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What does Bitcoin provide over PayPal?

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The Desert Island Case for Cryptocurrency

Working as COO at Blockchain.com means I constantly field cryptocurrency related questions from all sorts of people. The most interesting of which don’t focus on price, or mechanism, but the very purpose of digital money: Why do we need cryptocurrencies? What’s the point in Bitcoin when we already have Paypal and banking apps?

The confusion is not restricted to those outside of finance — I faced similar questions from bankers whilst I was at UBS working to develop a form of ‘digital money’ (eventually known as the ‘Utility Settlement Coin’): Why do we need this ‘digital money’? Surely all the money we deal with is already electronic?

In the past I explained that the aim is to create a decentralised digital bearer asset that enables fast and trustless peer-to-peer transaction settlement without a centralised third party, using a blockchain and distributed ledger technology. I recognise that this description is a mouthful and while it may be technically accurate, without a glossary of terms at hand, it doesn’t provide much clarity. An inquisitive listener is stuck wondering: So why do we all need that again? Here’s my attempt to explain.

When considering the role of Bitcoin, it’s helpful to conceptualise different monetary systems and take a look back at the history of money. For the purposes of today, let’s imagine a community on a self-sufficient, remote-island. In my head it looks something like the community in the book The Beach, made famous by Leonardo DiCaprio’s starring role in Danny Boyle’s 90’s film.

Imagine that on this beach Leo and his settler-buddies decide it would be useful to establish a form of rudimentary money and decide to use bags of rice for this purpose. Each of the beach members store their individual rice bags in various locations and when they trade between themselves they physically move the rice bags around as payment. These rice bags are both ‘commodity money’ and ‘bearer assets’ meaning that the person who owns the asset is the one who controls it. Transactions are ‘peer-to-peer’ because they take place directly between two people without any third party involved.

Soon the beach members realise it’s tiresome to store each of their own rice bags and move them around constantly. Leo has better things to do. So they decide to store all the rice bags in the same storage hut, and everybody keeps their own record (on paper) of how many bags each person owns. Every evening the community gathers round a fire and any new transactions and changes in rice ownership are announced, with everyone updating their own records accordingly. If there are any disagreements the beach leader (she’s called ‘Sal’ in the film) steps in and decides who’s right.

This money is no longer a bearer asset as it’s now ledger-based, in this case using a ‘distributed ledger’ — as everybody has their own copy of the transaction history and its current state. They have a centralised consensus mechanism for dispute resolution (Sal, the beach leader decides). However, if they were able to come up with a set of enforceable rules for reaching consensus without the need to rely on Sal then this would be a ‘decentralised consensus mechanism’.

A few weeks pass and the group decide that it’s inefficient and boring for everyone to come together nightly to update their individual ledgers. Instead they decide to rely on one ledger that they entrust to the beach leader, Sal. Now, every time a transaction happens the people involved inform Sal and she updates her ‘golden record’. This saves everyone time. Money is still ledger-based, but it’s no longer a distributed ledger.

Every few weeks Sal sails to the mainland to make trades and purchases on behalf of the island community. During one of these trips she has an idea! The rice bags which are the ‘asset-backed’ feature of the community’s money are never used and just sit idly in the central storage hut. So she decides to trade the rice in the mainland markets in return for other useful things like vegetables seeds and livestock that she takes back to the beach. The community members are pretty happy with this arrangement because they are able to grow more food.

They keep using the centralised ledger maintained by Sal for recording transactions and they continue to use rice bags as the ‘unit of account’ for their money. Only now there are no rice bags in the storage hut — they have all been traded out on the mainland. The islander’s ‘money’ is no longer asset-backed by anything physical — it has become a ‘fiat money’. The term ‘fiat’ derives from Latin, “let it be done” in the context of an order, requirement, or decree.

The money no longer had intrinsic value as it can no longer be converted back into rice bags. The islanders are now not only trusting Sal to look after the money and keep track of who owns what, they are now trusting Sal to also maintain the value of the money itself. For this to work the islanders must trust that the money will always be exchangeable for goods and services on the island and that Sal won’t devalue the existing money by creating more money out of thin air.

This system works fairly well, but because it’s based on a centralised ledger everybody has to continually come and speak to Sal each time a transaction is made. This also becomes tiresome, so Sal comes up with another idea. She starts handing out pieces of paper that represents a claim to exactly one bag of rice from the central storage hut (which of course are no longer there). She personally signs each piece of paper to prevent forgery. Beach members now use these notes as money to make peer-to-peer payments between themselves in whatever manner they like, without involving Sal.

