Decentralized Networks: An Introduction to Bitcoin and the Future of Finance

In economic literature, capital is considered the lifeblood of a financial system, and its formation has been emphasized as the most important factor determining the growth and development of society. To achieve this goal, banks have always played a very important role. A healthy banking system can move society towards prosperity; on the contrary, it can destroy the wealth and trust of society

What is a bank?

A bank is a financial institution that receives deposits from people and creates credit. The term bank is derived from the Italian word (Banko) which means bench. In the Middle Ages, Italians used to sit on a bench while conducting business transactions, and this word gradually changed and became the word (Bank), which is a German word. The first private financial institution the name of the bank also started working in 1171 under the name of "Venice" Bank. Various forms of banking continued with the establishment of the Bank of Barcelona in 1401, the Bank of Amsterdam in 1609, and the Bank of England in 1694. However, in the Middle Ages, with the expansion of the Church's sphere of influence, banking activities in Europe were severely limited. The prohibition of usury in Christianity caused the banking activities in Europe to be monopolized by Jews, but with the end of the Middle Ages and the formation of the Renaissance, and the weakening of the church, the banking industry was formed in Europe.

The modern banking that we know today started in France in 1711 and continued to operate with almost the same mechanism until 1918. But it was in this year that electronic money was used for the first time by the Federal Reserve Banks of America to transfer money by telegraph, and Bank of America was the first institution that decided to do time-consuming and very difficult tasks such as check collection and account management. Do your customers by computer. In general, despite the tremendous scientific and social changes and advances in other fields such as medicine, engineering, robotics, artificial intelligence, etc., the modern banking industry has been almost uniform and unchanged over the last 300 years compared to other sectors of society.

But what do this introduction and historical review of the banking industry have to do with Bitcoin and its so-called disintermediate network?

Banks, the concentration of wealth in a society

We talked in previous articles that Bitcoin was invented in response to all the failures, massive financial corruption in banks, and lack of financial transparency that led to the collapse of the world economy for 5 years. In fact, the only concept that has made Bitcoin a more reliable network than banks and financial institutions is only one concept: decentralization. Decentralization or Decentralization is a fundamental concept in the Bitcoin network and blockchain science, which, by understanding it, will make other concepts much easier for us.

Centralized Networks

bank will be used against you. Every year, millions of dollars of money are stolen through hacker penetration into the centralized banking system. Also, the management of a centralized financial system by a specific institution causes many problems such as inflation, stagnation, and unemployment.

The problems of centralization of international financial systems reached their peak during the financial crisis of 2008. Around this time, Satoshi Nakamoto published his Bitcoin article titled Bitcoin: A Peer-to-Peer Electronic Cash System (Without Intermediaries).

Bitcoin: Decentralized Network

Elinor Ostrom, an American economist, stated in her book: As long as a single and specific authority has the ability to use force, we will face a government instead of a self-governing society. Bitcoin is a clear example that can easily explain the difference between centralized and decentralized financial systems. Peer-to-peer or decentralized networks are collaborative systems that deal with single control and management. Basically, in this network, there is no manager, head, or central organization, and each member is responsible for maintaining the health and establishing the network. Unlike centralized networks where the entire network is destroyed when the center of the system is destroyed, in a decentralized network with, for example, 50 members, even if 49 members are lost, the network continues to operate in full health. The rules governing non-centralized networks are regulated and approved by the majority of the members of the group, and the power is distributed among all members in a decentralized manner.

Centralized networks are not only limited to financial systems but are a concept that affects all businesses, companies, social networks, and organizations. For example, Facebook is known as a centralized social network because all the data and information of users are stored on the central computers of this company. In Facebook's centralized system, if the main server shuts down, all users' access to Facebook will be cut off. Or in another example in 2018, due to the access of hackers to the main database of UniCredit Bank of Italy, the confidential financial information of many users was stolen. Meanwhile, in a decentralized system like Bitcoin, all information and transactions are stored in a decentralized and encrypted form.

Conclusion

In the previous 4 series of articles, Bitcoin was mentioned as one of the best inventions of the century along with Android, Google, and Windows. We also examined what effect Bitcoin has on human society and basically, it was invented in response to the needs of society. Bitcoin, or in the words of many technical people: decentralized gold, is a transparent financial network that carries out financial transactions from any part of the world to another in the shortest possible time.

Also, in this article, we learned about the concept of non-decentralization of Bitcoin and how this feature distinguishes the Bitcoin network from other financial institutions.

In the next article, we will discuss the mechanism of this network and check what is the relationship between Bitcoin and Blockchain.

Or to put it more simply, what components does the Bitcoin network consist of?

Source : Laqira Protocol Medium