How do traditional transactions take place (paypal, banks, etc) in comparison to Bitcoin transactions?

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Here we talk about bitcoins and blockchain. It is said they are more secured, and people ask questions about how they are implemented.

Since I am a complete newbie to blockchain, and I don't know neither how traditional transactions platform works, I would like to know if there is a comparison between blockchain and, for instance, paypal's transactions system.

Xiaoshi

Posted 2016-07-03T11:40:02.640

Reputation: 339

Answers

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A traditional payment with PayPal or a bank works like this:

  • You find the identifier of the intended recipient.
  • You request a payment being made in your name to the intended recipient.
  • The central entity checks your balance in their books.
  • The central entity deducts the payment's value and fees from your balance.
  • The value is then added to the recipient's balance (possibly by a cooperating third party).

The central entity is in control of your funds and transacts on your request.
The central entity has full information on your payments.

A transaction in Bitcoin works like this:

  • You find the identifier of the intended recipient
  • You signal your intention of signing over some of your funds to the intended recipient, you add a transaction fee to incentivize confirmation
  • The transaction's validity gets vetted by all other participants of the network
  • When the transaction is confirmed the recipient is in sole control of the assigned balance.

The users transact on their own behalf.
Only recipient and sender are aware of their involvement, the payment is private.

Murch

Posted 2016-07-03T11:40:02.640

Reputation: 51 063

Thank you for your answer. When you said central entity, is it the Central Bank ? I learnt that for interbank transfert, the Central Bank has the power to confirm. – Xiaoshi – 2016-07-06T10:17:44.707

@XRSC: I use central entity here as a general term for PayPal, Western Union, your Bank, or the central bank, i.e. whoever keeps track of the balances in the system. – Murch – 2016-07-06T11:29:16.087

If we take a deeper look when we pay: with visa, after typing the PIN code, it is immediately validated. Here what is checked? Does the balance of the account is verified? or only the validity of the card? When a transaction is done via bitcoin, I imagine that the balance is immediately checked. Then several confirmations are done to avoid double spending. – Xiaoshi – 2016-07-11T14:38:53.480

When someone uses a credit card to pay for something, the merchant notifies his bank, the bank requests a payment from the Visa network, which requests authorization from the bank of the cardholder. The issuing bank proceeds to check the account balance and that the card is not locked, then writes up the owed balance and authorizes the payment. However, the payment is only settled at a later date, e.g. at the end of the month or quarterly. – Bitcoin transactions that reference unavailable funds are invalid. – Murch – 2016-07-12T06:28:58.760