Bitcoin and blockchain came into existence to have a trustless ecosystem of exchanging value. Many wonder what makes Bitcoin so special. How is it different from paying with Paypal, a debit card number or other digital means of exchange (say PayTM, BHIM, UPI, etc.)? Why do governments want so badly to bring it under regulatory control? What makes it more than just a currency?
To the casual observer, Bitcoin is just another (albeit, currently a more difficult) way to facilitate digital exchange, much like Paypal. But the structure behind it makes it so much more that just a way to trade goods over digital mediums. Bitcoin is not just digital representation of already existing currency, but rather it is a “distributed crypto-currency” in and of itself. Instead of relying on a potentially corruptible centralized authority to issue and insure value of a currency, it relies on decentralized verification system to confirm that users have the value they claim to have, and to reward users for their participation in the verification process. The anonymity of exchange is possible due to powerful and widespread encryption. Encryption that at one point was classified as a cyber weapon by the US government.
To understand what we are discussing, let’s walk through a few experiences of ours which we all might have faced at one point of time in our lives.
Example 1: When was the last time at a petrol pump you were asked to pay 2.5% over and above on the bill amount for them to accept your debit or credit card? That 2.5% premium is what the commission is charged by Visa / Mastercard / RuPay (3rd party) on the seller which they pass onto the consumer by haggling with us!
Example 2: When was the last time when there was an error in online shopping and you panicked because the amount got debited by your card but the payment amount did not reach the seller? Where did the rupees go? It’s stuck with the 3rd party verification systems (remember BillDesk / PayU / etc.). Sometimes the transactions happen instantaneously and sometimes it takes hours, or days. The consumer, stricken worried, does all the back and forth with the parties over calls by calling up the call centres on each side (the bank and the seller) and it’s a drudgery of an affair which we just hate. The situation arises as we entrust the 3rd party with our currency such that exchange of value happens.
Example 3: When was the last time when your credit card or debit card was declined at the point of sale by that machine and felt a bit embarrassed as the rest of the bystanders in the queue looked upon you with disdain. The machine was unable to read your identity via the card even though your was loaded by with credit, a task again which is entrusted to 3rd party verifiers such as Visa and Mastercard.
Example 4: You were buying your online term plan with that popular insurance provider on the internet. It was all nice and easy to navigate through the site but you encountered a serious error once you go through the online payment process. The amount was deducted twice, of the same value X, from your account. For a novice online shopper, all hell breaks loose cause what was costing say INR6,000, even though bought at the same price and received the confirmation from the seller, charged his bank INR12,000/- to a mistake. We all know the path that follows, it takes a month or two to retrieve that extra payment via endless calls to the service desk just because of a “mistake” by the trusted 3rd party.
Time and again, we can now safely say that 3rd party operators in the business of exchange can’t be trusted. They might work but they are bound to fail often. Do you know that credit card is as old as 50 years in its existence now? And the same problems exist since time immemorial. Have we ever thought that large corporations such as private banks, payments companies, etc. sitting on millions of rupees aren’t able to fundamentally solve the lacunas of the system? Well, it’s just us silly consumers who are complaining so let it be as it is. The Visas and Mastercards of the world – it’s a duopoly around the world so what else can we as a consumer do right?
The answer is in cryptocurrencies and Blockchain. What Bitcoin does is it introduces a new option: exchange that relies on neither trusting the other party, nor a centralized third party. It, like the trusted 3rd party system before it, further decreases transaction costs and information costs. Through transparent exchange verification, digital and contractual escrow capabilities, and other decentralized financial instruments, Bitcoin allows for the positive aspects of a trusted 3rd party, without the drawbacks.
By reducing the need for trusted third parties, trustless two-party exchange decreases the utility of government, and by encrypting this exchange, the ability of government to interfere with the market decreases as well. This is why governments are trying so hard to regulate and control Bitcoin.
But they will not be successful, the key reason being that Bitcoin is decentralized and encrypted. This breaks the government’s monopoly control of capital and allows for previously disenfranchised groups to empower themselves. Governments, with their monopoly on violence, are very good at stamping out organized competitors, otherwise they would not be governments. But, because of encryption, governments will have extreme difficulty in identifying digital signatures of Bitcoin users. And, if they do manage the decryption of any single user (which takes massive amount of time and computing power), they still have no location on which they can focus their regulatory regime, no corporations they can fine, no leaders they can arrest; they have no power to stop the unending tide. As more people choose to use cryptography, crypto-currencies, and systems of trustless exchange, the threat to governments will become greater as their ability to counter it diminishes. Eventually peaceful, voluntary and trustless exchange will become the norm, all the while lowering information and transaction costs, and humanity will find new solutions for sustaining prosperity.