Bitcoin and the blockchain solving one of the biggest problems of the Internet
- 19. October 2016
- Posted by: Collin Müller
- Category: Strategy
In 2008, a man named Satoshi Nakamoto introduced the electronic currency Bitcoin and the associated global payment system. Bitcoin uses mathematical methods to handle secure financial transactions over the Internet without the need for a central clearing house such as a bank or a company like Paypal.
The Web has made almost everything easier – but payments have become more complicated
In the past, if you wanted to pay for a book in a shop, it was very easy. You took the money out of your pocket, handed it over to the cashier, who took it, gave you a receipt and the transaction was done. The money went through no other hands, no one documented the exchange and yet both sides were sure that things were done properly.
Nowadays, this can be much more complicated. When paying on the Web, it usually takes at least three middlemen to complete a simple process such as paying for a book. The buyer needs an account at a bank, and the seller needs an account at a bank. In order to enable payment from one account to another, a payment processor is usually involved, for example a credit card company or PayPal.
This not only makes the process more confusing than it used to be, but also brings along a number of other problems.
Firstly, transaction costs are incurred. Each intermediary deducts a portion of the transaction value in the form of fees, e. g. 1% for credit card payments or bank account charges. In contrast, paying in cash is free of charge.
Secondly, electronic payment slows down the payment process even though the data moves through the network at the speed of light. There may be days between the direct debit at the sender’s account and the arrival of the money at the seller’s, because the middlemen do not pass the money on immediately. In the analog world, the cash changes immediately from the buyer’s possession to the seller’s sphere of influence.
Thirdly, buyers and sellers need to trust the middlemen. They have to rely on everyone passing the money on properly and as quickly as possible. And they need to be confident that payment processors have secured their computer systems so well that misuse by third parties is impossible. In the case of a cash transaction, both parties can immediately verify whether the agreed amount has been paid and whether it has arrived. And manipulation of the payment process by third parties, for example through threats of violence, would be highly risky and is therefore very, very unlikely.
Fourthly, payments on the Internet are virtually endlessly traceable to third parties. Anonymous transactions or transactions that remain hidden from third parties are not possible with conventional methods. With cash, this problem has never occurred in the past few millennia.
And fifthly, people who cannot or do not want to have a current account or a credit card are excluded from many transactions on the Internet. In the western world, this mainly affects the poor and the elderly. In many developing countries, large parts of the population are connected to the Internet via smartphones. However, they are often so poor or have no proper identity verification that they are denied access to electronic payments – another problem that cash does not have.
With Bitcoin, the Web receives an equivalent to cash
The Web has so far lacked an equivalent to cash. Satoshi Nakamoto has solved this problem with Bitcoin.
Bitcoin’s mathematical encryption algorithms enable secure, irreversible financial transactions over public networks without the need for a central authority to handle them. Bitcoin works in many ways like cash and solves almost all of the problems mentioned above that occur today when making payments on the Internet:
- Transaction costs can be much lower with Bitcoin than in conventional payment transactions.
- Transactions are executed much faster than before. It only takes a few minutes until a payment is irreversible. And the duration is not arbitrarily determined by an intermediary, but is determined by the Bitcoin algorithm.
- No middlemen are needed anymore to transfer payments from A to B. Partners can transfer money directly.
- With Bitcoin, anonymous or at least pseudonymous payments are possible.
- And finally, anyone with the simplest hardware can participate in the Bitcoin system. No one is excluded just because they do not have a credit card or bank account.
Bitcoin is just the beginning – the blockchain can change the world
Bitcoin is based on a revolutionary new way of processing and storing transactions. All transactions are grouped together in “blocks”, which are then “chained” to each other in an unchangeable sequence. This results in a “chain of blocks” – the “blockchain”.
The blockchain is the real innovation behind Bitcoin. Bitcoin’s global ledger is stored in the blockchain. It is stored on the computers of all participants and changes to it are determined by the Bitcoin algorithm. Individual participants cannot withhold payments on their own or change the “rules of the game”. It is the blockchain that enables the above mentioned improvements by Bitcoin compared to the previous electronic payment methods.
However, blockchain technology cannot only be used for digital payment systems. Its potential applications are almost unlimited. Numerous other projects, such as Ethereum, have been developed which extend and improve the blockchain technology and extend it to new fields of use. Today, all databases based on Nakamoto’s idea are called blockchains.
Wherever central authorities were previously required for “notarising” and storing transactions, blockchains could be used in the future.
In addition to payment transactions, they are also suitable for the following purposes:
- to manage copyrights and licenses (and in conjunction with “Smart Contracts” the automatic payment of royalties),
- to administer property rights, such as in the land register,
- to provide identity to people and organizations (e.g. digital passport),
- for civil procedures such as births, marriages, divorces, etc.,
- for the secure storage and use of health data,
- and much more.
Compared to previous forms of data management, blockchains have several advantages:
- Central intermediaries become obsolete: through an open and decentralised implementation, blockchains allow all participants equal and transparent access to the stored information. No one can paralyze the entire system by shutting down a central node. And no one can change the rules of the system on their own, a majority of all participants is needed for all modifications of the algorithm.
- Mathematical methods guarantee the secure and, if necessary, anonymous storage of data and allow access only to authorized persons. It is no longer necessary to have “trust” in the secrecy and security of a central authority (e. g. a bank).
- Manual authentication and approval processes are no longer necessary, so that the transaction speed increases and costs decrease at the same time.
The blockchain is introducing a new age of the Internet
The blockchain adds a completely new and urgently needed decentralized infrastructure to the Internet for processing and storing transactions.
Like the World Wide Web, the blockchain belongs to everyone and is operated by everyone. It cannot be controlled by individual persons or organisations.
The blockchain is not just a new service or platform like YouTube or PayPal. Through its open and inclusive philosophy, it is comparable to the invention of the World Wide Web itself. With its wide range of applications, the blockchain has the potential to change the world at least as much as the Web has.