“At its core, bitcoin is a smart currency, designed by very forward-thinking engineers. It eliminates the need for banks, gets rid of credit card fees, currency exchange fees, money transfer fees, and reduces the need for lawyers in transitions … all good things” — Peter Diamandis
In the previous articles, we’ve covered the fundamentals of Bitcoin, how Bitcoin and financial markets work, along with the history of Bitcoin. In this article, we’ll cover some of the benefits of Bitcoin compared to existing payment methods.
Most modern transactions require an intermediary between entities to provide trust and security. Bitcoin provides the ability for people to transact between each other directly without the need for third-party intermediaries.
In places like the U.S.A or Europe where there is a regulation of financial institutions and established legal systems, this may not seem like an important factor.
However, the majority of the world’s population lives in countries without trustworthy intermediaries.
Billions of people in the world live in countries where governments and banks are corrupt, crime rates are high, there is little or no regulation of companies, record-keeping is manual and there are limited legal options.
Bitcoin is particularly useful in these countries where there is a lack of trust in governments, banks, and intermediaries. Transacting directly with people in these countries can also be risky due to high crime rates and no established legal options.
If you are transacting directly with someone with the local currency or gold, they may steal it or not honor the agreement. Storing and transacting in bitcoins can be a safer option than keeping money in bank accounts or transacting in the local currency in these countries.
Bitcoin provides trust and security while reducing many of the risks involved in transactions without requiring a third-party intermediary.
As mentioned above, most current financial transactions require an intermediary to be involved in the transaction. Even a payment on a credit card in a store has credit card companies and banks in between the buyer and seller.
These intermediaries have centralized systems to record and handle all transactions. If you are transferring money from your bank account to a bank account with a different bank, each of these banks has its centralized systems and ledgers to record the transactions.
You may have seen in the past when you send a transaction, the funds are withdrawn from your bank account however, they don’t appear in the other bank account until days later. Each bank is reconciling transactions on their own central ledgers and systems, so while a bank has recorded the transaction as sent, the other bank hasn’t yet recorded it as being received.
Bitcoin uses a decentralized shared ledger to record transactions, it is transparent, every- one has access to the same information and the ledger isn’t controlled by one single institution.
All transactions occur on the same ledger that is shared by everyone on the network. In the example of transferring money between different banks, currently, that transaction is recorded on multiple ledgers, with each bank maintaining their own ledgers and systems.
With Bitcoin, instead of banks recording transactions on multiple centralized ledgers, all transactions are recorded on one decentralized ledger allowing almost instantaneous settlement when a transaction is processed.
Centralized databases have suffered countless hacking attempts, manipulation, and data loss. Employees at financial institutions have committed fraud, customer funds have been stolen and financial institutions have collapsed.
Decentralized databases have no single system that can be hacked or manipulated. In order to manipulate the Bitcoin network, over 50% of the computers on the network would need to be controlled at once which is almost impossible.
Everyone on the network has a copy of the ledger so if one computer is hacked or crashes, it will not impact all the other computers on the network.
“Nobody cares about the edge cases until they become one” — Marc Hochstein
Decentralization along with the removal of intermediaries also removes the control of governments and banks.
This takes currencies, bank accounts, and financial transactions out of the control of governments or banks and gives it to individuals. In the case of Zimbabwe, the government printed so much money that the currency was devalued to the point it was eventually deemed worthless.
Governments control the supply of money which impacts the people living in those countries. Governments or banks can freeze bank accounts, seize funds, restrict payments, and monitor transactions.
While you may think that you don’t care about governments or banks having control because you don’t live in a country where this is an issue. Government and bank control is not just a concern in countries like Zimbabwe. Wikileaks is an example where governments and banks froze accounts and payments to the organization. They were able to continue operations by accepting donations in Bitcoin.
Whether or not you agree with Wikileaks sharing classified government data, it is an example of how even in the USA and Europe nobody is outside of the control of governments and banks. Bitcoin operates outside of the existing financial systems, it is controlled by the people on the network, not by governments or financial institutions.
Bitcoin wallets can’t be frozen and payments can’t be restricted. Bitcoin wallets and transactions can also be anonymous so they can’t be monitored or linked to an identity.
Let’s go back to the example of Bitcoin payments being similar to sending an email. If you’re like most people, you probably send numerous emails every day.
When you send an email to someone in your country it is no different from sending an email to someone in another country. Emails are the same regardless of which country you send them to, we don’t think about sending an international email.
However, sending an international bank transfer is completely different, there are large fees, it is costly, complicated, and takes several days or weeks to complete. While companies like PayPal have made sending international payments easier, there are still fees and an unfavorable exchange rate when making international payments.
