A peer-to-peer network

To explain how Bitcoin works, let's look at what steps are involved with the existing business model for completing a cross-border transaction:

• A customer enters an order either by visiting a bank branch or via the web. The sender provides detailed information of an order such as the amount, sending currency, receiver name, receiving currency, receiver's bank name, account and branch numbers, and a SWIFT number. Here, SWIFT stands for the Society for Worldwide Interbank Financial Telecommunications, a messaging network used by financial institutions to transmit information and instructions securely through a standardized system of codes. SWIFT assigns each financial organization a unique code called, interchangeably, the bank identifier code (BIC), SWIFT code, SWIFT ID, or ISO 9362 code.
• The sending bank takes the order and verifies that the sender has sufficient funds available.
• The bank charges a fee and converts the remaining amount from the sending currency to an amount in the receiving currency by executing an FX transaction.
• The sending bank enters a transferring message to SWIFT with all the needed information.
• Upon receiving the message, the receiving bank verifies the receiver's account information.
• Upon a successful verification and settling the funds between sending and receiving banks following the protocol, the receiving bank credits the amount to the receiver's account.

Since there are multiple steps, entities, and systems involved, the preceding activities take days to complete.

A Bitcoin network connects computers around the world. Each computer is a node with equal status, except for a subset of nodes called miners, which choose to play the role of verifying transactions, building blocks and linking to the chain. With Bitcoin, the business model for completing a money transfer involves the following steps:

1. A sender enters the number of BTCs, the addresses of Bitcoins to be taken from, and addresses of Bitcoins to be transferred to, using an e-wallet.
2. The transaction request is sent to the Bitcoin network by the e-wallet.
3. After miners have successfully verified the transaction and committed it to the network, the BTCs are now available for use by the receiver.

The Bitcoin transfer is a lot faster (in 1 hour, or minutes if using Ripple) for the following reasons:

• The transaction and settlement are one step. This avoids the need to go through a time-consuming and expensive reconciliation process.
• No FX trade is needed since BTC is borderless. It can move worldwide freely and rapidly.
• No fund settlement is needed between banks since the transaction requires no intermediary banks.

In a case where a sender or receiver prefers to use a fiat currency such as USD, GBP, CNY, or JPY, a cryptocurrency market can be used for a conversion between BTC and a fiat currency. A website, CoinMarketCap, lists these markets: https://coinmarketcap.com/rankings/exchanges/. As of September 21, 2018, there are 14,044 markets. In terms of market capitalization, the top three are Binance (https://www.binance.com/), OKEx (https://www.binance.com/), and Huopi (https://www.huobi.pro).

A peer-to-peer network can connect nodes worldwide. However, a merely physical connection is not enough to make two untrusting parties trade with each other. To allow them to trade, Bitcoin takes the following measures:

• Every node saves a complete copy of all transactions in a decentralized ledger. This makes any alteration to a transaction on the chain infeasible.
• The ledger transactions are grouped in blocks. A non-genesis block is linked to its previous block by saving the hash of all preceding blocks' transactions. Consequently, changing a transaction requires changing the current block of transactions and all subsequent blocks. This makes hacking the decentralized ledger extremely difficult.
• Bitcoin addresses the double-spending issue, that is the same BTC being spent twice, by using the Proof-of-Work consensus algorithm.
• Hashes are used extensively to protect the identities of parties and detect any changes occurring in a block.
• Public/private keys and addresses are used to mask the identities of trading parties and to sign a transaction digitally .

With these measures, untrusting parties feel comfortable to trade due to these reasons:

• The transaction is immutable and permanent. Neither party can nullify a transaction unilaterally.
• No double spending is possible.
• Transaction and settlement occur simultaneously; therefore, there is no settlement risk.
• Identities are protected.
• Transactions are signed by both parties, which will avoid any future legal disputes.