One of the primary culprits is a banking system known as fractional reserve banking. Under this system, banks only have to retain 10% of the funds deposited by individuals and companies, allowing them to lend out the remaining 90%. So, if you deposit 100 Euros in your account, the bank could lend out 90 Euros to someone else. And if that person deposits the 90 Euros in their account, the total deposits would amount to 190 Euros, all starting from your original deposit of 100 Euros. But here's the catch - if everyone wants to withdraw their money at the same time, the bank may struggle to pay them all out, resulting in a liquidity crisis. In the worst-case scenario, the bank might have also put the money in a risky investment that's currently incurring losses. So, when you and the other depositor demand your money back, the bank not only lacks the funds, but it also has to sell its assets at a loss to meet the withdrawal demands. This creates an even bigger problem for the bank.
Picture this - what if every single person who deposited money into a bank demanded it back all at once? The result could be a catastrophic phenomenon called a bank run, which occurs when the bank fails to meet its obligations. To prevent a total financial meltdown, governments often step in and bail out the failing bank. This means that taxpayers' money is used to cover the debts incurred by the bank due to its irresponsible financial decisions or risky investments.
The Bitcoin white paper presents a groundbreaking concept for a monetary system that completely revolutionises the traditional banking model. How is this possible? It's all thanks to a revolutionary technology known as the blockchain - a decentralised, trustless ledger that serves as the backbone of the Bitcoin system. Unlike the traditional banking system, there is no need for a central authority, such as central banks, to control the money supply or validate transactions. Instead, a global network of nodes collaborate to validate transactions through complex mathematical algorithms that guarantee the system's integrity. This means that individuals can conduct transactions directly with each other without the need for intermediaries like banks.
Hold on to your hats, because the Bitcoin white paper has even more mind-boggling content! In addition to the revolutionary blockchain technology, the paper proposes a fixed supply of only 21 million bitcoins that will be gradually released over time through a process known as mining. This is a stark contrast to the traditional banking system, where banks can create money out of thin air by lending out more than they actually have in reserves. By limiting the supply of coins, the Bitcoin system eliminates the threat of inflation that can result from these self-interested banking practices. In short, the Bitcoin system can be considered a good solution to the problems of traditional banking, creating a new monetary system that's decentralised, trustless, and resistant to inflation.
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