10 Years In, Here’s How Bitcoin Handles The Problems Of Traditional Payment Systems
In just a few days, on October 31st, Bitcoin (BTC) will celebrate its tenth birthday. This will mark 10 long and eventful years for the first, and to this day the largest, cryptocurrency, whose white paper was published back in 2008.
Back then, an unknown group or individual using the alias “Satoshi Nakamoto” published a document titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” The document presented a new monetary solution and introduced the concept of cryptocurrency.
These days, a decade after the document was published, Bitcoin is a much more evolved coin than it used to be in 2008. While it still has its flaws, it is interesting to compare it to the coin that was launched in February 2009.
Bitcoin At The Time Of Its Launch
As mentioned, Bitcoin was introduced as a concept in 2008, and launched several months later, in 2009. Back then, the world was facing a financial crisis, and Bitcoin came as a response. The traditional payment system itself had numerous issues, many of which are still present to this day.
This is what Nakamoto addressed, stating that there are three biggest problems that can be resolved via BTC. The first one is the inflation, for which central banks are responsible. In order to maintain some form of balance in the economy and financial industry, banks, which serve as money issuers and managers, need to be trusted. However, on numerous occasions throughout their history, they took advantage of this trust and brought financial chaos.
Next, Nakamoto addressed a serious lack of security, as well as privacy. Banks need to ensure their users that their money and privacy will be protected. This is another area where they often had disappointing results.
The third and final issue includes costly fees that bank require in exchange for their services. Nakamoto stated that Bitcoin can deal with these issues by providing new solutions and solving problems that were deemed unsolvable up to that point. The question now is — did it successfully keep this promise?
How Did Bitcoin Deal With Inflation And Volatility?
As stated before, Nakamoto saw inflation and devaluation as huge issues and stated that Bitcoin has the potential to eliminate them. If we look at the history of fiat money, it is evident that these issues exist, and that banks issued too much money on numerous occasions. As a result, the money lost its value, and financial disasters occurred.
This issue can indeed be solved with Bitcoin, as the coin's source code only allows a limited number of coins to exist. However, another problem arose with the increase in demand for BTC. These difficulties regarding the adjustment of the coin amount fell on purchasing power or price. This has made Bitcoin extremely volatile, with its price jumping or dropping by hundreds of dollars each day. In fact, the change can happen almost instantly, which is a huge problem.
Investing in Bitcoin became a risky move, which has since grown to be almost a game for some investors. However, things are far more serious when it comes to using BTC in everyday life, like for paying bills or shopping for supplies. Many argue that Nakamoto could not solve this problem while still keeping Bitcoin fully decentralized, and the solution has yet to be discovered.
However, with a cryptocurrency finally being presented to the world, many attempted to create a version of it with more stability. This has led to the creation of stablecoins, which are supported by traditional money, such as the USD. As for Bitcoin, Nakamoto believed that it might start acting like gold. Instead of increasing the number of coins, Bitcoin would simply experience an increase in value.
Of course, for this to happen, Bitcoin would first have to experience a massive growth in the number of its users. This is what we experienced to an extent already, especially in late 2017. As BTC becomes more and more accepted around the world, its value is also expected to increase far beyond any amount we have seen so far. A further increase would attract more users, and the process would go on a loop.
However, this has yet to happen. While Bitcoin is slowly starting to receive new use cases, especially when it comes to retail, it is still a long way away from mainstream usage that will truly kick its price to new heights.
How Did Bitcoin Handle Privacy Issues?
Nakamoto's second problem with traditional money is the lack of privacy. His goal was to create a new payment system that will increase user privacy, and provide Bitcoin holders with greater freedom. This has indeed happened, and Bitcoin does have the ability to protect its users' wealth from various restrictions like confiscatory taxes and exchange controls.
However, the privacy is not total, as the blockchain records all transactions that occur. Additionally, since it is transparent, every network participant has the ability to see this information at all times. We can say that Bitcoin is pseudonymous, rather than anonymous. Users do not have to use their real names in order to use the coins, however, they do have to provide real information if they wish to access the exchanges.
If they do so, their pseudonymous accounts will be connected with their exchange accounts, and all anonymity is automatically lost. To combat this, there are several solutions, the most popular one being the use of privacy coins, instead of Bitcoin. These are altcoins such as ZCash, Monero, Dash, and others.
How Did Bitcoin Handle The Issue Of High Fees?
Back when it was still new, Bitcoin did not have that many users, and as a result, there were not that many transactions to handle. This has allowed all transactions to be instantly validated, and the cost of the process was indeed quite cheap. However, BTC can only handle 7 TPS (Transactions Per Second), and as its popularity grew, so did the number of transactions.
Since its TPS number remained the same, a lot of transactions ended up having to wait their turn, which has increased the costs quite a bit. The problem was quickly recognized, but developers spent years searching for a proper solution for it. One such solution emerged relatively recently, in a form of a Lightning Network. The LN would add another layer to BTC blockchain and allow users to form a network of channels between one another. That way, they could send numerous transactions by exchanging ownership of deposited coins, with none of them having to actually be validated.
Only after the transactions are finished, and the channel gets closed, would the blockchain record the new state of things. This is a solution with the greatest potential so far, and it has been in development by several companies ever since it was originally introduced. While this does not solve the problem in a traditional sense, it is still more than a decent workaround.
On the other hand, numerous altcoins were developed with a specific intention to address this issue, and there are many of them that can offer speeds equal or even greater to those of VISA.
While Bitcoin has brought a new concept of digital money to the world and presented that it is indeed possible to implement a new and improved system, it is still far from perfect. This is why many believe that it is not to be regarded as the last word in digital money industry and that it will be surpassed, eventually.
This is why over 2,000 altcoins are currently in existence, with a lot of them focusing on doing what BTC does, only better. Even so, BTC is an impressive technological breakthrough, and it is often praised for bringing the blockchain technology with it.
While its usefulness has yet to expand, it did manage to establish a value as a digital asset, and it will definitely be the leader of the crypto world for quite some time.