Tracing Back the Value of P2P Payments to Cypherpunk Roots
Should We Be Satisfied with Credit Card Payments?
Since the dawn of the credit card era, which really took off during the financial crisis of 2008–09, consumers have taken the ease of digital payments via credit cards mostly for granted. But credit cards are by no means a cure-all. Have you ever visited a family-owned restaurant that only accepted cash? Many small businesses can’t afford to take on the equipment and processing fees that accompany credit card payments.
Both banks and credit card companies act as middlemen that facilitate and benefit from the transactions between businesses and consumers. According to creditcards.com, “Businesses are charged between a quarter of a percent and five percent on each credit card transaction in what are known as “interchange fees.” Many small businesses refuse to accept credit card payments below a certain amount in order to offset these fees.
The other issue with digital payments is a lack of trust. When you’re paid in cash, there is more trust in the authenticity of the exchange because the cash is transferred directly from the buyer to you. Cash payments are actually the purest form of what is called a peer-to-peer transaction (p2p). When you’re paid online, how do you know that the buyer has enough money to pay for the purchase? You don’t, so you put your faith in centralized institution like a bank to verify the purchase.
Banks know a lot about us. They know our social security numbers. They know whether we’ve saved up enough money to buy a house. They know if we are overdue on credit card bills. Do banks really need to know all this information to facilitate a financial transaction? Beyond that, haven’t we witnessed enough examples of banks taking advantage of customers for their own gain?
The CypherPunk movement of the 1990s was born from a repugnance for the unscrupulous collection of data and personally identifiable information about consumers for the economic benefit of centralized institutions and middlemen like banks and credit card companies.
The CypherPunk Manifesto stands behind the belief that privacy is essential for a free and open society in the digital age. The manifesto, published by Eric Hughes in 1993, defines privacy as the right of the individual to reveal his/her information to whom he/she wants, as opposed to corporations controlling personal information. The desire for private payment systems devoid of a centralized mediator like a bank led to the development of anonymous digital payment systems like DigiCash. The problem with DigiCash and other early digital currencies is that in order to prevent double spending, the systems still relied on third parties to verify transactions.
Double spending refers to the possibility of a buyer “fooling” the network into believing it has enough funds to complete two separate transactions, while in reality only completing payment for one. This is accomplished by initiating both transactions near-instantaneously and tricking the system into approving both purchases. Double spending remained a serious roadblock to the success of early cryptocurrencies until Satoshi Nakamoto published the Bitcoin White Paper, which described a truly peer-to-peer electronic payment system meant to address the double spend issue.
Bitcoin draws from the core cypherpunk belief in the right to privacy by enabling p2p transactions between anonymous individuals without an intermediary verifying transactions. Instead, the peers, or nodes, on the network verify each transaction. The strength of the network therefore relies on the level of decentralization. The more, nodes, the lower the probability of collusion, and the more secure the network. Once transactions are verified they become part of the permanent record on the ledger, referred to as “the blockchain.” Because copies of the blockchain are stored on every user’s computer, altering a record would require overwhelming the combined computing power of all other computers hosting the blockchain — a highly unlikely event.
To return to our initial question, “Should we be satisfied with credit card payments?” We think, the answer is a resounding NO. Credit card payments rely heavily on intermediaries such as banks and credit card companies that inevitably make the transaction more expensive for buyers and sellers and endow centralized institutions with too much unchecked power. We think cryptocurrencies could form the basis for a new financial system that eliminates the need for intermediaries entirely and empowers individuals to transact directly with one another in a peer-to-peer manner. Crypto may very well be the new plastic.