How traditional payment systems work

As anticipated, our goal here is to discuss how the participants in a blockchain network ensure that the double entry accounting principle is taken care of. We'll also show how this solution is different from the other existing solutions of the legacy financial system.

In the Bitcoin blockchain, payments are settled through a so-called consensus mechanism, which works based on economic incentives rooted in game theory. Confused? We will explain it in simpler terms in the following paragraph.

The consensus process aligns the interests of all network participants, so that their best course of action is to support the truthful verification and record-keeping of all transactions. We'll cover the consensus mechanisms in more detail later on. For now, here's what Satoshi himself wanted to share about this issue:

So, the root of the problem is to secure a consensus process through which all participants in the network are on the same page at any given time. This process must be so robust that all participants trust it with their money. The simple solution is to introduce a trusted central authority to run the ledger of transactions, just like a bank. History has shown many times that such central parties, or middlemen, can present a risk of their own, and have been compromised far too often.

Therefore, Satoshi goes for the more difficult solution: to secure and maintain decentralized consensus in a global payment system. In fact, this problem is so complex that nobody had ever solved it before.

Let's run through a few examples of how different existing payment systems work.