Blockchain Basics PYMNTS: What is Bitcoin?

So what is bitcoin?

At this time, most people knew even a little about bitcoin, the first cryptocurrency, and that there was also the Bitcoin blockchain.

And while we’ll discuss the basics of both, there’s a lot more to the Bitcoin story than how it works.

If you listen to the many Bitcoin boosters, it is the ancestor of the largest new industry since the World Wide Web, set to change finance, fiat currency replacement, personal and financial recovery. privacy, reinventing how people interact (see “metaverse”) and so on. provide the infrastructure for the new Internet free of Big Tech censorship and control (see “Web3”).

See also: What is a metaverse and why do we organize a fashion show?

There’s something to some of these claims – Wall Street is very interested in decentralized finance, governments are afraid of stablecoins, and the metaverse attracts hundreds of big brands, as well as social media networks like in Meta, purchased enough to drop the “Facebook” name.

But the reality is that Bitcoin has so far failed to fulfill its primary purpose, which pseudonymous creator Satoshi Nakamoto described as a “purely peer-to-peer version of e-money that will allow payments to line to be sent directly from one party to another. ” without going through a financial institution.

It’s important to keep this description in mind, as it not only summarizes Bitcoin’s goals, but it also provides a good overview of its shortcomings.

If there is no trust

At the core of Bitcoin’s uniqueness is the solution it provides to what Nakamoto calls “the problem of double spending” that requires transactions to be done through a trusted third party, such as a bank. , credit card network or broker.

Bitcoin is what cryptographers call “untrustworthy” because it doesn’t require trust. This can be achieved by building a network of distributed ledgers where all ledgers (called “nodes” in the blockchain) must agree on the correctness of a transaction at a time. it has not yet been done, marked with time and written. to register an order that cannot be. change. without making a very visible break in the ledger.

More here: PYMNTS Crypto Basics Series: What is Blockchain and how does it work?

Blockchain gets its name from the comparison of a chain to which new links are added. Any misunderstanding causes a “fork”, which is actually a new ledger at this point-consider adding two links at the end of a chain and adding new links to each.

Thus, in order to make a change to any existing transaction anywhere in the past it is also necessary to change all subsequent links. Each “link” in the chain is a block of validated transactions. This process is kept honest by a process called proof-of-work, in which the operator of a node competes to solve a mathematical puzzle, with the winner receiving a prize of the newly produced. bitcoins when other node operators agree that the block has been successfully validated and add it to the blockchain.

Also read: PYMNTS Crypto Basics Series: What is the consensus mechanism and why is it destroying the planet?

This way there is no need for a reliable intermediary because there is no way for a party to spend their bitcoins twice – transaction records cannot be changed and the process of spending a bitcoin requires the use of a once the password code is burned in the process. ; a new one has been made for the next owner of this bitcoin.

And, in theory, with enough nodes spread around the world, there is no way for individual governments or bad actors to control the network.

Yes, but…

There are a few issues here, ranging from the fact that there are many reasons to want to cancel a transaction, from buying a wrong product to sending it to the wrong person to learning that you bought the something stolen.

In addition, relying on complex single-use codes makes bitcoin transactions “pseudonymous”-meaning that while bitcoin itself can be tracked in a publicly visible blockchain, the owner is hidden behind a code. .

That’s nice from the libertarian philosophical stance promoted by Nakamoto, but it creates problems when this cryptocurrency is used by drug dealers, ransomware hackers and others to pay in a currency that is almost as difficult to trace as physical money but can be sent, received and spent immediately and is not known around the world.

But there is a hole in this hole: even though bitcoin has value everywhere, very few traders accept it directly. As such, spending it often requires “lowering” it through a payment processor, bank, or other financial institution. The main way to spend bitcoin-and any cryptocurrency-at retail is through a debit card issued by Visa or Mastercard that allows the owner to pay in bitcoin but gives the dollars to businessman.

And while some traders are starting to accept it, the change is slow, and slowed by the more volatile price of bitcoin and other cryptocurrencies, increasing or decreasing by 5% or even 10% each. day, on a consistent basis. . Just last year, bitcoin saw its price double and a half.

Bitcoin enthusiasts, who call themselves “hodlers” because they “hold on to life,” are happy with the long look. However, traders never want to spend a currency fluctuating. Companies with cash flow to manage cannot afford this expectation.

Store in value?

As a currency, bitcoin is still in its infancy 13 years after the Bitcoin Genesis block was created on January 3, 2009. Currently, it is used as an investment, which confuses more than one investor because it literally does not. ‘y anything behind it. . bitcoin other than people’s belief that it has value – no yellow metal can be used as jewelry, no part of a company that produces something, no product can be used to build or feed, and no “absolute belief and credit ”to a sovereign government as fiat currency.

Berkshire Hathaway CEO Warren Buffet recently said he wouldn’t buy half a trillion dollars worth of bitcoins “for $ 25.”

Related Reading: Buffett: Crypto Has ‘Magic’, But He Can’t Buy It All For $ 25

There is, he said at his annual shareholder event, “all sorts of frictional costs that are real, that someone pays to a group of people who run this game. Money in the room. just replace it with a hand.

Buffett cites financial intermediaries as cryptocurrency exchanges.

The adoption of bitcoin by bankers and investment firms on Wall Street that began in earnest in late 2020 is based on the idea that it is a store of value, i.e. an investment that, like gold, will maintain its value in the face of inflation. . .

It’s based on the fact that no more than 21 million Bitcoins can be made, which makes it, the argument goes, not inflationary.

That was a great idea, until it started to go up and down in the broader markets as the current financial situation worsened.

And bitcoin has some technical drawbacks: it takes 10 minutes to complete transactions; the costs are unpredictable; and with about five transactions per second, it is not scalable enough to act as a real currency.

See more: Bitcoin’s 10-Minute Block Time Lots and Fluctuating Transaction Fees Give an Edge to RTP

There are ways around this – Layer2 blockchains like the Lightning Network are a good example, because the transaction takes place on the Bitcoin blockchain and is only written to it in batches after it is completed.

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But Bitcoin still has a long way to go if it wants to be a “purely peer-to-peer version of e-cash” that people prefer in dollars and cents.



April Study PYMNTS 1

In: Shoppers with store cards use it for 87% of all eligible purchases – but that doesn’t mean retailers should start buying now, pay later (BNPL) options at checkout. The Truth About BNPL and Store Cards, a collaboration between PYMNTS and PayPal, surveyed 2,161 consumers to find out why providing BNPL and Store Cards is key to helping merchants increase conversions.

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