People who know me, know that once I get interested in something, I’m like a dog with their favorite bone. I won’t stop until I know as much as there is to know about that thing, or I get bored of it. Bitcoin / Blockchain has been that thing of late. One morning I woke up, and I started questioning… what is the use of Bitcoin? Now that I’m understanding some of it’s benefits and very real flaws... what niche can and should it fill? I have no plans to get rich off of this, but it’s cool and I like cool things.
First off a few myths to bust:
- Bitcoin is free
- Bitcoin is not free – every time you do a transaction, you have to pay a fee. If you want to send $0.02 to someone, forget about it. The fee will be more than the money
- Bitcoin is a ponzi scheme.
- No – lookup what a ponzi scheme is in the dictionary. It is no more that, than any currency OR commodity. Is it the method of currency transactions in some ponzi schemes, absolutely. That doesn’t make Bitcoin itself a ponzi scheme though.
- Bitcoin is untraceable
- This is also not true. Bitcoin transactions are all recorded on the Blockchain, and while there is no way to look at the Blockchain and see who the two ends of a transaction are, if you gain access to one of the parties digital wallet, that changes. It’s complicated to say the least. Yes it’s far more anonymous than other forms of transactions, but it is not totally anonymous. There are other altcoins out there that do provide true anonymity. I’m sure the drug dealers / criminals will slowly move to those.
- When the halving comes (google it), Bitcoin will collapse because no one will want to mine anymore.
- When Bitcoin was created, it was intended for there to be a day when mining WOULD end. That day isn’t in ~6 months, but in any case, the plan is for a gradual transition from Bitcoin miners to making profits on block creation, to making profits on transaction verification. Everything is fine. Calm down.
- Bitcoin is only loved by crazy libertarians.
- Anyone who thinks that I’m a libertarian, has clearly never met me (or looked at my resume). I believe that government is important, I wouldn’t have gotten a Masters in Public Administration otherwise. Just because I believe government is important in many areas of life, that doesn’t mean that I explicitly trust “Government” or for that matter “all” governments. I’ve seen what kind of corrupt / horrible practices governments can and sometimes do commit. I like Bitcoin not because it “sticks it to the man” but because it fills some important roles of commerce that were previously being exploited for profit by super large institutions. Reducing the cost of exchange is a very capitalist thing to do, and after seeing Communist systems in person, and more importantly, the legacy they leave – yes I am a capitalist. So that’s why I like Bitcoin, because I’m a capitalist.
- Bitcoin is capable of handling all of the worlds transactions! It’s rock-hard stable!
- This is the most laughable of all myths. Bitcoin is falling apart at the moment. Not in the, OMG all of the money is going to disappear sense, but it has hit up against some very real technical limitations in the protocol. You can read a triste on why one of the core developers left bitcoin here: Bitcoin Experiment Failed Many news sites are taking this to mean that Bitcoin is over with. All it means is this: Bitcoin has a flaw, a big flaw. Each block of transactions (produced every ~10 minutes) can only hold a few transactions. So what happens when more transactions enter the network than can be fit in a block? They get queued. Queue enough transactions and…. yeah it’s a problem. So there have been many proposals to fix the issue. Bitcoin-XT was one, made by the guy who posted the previously mentioned blog post. That proposal had a timeline attached to it. That timeline has passed, meaning essentially his proposal is dead. That doesn’t mean the problem will never be fixed, just that it won’t be fixed in the way that Mike Hearn wanted. Keep in mind that I’m NOT bashing Mike. I’ve read the debate on both sides as to why his proposal didn’t gain favor, but that doesn’t matter. The guy was trying to fix a bug, and people didn’t like the fix. OK, let’s all move on. What fix DO people want to implement? That’s where the issue is now, people are debating how best to fix the issue, and other competing proposals are floating around. Some of the ones that have the (in principle) support of the guy pegged to run Bitcoin back in the early days: Gavin’s Thoughts are Bitcoin Classic and Bitcoin Unlimited. I think Gavin’s analysis is the best. The code-base needs a patch or two and things will be fine. It won’t be easy, but calm down people.
OK now to the reason I actually wanted to post up…. I wanted to talk about a feature of Bitcoin that has been around for some time now. Multi-Signature transactions. Simply put, these are awesome.
So I’ve been trying to think through where BitCoin will go next now that it’s past the “this is cool” phase. Initially some people thought it would replace cash / credit cards. That’s not going to happen at least in the US. It takes 10 minutes to get your first confirmation of a transaction, thus every store that accepts bitcoin is taking a tremendous risk for the first 20 minutes or so. There are projects out there trying to create a “Lightning” verification system on top of bitcoin, but I don’t see it being useful anywhere but maybe some European countries / Asia / Africa (not the US), because there is no incentive for a customer to use Bitcoin (beyond the cool factor) when they don’t have to pay the merchant fees.
So if it’s not a replacement for cash / credit cards, what is it? I figured out it’s usefulness for transferring money (eventually making Western Union far less relevant – except as a cash broker), but it could also be a PayPal.. except for the fact that there is no recourse if whatever your buying turns out to be a dud / you’re dealing with a scam artist.
But then there is Bitrated – this system is awesome because it uses a feature of Bitcoin called Multi-Sig. Normally you simply enter the receive address that a seller gives you – and you send funds to it. If you don’t get what you asked for, tough... stuff. With Multi-Sig though you don’t pay funds directly to the seller, you pay them to a multi-sig address. That multi-sig address doesn’t actually receive the funds, it simply becomes a lockbox (that no one owns). You then assign an arbiter as the third party (and they may charge some fee to be an arbiter). With the multi-sig address the process goes like this:
- I want to buy X from party Y
- I tell party Y, I’m buying X – I’ll send money to this address, with such and such as an escrow agent
- Party Y sees that you’ve paid into the special address and ships the item / does whatever service you’ve contracted
- If you are happy with the product / service – you sign off on the multi-sig address, and the funds are sent to the seller (no escrow agent involved)
If you are NOT happy:
- You refuse to sign for the product / service and provide evidence to the arbiter as to why the seller failed to hold up their end
- The arbiter then decides what to do. If they think you the buyer are just trying to get out of paying, they sign the multi-sig and the funds are released (even though you don’t want them to be)
- If they think you have a legitimate complaint, they can refuse to sign the multi-sig address – and the seller gets nothing, and the buyer loses no money (it gets auto-refunded to the buyers bitcoin wallet).
The whole idea is escrow 2.0 – it’a awesome. So now I feel like I see at least three niches that Bitcoin can and will fill: – Person to person transactions with fewer fees, and far faster than the days it takes with ACH / SWIFT – Currency exchange (put USD / whatever into Bitcoin and Euro / whatever can pop back out) – Paypal without banks, delays and high fees.
Maybe outside of the US, where people actually have to pay to use a credit / debit card, there are uses there as well... but I’m less certain about that.
That’s all for now.
(edited 2019-07-15 as part of website migration)