With the bankruptcy of high-profile cryptocurrency-exchange FTX; fraud and money-laundering charges levelled against their former CEO; and the general fall in value of various cryptocurrencies (including bitcoin); people have been reacting with anger, frustration, and in some cases, superiority. If you lost money in the FTX collapse, your anger and frustration is of course justified. If you have been disapproving of Bitcoin for a while now, then you should certainly enjoy the current climate, but some of the self-righteous seem unaware of what problem bitcoin solves and what use-cases it has. In general, they ask: what's the point of Bitcoin?
I understand the scepticism. I personally didn't think much of Bitcoin or blockchain until I delved deeper and took some professional certificates. I also remain critical of the general cowboy behaviour of many in the crypto sector (reminds me of the web's early days, actually), and the prevalence of scams, frauds, and cons (who could have thought that a trustless system would have a trust problem?).
A lot of what I write in this article will apply not just to Bitcoin but to other cryptocurrencies as well. There are some legitimate criticisms of specifically Bitcoin in terms of transaction speed, electricity consumption, and environmental impact, as compared to private money transfer networks such as Visa; which have been solved in other cryptocurrencies/networks, but I want to focus on Bitcoin because Bitcoin was the first digital currency to practically solve the Double Spending Problem.
The Genesis of Bitcoin
October 31st, 2008 wasn't just any old Hallowe'en. It was exactly one week after many of the world's stock exchanges had experienced their greatest loss in history, signalling the largest financial crisis in human history. This had followed the collapse of Iceland's three biggest banks; the introduction of federal guarantees for US depositors; the bankruptcy of Lehman Brothers; a bank run in Great Britain; and the subprime mortgage crisis. And it was the day that the white paper describing Bitcoin was published.
This was no coincidence. The financial crisis created a crisis in trust among ordinary people when it came to banks and financial institutions, going so far as to precipitated a mass, grassroots political response in the US on both the right (in the form of the Tea Party Movement) and the left (in the form of Occupy Wall Street). The Bitcoin white paper can be viewed as a reaction to this loss of trust as Bitcoin provides a way to exchange money digitally without the need to use a trusted third-party such as a bank, credit card company, or other financial institution. But why can't we just send each other money? We can't because of the Double Spending Problem.
The Double Spending Problem
Alice is a fan of pop-country icon Taylor Swift. Her friend, Bob, is also a Swiftie. He managed to get two tickets for Taylor's concert in their home town, so Alice owes Bob $200 for her ticket. A few nights ago, Alice went on a big night out with her friend Charlie. For convenience's sake, Charlie put everything on her card, and texted Alice afterwards with the damage: $200 for food, drink, and karaoke. Alice just received an e-mail with $200 from her Aunt, so she only needs to find another $200. Luckily, her computer can easily make counterfeit money, indistinguishable from the original, by simply making a copy of any money file. So Alice makes a copy of the e-mail, and sends it to Bob. She then makes another copy, and sends it to Charlie. Alice has effectively spent the same money twice because she has an infinite duplication machine.
Of course, in a real-world scenario, we wouldn't accept money sent as a file in an e-mail. We would have no way of knowing if it actually was genuine money, or if it was a counterfeit copy. In centralised systems, we rely on the trust we have in a provider such as a bank, credit card company, or an app like Venmo (we let them decide if the money has been spent or not, and trust their decision). But in 2008, trust was at rock bottom, and Bitcoin proposed a way to solve this problem without requiring trust.
Bitcoin's solution is to store identical, public copies of the list of transactions on multiple servers. Batches of transactions are verified by solving a puzzle, with each puzzle including the solution to the previous puzzle. In this manner, a tamper-proof chain of blocks (or a blockchain, if you will) can be created. If someone attempts to change one of the blocks so that they can spend the same money twice, then we can easily detect this, because the solutions would no longer match, and the chain would be broken.
(There are other mechanisms in place to avoid other potential clashes, and the blockchain can actually be tampered with using a 51% attack, but for a network as large and diverse as Bitcoin, this is unlikely to happen.)
As the chain is public, anyone can independently view and verify the transactions at any time, thus removing the need for trust in an institution, because trust is built into the very way Bitcoin works. This unlocks the ability to have a fully functioning currency network, where individuals can transfer money digitally in much the same way as they would with cash.
Bitcoin Use-Cases
Now that we know what problem Bitcoin is actually trying to solve, I want to present two use-cases of Bitcoin.
