3. Decentralization - why Bitcoin doesn't need a central bank
In the world of fiat money, financial institutions keep track of your transaction. When you pay with your card or withdraw money from an ATM, your account balance is reduced. A record is created somewhere in the bank's database that you spent that money. This transaction record also appears on your account statement.
But there is no bank controlling Bitcoins. So where are transactions recorded? And who keeps these records?
All cryptocurrency transactions are included in a special ledger. It's just like a stock exchange ledger – a sort of a book of records. Every transfer of Bitcoins receives its unique ID, known as a hash.
Now, here's the key problem: how do you make sure that all the records are correct? What if someone decides to change the records - for example, spend some Bitcoins and they make it look like they still have them in their wallet? Is this kind of fraud possible with Bitcoin?
Here's where a decentralized ledger comes in. It’s also a 'book of records' of sorts - with two important features:
- This ledger doesn't just exist in one copy. There are thousands of copies stored on servers across the globe. And all these copies agree with each other. So if a fraudster wants to change the records, tweaking just one (or 10, or 100) copies of the ledger won't do. You'd have to change at least 51% of all copies, and that's nearly impossible.
- The ledger is fully transparent and available to all. You can verify any transaction in it on your own. There are many sites where you can do that, such as Blockchain.com.
Bitcoin’s distributed (or decentralized) ledger is designed to record all payments and prevent manipulations. It doesn't need any bank to track transactions in the network, because it's all done automatically.