
Millions of such transactions occur daily on large platforms like Facebook, Amazon, and banks. Each transaction must be swiftly stored on the database and retrievable quickly, or users will become frustrated with the platform experience. This storing and retrieving is efficient because of a centralized architecture. There is only one decision maker, the company, and one central database to update. This data is then permeated and synchronized to all their databases across different geographies. A balanced and distributed network ensures prompt responses to user queries from various global locations.
People trust the brand or the company when they use a product or service. Revenue for the company comes from commissions of sellers or subscriptions from users or charges to advertisers. Companies typically do not impose fees for database storage.
The integrity of the database matters for a social media company selling user preferences, a marketplace like Amazon selling goods and banks handling financial transactions. They must ensure accurate record-keeping to earn and keep their customers’ trust. Banks charge on ATM fees, demand draft fees, the give interest and lend money for higher interest.
The success of companies like Facebook or Amazon or Banks depends on this single property called network effects. In fact, network effects are behind 70% of the wealth created by technology companies.
A network refers to a system of interconnected nodes that communicate with each other. The nodes can be computers or even people. A telephone company, for example, is a network of people connected by telephones. It becomes more valuable as more people join this network.
Network effects refer to the phenomenon where the value of a product or service increases as more people use it. This same property applies to banks and money also. More people use a particular kind of money or service the more popular or valuable it becomes.
There are different kinds of networks and network effects. The telephone and trains are an example of the direct physical network effect, and Facebook is an example of the personal direct network effect.
Amazon’s success is an example of a two-sided market network effect in which there are buyers and sellers. Another broad category of network effects is Data network effects, and Google Maps is an example of that success. BitTorrent is an example of the broad category of network effects called the tech performance network effect, where the more tech nodes there are, the better the network performs, and hence, more users want to use it.
Social networks are a broad category of networks that do not involve any devices but just people. Language is an example of a social network. For an Indian, it will make sense to learn English over German because now you can serve 1.5 billion people who know English compared to 150 million who know German.
Belief networks are another social network effect; you can see that in action in religions and gold. Gold is valuable because we believe it, or people around us believe it is valuable, not because you can eat it. Belief network effects are like sand. A small amount of sand can be easily scattered by a breeze. However, when you accumulate enough sand in layers, it compacts and becomes as solid as stone.
Bitcoin, which behaves like gold or money, has multiple network effects, helping its success, like a direct protocol network effect plus the belief network effect.
Fiat money is also a belief network. It had a hierarchical top-down network structure. The king or government decides what money is, and we are forced to use it by decree. We use it or believe in it out of respect or fear. There is no gold backing your fiat money anymore. If you doubt it take 80,000 rupees to Reserve Bank of India and see if they will give you gold and you will notice that they will give you another set of notes at best.
Bitcoin has a decentralized network structure.
The Internet operates as a decentralized network. Even if some computers or nodes fail, the requestor’s search queries will be processed, as the data can reroute through other functioning nodes.
With emails, if you send an email from a sender’s Gmail account in Spain to a receiver’s Yahoo account in India, it traverses numerous nodes or computers. The email will still reach its destination even if specific nodes are inactive, as it will simply reroute via active nodes, finding a path to the recipient. When they log in to their Yahoo account, the receiver is accessing the Yahoo database somewhere in England. His browser retrieves and displays the message stored in the database through various nodes.
The government can shut down centralized entities like Amazon or Facebook or a payment gateway or the user of a payment gateway by incarcerating their executives and sealing their data centers. This scenario highlights the vulnerability of centralized networks to censorship by powerful middlemen who control those systems.
The recent Russia-Ukraine conflict has underscored the vulnerabilities inherent in centralized financial systems. Most global money transfers today rely on centralized mechanisms such as SWIFT and Fedwire, which are overseen or heavily influenced by institutions based in the United States. Following the invasion of Ukraine, the U.S. government, under the Biden administration, imposed sanctions on Russia and went as far as freezing Russian assets held within these systems.
In effect, a sovereign nation’s access to its own funds was unilaterally cut off—not because of internal fraud or system failure, but due to geopolitical decisions. This incident has raised serious concerns about the neutrality and reliability of centralized financial infrastructure. When access to money can be revoked or assets seized at the discretion of another government, trust in the system begins to erode. It’s no surprise, then, that countries like Russia and China are actively working to build alternative global transaction networks that are independent of U.S. control. Such developments highlight a fundamental flaw in the current monetary order: dependence on a centralized authority introduces risk not just for individuals, but for entire nations. It serves as a compelling case for exploring decentralized systems which aim to eliminate the need for trusted intermediaries and reduce the risk of politically motivated financial exclusion.
In this article we will explain what this ledger looks like compared to traditional ledgers or databases. And in the next article we will explain who writes data in this database and how they do it.