Payment
Bitcoin is meant to be a currency, so of course payment in exchange for goods or services and the settlement of debts is an absolute no-brainer use-case with some 15,000 businesses accepting Bitcoin as payment globally.
In a free society, making payments may seem trivial, but in stricter regimes, authorities may attempt to block online payments in order to maintain censorship regimes. For example, in China, the sale of texts critical of the government, or relating to restricted religious movements (e.g. Falung Gong, Christianity), or LGBT-related materials, or the film Avatar are banned. In 2016, five people were arrested for selling Christian literature, receiving a minimum of three years in prison.
Even the land of the free provides us with a good payment-related use-case for Bitcoin: purchasing reproductive healthcare. Some ten US states ban abortion completely, with at least three states making moves to also ban some forms of contraception. If the purchase of at-home abortion pills or day-after contraception is restricted by law, then financial institutions such as credit card companies will not facilitate such transactions. In Texas, citizens can sue those who assist women before or after an abortion, and can receive $10,000 in damages for doing so, even if they are not party to the abortion, companies that provide reproductive healthcare can be targeted by literally any texas resident. Being unable to access reproductive healthcare is a terrifying prospect for victims of abuse, where such access could be life-saving.
Bitcoin can circumvent these restrictions as the network cannot be shut down by a single actor, transactions can be made anonymously, and cannot be reversed or cancelled, so it is significantly harder for the state to interrupt payments.
Remittance
For those of you lucky enough to be reading this from the comfort of a wealthy, western country, you might not have heard of the word "remittance" before, but for Indians, remittances are worth $87 billion, and for Tajikistan remittances count for over 40% of the country's GDP.
Remittances are simply money from an overseas worker in a rich(er) country, sent back to support relatives in their (often significantly) poorer home-country. Countries such as India, China, Mexico, and the Philippines are among the top recipients of the total over $715 billion remitted globally each year.
The biggest problems with remittances are that sending money internationally is expensive for the sender, administratively time consuming for the sender, the receiver, and the company carrying out the transfer (having to turn up in person to send/receive cash can result in a loss of money; physical forms increase error rates and require staff to process), and that it can take between two to five days for the money reach the recipient.
Bitcoin solves this by having lower transaction costs. The sender can send as much bitcoin as they like for between $0.04-$0.90, depending on how quickly they want the transaction to be completed. As Bitcoin is a digital currency, the sender can leverage digital tools to fill out the transfer details automatically, without having to go down to a remittance office or fill out a form in person and reducing the risk of mistakes and potentially losing money. As alluded to above, Bitcoin can be transferred significantly more quickly than a money transfer, taking anything from within ten minutes up to an hour, with the Bitcoin Lightning Network offering virtually instantaneous transfers for $0.04. Knowing that they can receive it so quickly in the case of an emergency is a great comfort to people who rely on this money, and being able to access it without being at the mercy of the remittance office opening times, or distance from where you live makes a huge difference. The sender and recipient can even share a Bitcoin wallet, eliminating the need to wait
Since Russia's invasion of Ukraine in February 2022, another remittance-related problem has arisen: sanctions on money transfers from the Russian Federation.
9-11 million migrant workers send remittances from Russia to their home-countries. As mentioned above, remittances count for over 40% of the GDP of Tajikistan, and over 30% of the GDP of Kyrgyzstan. When Russia was rightly sanctioned for their illegal war on Ukraine, remittance companies ceased operations in Russia. Russian banks were also excluded from the SWIFT system for making inter-bank transfers. This removed the ability of many migrant workers to send remittances. Obviously, Russia's actions in Ukraine are wrong, but the blame does not lie with a desperate Tajik family who are reliant on money from a construction worker in Russia.
Similar to the points about Bitcoin protecting payments from state interference, Bitcoin can also ensure that vital remittances continue because the network cannot be controlled by governments, and transactions can be made anonymously.
You Probably Think I'm a Cryptobro Now
Don't get me wrong. I don't think Bitcoin is some panacea. I don't think the government is out to get you. And I do think that Bitcoin is currently more suited to being a commodity than a currency. But I also think that Bitcoin does have a purpose; has legitimate use-cases; and does solve real problems that touch people's lives.
While those that are critical of Bitcoin, cryptocurrencies, and the abundance of bad actors in the space are right to criticise, and are right to enjoy the current moment, I do think it's glib and facile to say Bitcoin has no purpose and solves no problems. I've shown here that Bitcoin overcomes an important hurdle
in developing digital currencies. I hope I've shown exactly how simplistic such reactions can be.
Top comments (0)