Sending a payment with Bitcoin is no different if you are sending money to someone in your city or to someone in the middle of Africa. You can send the payment for the same price and it will take the same time to be received.
While you may not be sending a lot of payments to the middle of Africa, for billions of people in the world this is revolutionary for how they send and receive payments. It also opens up the world economy and financial markets to billions of people that were previously excluded.
Anyone in the world can start a business, offer service, and now the entire world is their potential customer. The internet allowed these people to access information from all over the world, however, many people were still excluded from receiving or sending international payments.
The poorest people in the world that were previously cut off from world financial markets now have low cost, efficient ways to be a part of the global economy.
Along with reducing the fees of international payments, all fees and costs could be reduced. There are no account fees with Bitcoin, there is no conversion rate required when transferring between countries, and transaction fees are very low.
Removal of intermediaries along with settling transactions on a shared ledger instead of multiple individual ledgers also reduces costs. Each layer removed in a transaction through removal of intermediaries or removal of a ledger required to settle transactions, also removes the fees and costs associated with that layer.
Not only are the fees and costs reduced but the speed of transactions is significantly increased. Removing intermediaries and settling on a shared ledger allows for transactions to be settled significantly faster than existing methods.
As mentioned earlier, transferring money from one account to another bank will often show the funds removed from one bank account but not received in the other bank account several days later. For store owners, accepting credit card transactions can be the same.
You may make a purchase on your credit card at a shop and that transaction will show as pending in your account for several days. The shop where you purchased that item may not receive the actual money for the purchase until days later when the credit card company reconciles payments.
Bitcoin allows transactions to be processed almost instantly with transactions in bitcoins sent, received, and settled at the same time.
Bitcoin offers significant improvements in transparency over current financial transactions and ledgers. It seems there is always a new case of an employee or CEO of a company that has committed fraud by manipulating transactions and covering it up.
After investigation, the factors that allowed the fraud to occur often include lack of transparency, people were unaware of the transactions, insufficient auditing, or checking of transactions.
One of the benefits of Bitcoin is the transparency of transactions, Bitcoin transactions occur on a shared, decentralized ledger that is open to everyone on the network.
Transactions are checked and approved by over 50% of computers on the network. Imagine how this would reduce fraud if over 50% of employees in an organization were checking the transactions that occurred.
Now imagine if over 50% of the customers of a bank were checking that bank’s transactions. It would be very difficult to commit fraud with that level of oversight.
Once a transaction is entered onto the Bitcoin blockchain it can’t be altered or deleted. With existing systems, people committing fraud will attempt to cover up the audit trail by changing or deleting information. This is not possible with Bitcoin, an audit trail of Bitcoin transactions can be traced all the way to the very first block on the blockchain.
All transactions are in real-time with the status of any transaction able to be viewed on the Bitcoin blockchain. When you send a payment or bank transfer using existing methods, you don’t know if it’s been received and often you will have to follow up to confirm the payment was received.
With Bitcoin, when you send a transaction, you get a transaction reference, you can enter that transaction reference in a Bitcoin blockchain explorer and view the status in real-time.
You can see when it is received by the other Bitcoin address or if there is an issue with the transaction.
Currently, when performing a transaction, people place their trust in an intermediary to facilitate the transaction. With Bitcoin, this trust is placed in the Bitcoin network instead of an intermediary.
The Bitcoin network is decentralized with everyone connected to the network able to view all transactions that have occurred. Transactions can’t be altered or deleted so if a transaction occurs everyone can see the details of that transaction and the Bitcoin addresses involved.
Bitcoin allows for the removal of intermediaries while still retaining trust and security in the transaction process through decentralization and transparency.
Security is one of the key elements in the design of Bitcoin. There are several features of Bitcoin that provide a high level of security.
Cryptography is used to protect wallets, addresses, identities, and transactions. It is almost impossible to obtain someone’s private key to their Bitcoin wallet through existing hacking methods such as a brute force attack.
Note: A brute force attack is where a computer generates a large number of guesses at a password in a short period of time. Often this is done using common words, phrases, and numbers. E.g. yourname1, yourname2, childname1, childname2, petname1, petname2, etc.
The decentralized structure of the Bitcoin network means that in order to manipulate or control the system, a person would need to control over 50% of the computers on the network at the same time which is computationally unfeasible.
With existing centralized systems, a person only needs to obtain access to one centralized server in order to control the system.
While the security of the Bitcoin network is not perfect, it offers significant improvements over existing systems with a wide range of security features that are non-existent or not possible with existing centralized systems.