Bitcoin and Blockchain Technology: New Age Saviors Changing the World
Bitcoin(BTC) is a type of cryptocurrency invented by Satoshi Nakamoto and introduced on January 3, 2009. It is operated by a decentralized authority, unlike fiat currencies, and can be sent from one user to another through peer-to-peer (P2P) BTC network without the need for a third party. The first mined BTC is Block 0. Bitcoins are neither issued nor backed by any governments or banks, and at the same time, individual BTCs are not treated on par with valuable commodities. But, despite not being a legal tender in many countries, Bitcoins enjoy relatively high popularity on the charts and have paved the way for the introduction of many other virtual currencies, collectively termed Altcoins. As of October 2019, BTCs new price point is between $8,000 and $9,000, and the technology enjoys a good record-high 114 quintillion hashes/second.
Blockchain into the Picture
Bitcoins are created, stored, and traded via a public digital ledger, a decentralized and distributed system, called blockchain that came into existence in 2008. In other terms, it is a timestamped database that is unchangeable and run by a computer network not regulated by a central authority. Each of these blocks is secured and bound to one another via cryptographic principles. Its benefits include accurate tracking, increased transparency, permanent ledger, and cost reduction.
Potential Benefits of Blockchain
|Automotive||Consumers can use blockchain to gain fractional ownership over autonomous cars|
|Financial Services||Low-cost and quick settlements could save tens of thousands of dollars in transaction costs while improving transparency|
|Voting||Using blockchain code voters can cast their votes via smartphone and other computing devices|
|Healthcare||Encrypted health information of patients can be shared with multiple providers with no risk to privacy|
Mechanism of Blockchain Technology
The Byzantine Metaphor
Byzantine Generals’ Problem is a computer-based problem theorized in 1982 by mathematicians Marshall Pease, Robert Shostak, and Leslie Lamport. The problem is an analogy used in the illustration of a consensus requirement for DLT (distributed ledger technology). Touted as the major stepping stone in the development of a safe, decentralized e-voting system, the problem describes a situation where the parties involved must agree on and create a single strategy that could avoid complete failure, while the other involved parties, the rogue and malicious ones, might disseminate wrong or unreliable information causing the whole system to collapse.
In a blockchain, all participants and nodes are of equal hierarchy. Therefore, all the nodes of the same network work together to control the system effectively. The agreement between the nodes is called a “consensus.” The solution involves some solid computing work, hashing, and proper communication between all the nodes to verify the message that could neutralize threats.
Blockchain offers a self-governed method to manage a user network. Each blockchain comprises numerous data and is constantly updated. Cryptocurrency developers have ensured that these data are tamper-proof, unlike in the Byzantine problem, where the communication channel (the defender city through which the messenger passes) is unreliable. Sending a pure text is suicidal.
The impact of the Byzantine problem and the practical application of the corresponding solution is also referenced in the paper “Bitcoin: A Peer-to-Peer Electronic Cash System.”
Cryptocurrency the Champion Problem Solver
Some of the problems cryptocurrencies can solve include:
The Custody Problem
- ~ A situation where assets are confiscated
- ~ Consider the 2013 Cyprus banking crisis. The forced bail-in pushed people to withdraw their money from the bank and invest the same into Bitcoins over which the government had no control.
- ~ Cyprus’s growing middle class is attracted to cryptocurrency for the lack of other alternatives.
- ~ This idea is becoming a worldwide phenomenon, with many people now investing in digital currencies like Bitcoin. You can also invest in Bitcoin through the Bitcoin Revolution.
The Capital Control Problem
- ~ Getting trapped in an uncontrollable or an undesired investment
- ~ Cryptocurrencies easily slip through capital controls
- ~ Consider Argentina. When the country’s government staved off its population from purchasing U.S. dollars, stagnating banks, during the 2019 financial crisis, people tilted more toward BTCs.
- ~ Argentina even became a leader in the BMPI(Bitcoin Market Potential Index).
The Bummer Machine Problem
- ~ The problem is not the technology but the business plan style that corrupts everything from the system to individuals.
- ~ Cryptocurrencies avoid expensive and old-fashioned transactions.
- ~ Bring microsystems closer than imagined and pose a menace to advertising-based revenue models such as Google and Facebook.
The Moral Hazard Problem: A crypto downside
- ~ Though cryptocurrency does not pose a bail-out and bail-in threat since it is not state-controlled, it could still represent a moral threat since the same is not functionally equal to fiat currency
- ~ Recently, South Korea announced that it would not issue cryptocurrencies citing that the latter could destabilize the economy
Other similar problems include the consensus problem, execution problem, and dilution problem.
Cryptocurrencies were born out of protest. If states had their monetary system properly structured, a system that treated everyone fairly, then probably Bitcoins would not have been invented at all. The crypto industry functions because it solves many things, and will continue to soar if the implementation of harebrained economic models does not stop.