The traditional banking system is modeled on the usage of conventional fiat currency. Every country has its own reserve currency, and can be printed at will of the government and central banks as/when needed. The banks maintain the records of transactions and the amount of money that has been transferred.

The banking system has been since long time facing manipulation of records, exchange rates, and meddling of authoritative bankers and government officials, and owing to the simplicity at which conventional money can be printed gradually misplaces its value. Numerous banks function on ‘fractional reserve banking’, where they only have a supply of money at a specific time for a definite percentage of customers. If all customers challenge to extract their money at one occasion, the banks would fail in this scenario.

The banks have to operate under certain legal compulsions towards their customers; however, they have ability to invalidate payments in many scenarios and mostly in the event of frauds. The traditional banking systems networks are working for decades, allowing  trustworthiness for digital transactions and these guidelines are well recognized around the world.

However, it can be concluded that the traditional banking system is already established, and payments systems like major debit/credit cards and cash are acknowledged almost everywhere in the world and can be exchanged in diverse countries. Nonetheless, usage of cash does not necessitate an Internet connection or any technology.

On the other hand, exploitation and mishandling of data in the banking system has been causing scams and exploitation of the resources. The very example of the financial crash of 2008 can be owed to the banking manipulation. Bitcoin was therefore created as a solution to the discrepancy in the banking system and a mechanism with a more democratic structure and something in the control of the people. Satoshi Nakamoto, the creator of this virtual currency, left an evidence that his objective was exactly the one stated above i.e. to democratize the information by employing this technology. This was embedded in the very initial block of transactions on the bitcoin digital ledger.

The essential difference

Bitcoin works in contrast to the fiat system. The bitcoin network works on the nodes. Further, these nodes are distributed and operated from people around the world, which can be distinguished, as bitcoin enthusiasts, and major mining groups. These nodes basically involve in solving mathematical problems, while at the very time holding a memory of all the current transactions that just happened after the last problem was solved as the previous transactions are memorized into a ‘block’ and recorded on the blockchain, which is defined as a distributed ledger.

An intelligent feature of the bitcoin is that it works on the distributed ledger system, which essentially means that it creates a kind of database called the blockchain. The system is designed in a way that all the nodes hold an entire copy of the blockchain.

The network is designed where most of the nodes must form a consensus about a transaction that it is valid, or practically 51% of the nodes must do this. The idea being that if at least 51% of the networks computing power are faithful and are open sourced, the ledger will not be manipulated even by people with authority, high finances and power. Banks are trying to imbibe their own private blockchain, but as the banks themselves will administer the computing power, this does not fully promise in any way that it will not be alterable. In the digital currency like bitcoin the ledger is preserved by individuals and the corporations who are willing to run nodes and verify transactions.