A traditional payment with PayPal or a bank works like this:
- You find the identifier of the intended recipient.
- You request a payment being made in your name to the intended recipient.
- The central entity checks your balance in their books.
- The central entity deducts the payment's value and fees from your balance.
- The value is then added to the recipient's balance (possibly by a cooperating third party).
→ The central entity is in control of your funds and transacts on your request.
→ The central entity has full information on your payments.
A transaction in Bitcoin works like this:
- You find the identifier of the intended recipient
- You signal your intention of signing over some of your funds to the intended recipient, you add a transaction fee to incentivize confirmation
- The transaction's validity gets vetted by all other participants of the network
- When the transaction is confirmed the recipient is in sole control of the assigned balance.
→ The users transact on their own behalf.
→ Only recipient and sender are aware of their involvement, the payment is private.