Why is Bitcoin important?

Gemma says…

Bitcoin offers decentralization (eliminating the middleman to process a transaction), immutability (transaction records cannot be modified), and the ability to be your own bank / control your own assets.

When the Bitcoin white paper was released in 2008, it was difficult to visualize a scenario in which a single unit of the currency was worth thousands of USD, with a large entrepreneurial ecosystem working towards bringing the digital asset mainstream. Bitcoin was a clear response to the Great Recession and the shortcomings of global monetary policy. It offered a deflationary currency outside the control of central banks and governments. Since then, the Bitcoin network has grown rapidly and users all around the world are being exposed to the technology.

Decentralization: Eliminating the Middleman

Bitcoin is an ingenious breakthrough in computer science, cryptography, and economics. For the first time, people have a mechanism to transfer digital money between one another without a third party sitting in the middle. Eliminating the middleman is an important innovation because not only is using an intermediary more expensive, but it also contributes to corruption, as those in power have the ability to manipulate the system in their favor. Bitcoin, on the other hand, has no central authority or intermediary. Instead, it distributes its transactional ledger across a network of widely dispersed participants.

Bitcoin is also the first technology to truly digitize money. Traditional payment systems send messages back and forth for each transaction and nominally update account balances. Each party involved has to verify that the sender rightfully owned the money in the first place. Bitcoin uses cryptographic keys to represent ownership so there is no need to clear and settle each transaction. This makes Bitcoin a digital bearer instrument, a new medium for money.

Immutability: Blockchain Technology

Bitcoin is not a hacked together software project that happened to gain traction, but rather a meticulously thought out solution to one of the most challenging computer science problems called the Byzantine Generals Problem. The Byzantine Generals Problem describes a scenario in which multiple generals from the Byzantine army are surrounding an enemy city and can only communicate through a messenger. They are tasked with creating a common battle plan, but they cannot be certain that either one of the generals or the messenger could act nefariously. At the highest level, the Byzantine Generals Problem is the question of how to establish trust between parties who know nothing about each other over the Internet.

Bitcoin’s solution to the Byzantine Generals Problem was Blockchain Technology, arguably its most influential externality. For Bitcoin to work, the software had to devise a mechanism in which value could be exchanged in a decentralized way. Decentralization in this case means without an intermediary, similar to how the Byzantine Generals could not communicate with one another.

A blockchain is a digital ledger that is distributed to and shared equally with every actor in a network. A ledger in this sense is similar to any basic economic ledger that records transactions. In the case of Bitcoin, the network’s blockchain ledger records Bitcoin transactions between public addresses. Blockchain technology leverages cryptography to ensure that the ledger is immutable, meaning that once the network has agreed on the order of transactions, it is computationally expensive and impossible to reverse or change without anyone noticing. For the first time, Bitcoin created a way to exchange an asset over the Internet without the need for an intermediary to guarantee transaction safety.

The implications of this breakthrough are immense. Money isn’t the only digital asset that can be exchanged using distributed ledger technology. Any asset that can transcribed digitally can be moved in this way. Some of the most exciting use cases focus on moving bonds, stocks, and property rights on a blockchain. While many questions regarding blockchain still remain, it is safe to say that it is pioneering the “Internet of value.”

Be Your Own Bank: Digital Bearer Instrument

Bitcoin’s other most significant property is that it is a digital bearer representation of money; you cannot spend bitcoin without rightfully owning it. A decentralized peer-to-peer payment network could not be possible without this property. The primary role of centralization is to ensure and control transaction settlement. In the current, traditional state of payments, individuals don’t control their money outright. Banks can theoretically impose charges and block transactions from going through if they deem them risky. Moreover, account balances are just nominal representations of a bank’s internal database.

With Bitcoin, a user’s public address or wallet acts like a type of safe that can only be opened with the corresponding private key. Assuming you’re the only one who knows your private key, no third party can access your money. Bitcoin guarantees bank-like security using only the internet. Societies with limited access to banking can now access these services from their smartphone. This has the potential to bring widespread prosperity to underserved parts of the world and many new users will now be able to participate in the global economy.