Another advantage of Bitcoin is its security. Bitcoin’s distributed network is a lot more secure than a single computer or server.
This article aims to bring about a better understanding of the cryptocurrency known as Bitcoin and the technology on which it is built known as blockchain. In this article, Bitcoin and its underlying technology blockchain will be explained, and its unique advantages and capabilities will be examined.
The origin of Bitcoin
After the global financial crisis in 2007, a pseudonymous person (or group) known Satoshi Nakamoto set out to create “a peer-to-peer version of electronic cash that could transact without relying on financial institutions” (Nakamoto, 2008). In 2009 this system became a reality in the form of Bitcoin.
“Bitcoin is a peer-to-peer electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.” (Nakamoto, 2008). Blockchain defined
Bitcoin works because of the blockchain technology that underpins it. Blockchain may seem like a difficult subject to grasp at first, but the basic principle of a blockchain is quite simple.
A blockchain is a chain of blocks, and ‘each block is a bunch of computations done by computers around the world using cryptography (Ferriss, 2017).’ Within each block, ‘transaction data such as when the transaction was made, how much was transacted, and whom took part in the transaction is stored and verified (Fortney, 2019).’ Once all the transactions within a block have been verified, it gets put onto the blockchain with all the previously verified blocks.
Each new block that gets added to the chain furthers the blockchain. Thus, the deeper the block is within the chain, the more difficult it becomes to undo the transaction. So once a transaction is made, it is there on the network forever and for everyone to see. This is what gives Bitcoin its unique advantage of immutability (Ferriss, 2017)
Additionally, all the computers that are running the series of computations that check and verify transactions on the network, have a copy of the complete history of all the transactions, which is referred to as the ledger. ‘Blockchain and distributed ledger technology are not the same thing, rather a blockchain is a type of distributed ledger with specific technological characteristics (Beedham, 2018).’ What is important to know is that
blockchain technology allows for every computer verifying the network to possess a full copy of the ledger. The result of this technological characteristic is that there is no longer one trusted party in charge of keeping accounts and verifying records. Instead, it is done through a consensus of thousands of individuals. This gets rid of the need for a middle man within any transaction and could
potentially eliminate a lot of the responsibilities of traditional financial institutions
Bitcoin means trustless transacting
One of the advantages of Bitcoin is that it is a trustless way of sending money. As explained above, due to the distributed ledger everyone has a copy and verifies records, so third parties are no longer needed. Moreover, before the invention of Bitcoin the only way to get money from place A to B was through institutions such as Visa or banks, with Bitcoin this can be done independently. No longer having to trust and rely on a central authority to handle your money translates into a large degree of independence from financial institutions. This is beneficial because, as 2007 showed, financial institutions do not always act responsibly with your money and do not always have your best interests at heart. Additionally, this independence is hugely beneficial to those who do not have access to financial institutions. Anyone with an internet connection is theoretically able to store, send, and receive money using Bitcoin, and 1.7 billion adults worldwide remain unbanked as of 2017 ‘(Demirgüç-Kunt, Klapper, Singer, & Hess, 2017)’. This is a big economic problem, especially in developing countries, and Bitcoin could potentially help eliminate this problem.
Bitcoin’s network is more secure than Visa
Another advantage of Bitcoin is its security. Bitcoin’s distributed network is a lot more secure than a single computer or server, due to the fact that single servers are easier to attack. A simple analogy to bring this point across is to imagine two different banks. Bank one has the key to its vault hidden in a single place, while bank two has the key to its vault divided amongst 100 different places. So getting the key to bank vault one requires much less effort than that for bank vault two. Now bringing this analogy back to Bitcoin, the single server is bank one, while Bitcoin and its distributed network is bank two. In order to “hack” the Bitcoin network the attacker would need to control 51% of the computational power, which would ‘cost rougly 1.2 Billion USD according to study done at the Indian Institute of Technology Bombay by Vijayakumaran in 2018.’ Therefore, attacking and manipulating Bitcoin would cost a lot more time and resources than attacking a single server. This unequivocally makes Bitcoin’s network much safer than that of a bank or any other company that runs on a centralized server.
New implications for global commerce and international remittances
Finally, Bitcoin offers new capabilities for any singular person and also for global commerce. Someone in Japan could send money to someone in America within minutes, for relatively low costs, and without the need to go through an institution. Transferring money via traditional financial institutions can take up to multiple days, while with Bitcoin it is nearly instant. This is an unprecedented achievement of technology and is greatly advantageous for global commerce. International remittances could also greatly benefit from the new capabilities provided by Bitcoin. According to The World Bank, ‘remittance flows to low- and middle-income countries reached $529 billion in 2018 (Ong, 2019).’ People in middle to low income countries often heavily rely on these international remittances, so it would be very advantageous if these transactions could be sent and received instantaneously, rather than waiting multiple days for banks to process the transaction.
To summarize, Bitcoin is a peer-to-peer electronic payment system that allows two parties to transact securely and near instantly without the need of a trusted third party. The underlying blockchain technology Bitcoin is built upon is what gives Bitcoin its immutable and distributed store of records. These characteristics are what allow Bitcoin to be trustless and more secure than traditional institutions. Not only does Bitcoin provide a solution for the world population that remains unbanked, it also provides a great opportunity for global commerce and international remittances. Tying this all together, society now has access to a technology that can transcend banks. This is no small feat and the traditional financial sector is starting to realize that. It is only a matter of time before Bitcoin becomes its own asset class and blockchains are widely used.
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