How Does Bitcoin Actually Work?
In a physical transaction, I give you a dollar for a piece of bubblegum. You were there. You now hold the dollar in your hand. I now hold a piece of bubblegum. And we do not need a third person verifying our transaction.
Before blockchain, digital transactions required a bank, who verified your transactions. Without a bank, money transfer is untrustworthy. For example, I might be a bad person and make copies of the same digital dollar. I might transfer you, your parents, and your friend the same digital dollar for three pieces of bubble gum instead of only one piece of gum.
At the end of the day, traditional digital transactions had a trust issue. In computer science, the issue is formally called the double-spending problem.
A solution first appeared in the white paper, Bitcoin: A Peer-to-Peer Electronic Cash System, by Satoshi Nakamoto in 2013. Satoshi created a digital accounting ledger used to track all its transactions. He decided to give control of the digital accounting ledger to everyone.
The ledger is synced up with everyone else’s records. When you try to cheat and duplicate digital dollars, your records will be flagged. Simply put, blockchain technology has made digital transactions behave like physical ones. As such, we no longer needed a third person watching our moves and verifying our transactions.
Money Transfer Should Work Like Email
Yet, the public is still skeptical of Bitcoin and blockchain, mostly because people have a hard time conceptualizing the digital into the physical.
Only 10% of the U.S Dollar Physically Exist
People love the idea of the U.S dollar but not Bitcoin. We regard the dollar as safe and fully backed by the government. Yet, many forget that the U.S dollar is just green paper with black ink.
The U.S dollar or any form of government-issued currency is just as abstract as Bitcoin. The truth is that the dollar is not backed by anything other than your faith.
I do not want to scare people but only 10% of all U.S dollars physically exist. The rest of the money remains in cyberspace. Out of a total of $11.5 trillion, only $1.5 trillion physically exists.
People accept the U.S dollar because we believe in its purchasing power. The federal reserve can, at any time, just print more dollars to pay a debt or pay you. In the end, it is all an illusion and a matter of faith.
I only mention this fact so we can see why we should be less critical of digital currencies. They both work in similar ways. People who say Bitcoin is a fraud fail to connect the U.S dollar with Bitcoin. Just like bitcoin, criminals use the dollar to conduct shady businesses. In fact, currencies digital or physical have always been used to conduct illegal acts. When there’s a will, there’s a way.
Bitcoin Vs. Other Digital Currencies
Video games often have a limited number of skill points and the different attributes you can develop. I made characters great at driving but bad at running, and vice versa. To a certain degree, digital currencies are exactly alike.
Bitcoin is secured, slow, and expensive to transfer. People often compare it to digital gold or a “store of value”. A large corporation might use Bitcoin to transfer large sums of money. You can also hold Bitcoin for a long time and watch it grow in value.
Other digital currencies have their own attributes. Ripple is fast, inexpensive, but not as secure. People can quickly and cost-effectively send money to their friends or family.
Blockchain Adoption is a Matter of “When” not “If”
We have advanced a long way since bartering and trading. Companies and governments are racing to the dominant digital currency provider. Infrastructure is being built around blockchain.
On Oct 25, 2019, Xi Jinping, the President of the Republic of China, openly adopt blockchain as a tool to alleviate poverty and business financing. He publicly stated:
“that the country [China] should commit to accelerating the development of blockchain and aim at taking the leading position in the emerging technology”
ACH, checks, and SWIFT are being replaced in the financial service industry. I urge people to learn more about blockchain technology; this technology will be our future.