How Bitcoin (BTC) and Ethereum Record Transfers Without a Bank

Bitcoin (BTC) and Ethereum let participants record and verify transfers on public networks without a bank maintaining the ledger, though consensus rules differ and custodial users still depend on their providers.

A bank maintains a private account record and updates it when a payment is processed. A public blockchain distributes its transaction history across a network. Full nodes, which independently keep and validate blockchain records, check transactions and blocks against network rules. A consensus process determines which valid records enter the chain and how they are ordered.

For a Bitcoin transfer, a wallet creates a transaction and signs it with a private key. The signature authorizes spending Bitcoin linked to an address. A wallet handles the key and signing process; Bitcoin is represented by blockchain records rather than coin files held in the wallet.

Bitcoin’s full nodes each keep and validate blocks independently. They check transaction outputs to make sure none has already been spent, preventing the same output from being used twice. As additional blocks build on earlier records, changing older history becomes more costly.

Bitcoin uses proof of work to organize the chain. Miners commit computing power to produce blocks, and the accepted chain reflects accumulated work rather than a vote by the largest number of computers. This lets the network establish transaction order while nodes check records against Bitcoin’s rules.

Ethereum uses proof of stake and moved from proof of work in Sept. 2022. Its validators stake Ether (ETH), review proposed blocks and attest to blocks they consider valid; those attestations are weighted by stake. The protocol defines 12-second slots, but that timing interval does not guarantee a transaction will finish within 12 seconds.

The networks also have different supply designs. Bitcoin’s design caps issuance at 21 million BTC, a protocol limit rather than a count of coins currently circulating. Ether supply changes as validator rewards add ETH and part of transaction fees is burned.

Bitcoin’s public record lets people inspect transactions and addresses, but an address alone does not identify a person’s real-world identity. People who hold their own keys control the credentials used to authorize transfers and must protect them. Users who leave assets with an exchange or other custodian depend on the provider’s security and solvency, including its ability to honor withdrawals.