Don’t we already have technologies like Bitcoin? What’s the big deal?
Bitcoin was created to be the digital version of cash. Now you’re probably wondering, well we have Venmo, PayPal, credit cards, and other technologies of that sort, what’s the big deal? If Venmo, PayPal, credit cards and other technologies are perfect then why are most apartment deposits still paid with money order*?
*Money Order: Is where you pay the money upfront to an organization (usually a bank) and they issue you a piece of paper that indicates that the transaction is verified, who’s involved, and the amount of money that was given. The proper person that receives this paper can cash in the piece of paper for money. It’s basically a piece of paper issued by a trusted organization that states the paper has the value of $XXX.
Transaction Processes with Credit Cards, Paypal/Venmo, Bank Transfers, Cash, and Bitcoin
If Person A wants to give Person B a $100 dollars these are the following things that would happen with these popular systems:
Credit Card Transaction
Person A tells Person B (through a swipe and signature) to ask their credit card company for the money. After Person B requests the money from the credit card company, Person B will receive the payment.
Who verifies the legitimacy of the transaction? The credit card company
PayPal or Venmo Transaction
Person A tells PayPal or Venmo to withdraw the funds for the payment from their bank account so they can pay Person B. After PayPal or Venmo withdraws the funds, PayPal or Venmo sends that payment to Person B’s PayPal or Venmo account. Person B finalizes the transaction by requesting PayPal or Venmo to deposit those funds into their bank account.
Who verifies the legitimacy of the transaction? PayPal or Venmo
Bank Transfer Transaction
Person A tells their bank that they would like to send funds for the payment to Person B.
If they both have the same bank, Person A will tell the bank to withdraw funds from their account and deposit it into Person B’s account.
If they have different banks, Person A will tell their bank to withdraw funds from their account and send the funds to Person B’s bank. Person B’s bank will receive the funds and deposit the payment into Person B’s bank account.
Who verifies the legitimacy of the transaction? Bank, if there are two different banks involved then both of the banks
Cash Transaction
Person A hands Person B the funds, then Person B goes ahead and checks that the notes are real and they were given the correct amount of funds.
Who verifies the legitimacy of the transaction? Person B
Bitcoin Transaction
Person A broadcasts to the network that they are giving Person B funds. The network verifies the transaction and makes the transaction a permanent record (adds it to the blockchain).
Who verifies the legitimacy of the transaction? The network
Cash seems to be the most efficient, why not stick to it?
Bitcoin is Trustless
The big difference between cash and Bitcoin is that if Person A gave cash to Person B, Person B can deny the transaction was legitimate. With cash, it’s very much a “their word against mine” situation. With Bitcoin, the transaction is securely recorded in the ledger (blockchain) and there are witnesses present (the network). In a real-life situation, it would be similar to if Person A handed Person B the note and Person B asked a group of unbiased people if they received real money for the specified amount.
The theory behind Bitcoin’s trustless system is that you can trust a group of strangers more than the individual involved in the transaction. The strangers are unfamiliar with both parties and will gain nothing by lying about the legitimacy of the transaction. Versus Person B, who’s involved in the transaction has everything to gain in they lie.
Bitcoin is Securely Stored
Cash can be securely stored in your wallet, in a bank, even under the ground in an undisclosed location (+34° 59′ 20.00″, -106° 36′ 52”, for Breaking Bad fans), but there is a little thing called robberies. Robberies have happened numerous of times throughout history, we even have a collection of movies and books on them. With Bitcoin, your coins (ledger balance) are stored in a decentralized system spread across several machines.
Hacking the network is possible, but it isn’t financially beneficial (long story short:groups of transactions are chained together, so if you wanted to change a transaction you would have to change all of them requiring an exuberant amount of computing power that is very expensive).
The theory behind Bitcoin’s security is that people won’t want to steal something that would require more capital than they’ll gain from the heist.
Bitcoin is Digital
This is the most obvious one, cash is a physical object that can only be moved in a physical manner and Bitcoin is a digital object that can be moved digitally.