The bitcoin protocol also has a ledger or database where transaction details are stored. The difference is that it is not a centralized single database. It is a decentralized database where this ledger is duplicated across multiple nodes, ensuring no single entity controls the network, and even if multiple nodes are down, the protocol works. This ledger or database is called the blockchain. It consists of blocks of transaction data and each block has a reference to the previous block forming a chain. This is how the name chain in the blockchain takes shape, blocks of transaction data with reference to the previous block. Each block consists of several transactions.
You can trace the history from the current transaction to the first-ever transaction by going through the links that point to the previous block and transactions.
A significant difference when you compare the blockchain and traditional centralized databases is the feature of “immutability”. In handwritten ledgers or company databases, the entity maintaining the database could update the database or erase and write something over what was previously written. In a public blockchain like bitcoin, no one person can rewrite the previously written data as there is no feature to delete previously written data. They can only add new blocks of data and point it to another older block of data.
Visually, the blockchain concept can be imagined in this manner:
A file explorer gives details of files on your computer and a block explorer will provide details of blocks on the ledger.
To get more information on the bitcoin block, we can use a block explorer like blockstream.info, type in a block number and click enter.
We used block number 824724 and this is how it looks like
We can see that the first info is the hash of the block. That is 000000000000000000014645a1ef30f9705aa55aea73e83a70454b2149e4153a
We will get more information on the block when we click on details.
Each bitcoin block in the blockchain or the block header, besides its hash, includes a reference to the previous block’s hash, block height, timestamp, block size, transaction (Tx) count (in this case, 3157 transactions), version, bits (detailing the complexity of adding this block), nonce, and the Merkle root.
The main difference here is all this is public information as it exists on multiple computers across the globe. Anyone can go online and verify all this. With a bank their database is private so we have to trust them and believe what they say but we cannot verify it. We again must trust the auditors and chartered accountants.
And we know in the end how that ends when we trust centralized actors and middlemen when they say they are highly capitalized and everything is fine and dandy right? Bank failures, non-performing assets and bailouts by central governments whether the bank is in US, India or China.
The traditional accounts model database or ledger stored at banks require a ton of space and memory and that is maintained by large banks with high capital costs. It is not something they can give to anyone to take care of for them. It requires highly sophisticated software like Oracle that runs this database on a very costly machine with bank ups and redundancies. This is the only way the bank can ensure they are up and running almost all the time and can service the needs of all customers across a nation.
The bitcoin blockchain database is an append only text file without any frills and tools. It keeps adding data at the end and it grows. Despite 18 years of existence and all these transactions a full database can still be run on ordinary machines in your home. Our next article will cover how the distributed technology and game theoretical incentives makes this possible.
The next time you hear bankers say they don’t like bitcoin but love blockchain technology always ask them why do they like blockchain over oracle. I have met a ton of people from 2016 who told me how they do not like bitcoin but love the blockchain. I always asked them this question and got blank stares at best.
Jamies Dimon CEO of JP Morgan Chase has said this “The blockchain is real and Bitcoin is a fraud” in 2018. Bitcoin was priced at 3,000 dollars at that time and now priced at 85,000$. Berkshire Hathaway Vice Chairman Charlie Munger, a longtime cryptocurrency skeptic, said digital currencies are a malicious combination of fraud and delusion. He also said Tesla would go bankrupt by 2012 to Elon Musk. Companies like IBM who invested in blockchain technologies instead of bitcoin all wrote down those investments over time.
So, the next time you hear something like this from famed bankers and traditional investors understand that they did not take the time to study or learn bitcoin or blockchain properly. They did not have to since they are extremely rich and they don’t need to understand new technology but you do if you want to become wealthy. You need to understand disruptive technologies like bitcoin, AI, chatgpt, crisper, gene editing etc.
Vanderbilt did not invent the car, henry ford did not invent the airplane. IBM did not make the Windows OS and become Microsoft, Microsoft did not build the search engine empire like Google or social media empire like Facebook despite all the money they had with them. It took a new generation of entrepreneurs to do all that who did not have the baggage of old technologies ingrained in them.
News Summary in the Crypto Space this week worldwide
Bitcoin has held its ground during the Trump tariff drama. It was a great trading opportunity for volatility traders.
Paul Atkins a prominent crypto friendly lawyer has been confirmed to head the SEC, which has been very crypto antagonistic during the tenure of the last administration causing major setbacks to the industry in costs and technology. The crypto community and crypto companies were the single largest vertical of donors in the last elections in the US.
WazirX Creditors Back Restructuring Plan to Payback $230M Hack Victims
Nithin Eapen is a technologist and entrepreneur with a deep passion for finance, cryptocurrencies, prediction markets and technology. You can write to him at neapen@gmail.com
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