Just like the bags of rice at the beginning, these notes are again ‘bearer assets’ as they no longer rely on a ledger and instead it’s the control of the asset (now the paper notes) that determines ownership. We have almost come full circle, only now we have ‘peer-to-peer fiat-money’ rather than the ‘peer-to peer commodity-money’ that we started with.

The island example is simplistic but most forms of money used today can be understood in these terms. Just like the beach community, our modern economies have gravitated towards centralised ledgers. The majority of money today exists as electronic ledgers maintained by banks, like the one controlled by the beach leader, Sal. A small proportion of money exists as physical cash, like the notes the beach members used to settle transactions directly between themselves. Almost all of this money is fiat money — it’s not ‘backed’ by anything and so it’s value relies on trust.

In our current society, you first need to trust the institutions that issue the money and maintain the ledgers (i.e. that banks won’t go bust, or mess with the ledger to take your funds). Second, you need to trust the value of the fiat money itself. Just as the islanders had to trust that the Sal’s money would continue to be exchangeable on the island and on the mainland, we must trust that the money we own will be forever exchangeable for goods and services in our economies. We must trust that people will always be willing to accept our money and that banks won’t create too much of it. We trust (hope!) that there will continue to be demand and not too much supply to ensure that the value (price) is maintained over time. But sometimes this trust is lost. Beach leaders like Sal can make mistakes or sometimes be downright cheats. And that has consequences.

Banks can fail. Looking back to the last decade, the world economy was defined by the 2008 Global Financial Crisis. This demonstrated quite clearly that the money in banks was not as sound as many had assumed. Banks had created money out of thin air by using borrowed money to create loans. But these loans turned out to be bad. Imagine if Sal had borrowed the rice bags from the storage hut and traded them in on the mainland for seeds and livestock that turned out to be rotten and totally useless. This is essentially what happened in 2008 — people realised the assets the banks had were worthless and so trust and confidence in the economy was lost. As a result, banks became insolvent, people were unable to withdraw money and in some cases funds had to be frozen.

Transactions can be blocked. Many users have found their accounts frozen or transactions blocked by banks and payment providers, like PayPal. Sometimes this is due to fraud detection algorithms that are protecting the customer, but at other times it’s due to false positives or other factors. The result is that your money isn’t fully yours when it’s at a bank, with PayPal, or any other traditional financial institution. That institution must ‘co-sign’ every transaction and has the ability to block it.

Fiat can be inflated. Economics 101 tells us that if you create too much supply without enough corresponding demand, prices will fall. Money is no different: If a country prints too much money but the economy does not grow to generate demand, the value of money will decrease. We call this inflation and right now there are high levels of inflation in countries like Venezuela, Argentina, Turkey, Iran and Zimbabwe. The impact means that people don’t have easy access to stable currencies or safe haven assets and so their options for wealth preservation are very limited — in many cases their life savings disappear. Imagine a mother in Venezuela trying to save money for her children’s future. She’s been carefully storing cash in a safety deposit box for years, but now due to hyperinflation the money is essentially worthless. Savings that used to be enough to pay for tuition fees are now worth less than a toilet roll.

Millions of Venezuelan bolivars are worth less than toilet paper

Cryptocurrencies can offer an appealing alternative to fiat in cases where people have limited trust in centralised institutions or a way to store wealth. Cryptocurrencies like bitcoin can be understood as the digital equivalent of the beach members coming together around fire to collectively come to consensus as to which transactions are valid and then each updating their own individual ledger at the same time. (Please note that this brushes over many technical details as to just how these ledgers are kept in sync and why someone can’t award themselves a large amount of money!)

But the general concept is that if you can solve these technical details, then each beach member need no longer rely on the golden ledger controlled by Sal. They can choose whether to trust Sal or not. They don’t need to follow Sal if they don’t want to, because now the system is completely decentralised — no one needs to trust Sal to maintain the ledger or the value of the money itself.

Bringing this back to the present, as a concrete example of loss in fiat trust, Venezuela has recently experienced hyperinflation. A Venezuelan holding 1000 USD worth of bolivars a few years ago has seen the value of this holding evaporate to basically zero. Had that person been able to swap those bolivars into bitcoin over this time — had they had a choice of who to trust — they would have preserved their purchasing power in USD terms and would be better off.

But this is only part of the story. Right now when you send money to a friend (via an app, using PayPal or otherwise) what you are really doing is sending a message telling your bank to make a change in their centralised ledger. This is limiting, as everything is constrained by the need to plug-in to the bank’s centralised ledger. By contrast, cryptocurrencies are like digital cash which can be transferred between two people directly (peer-to-peer) over the internet without the need for any permissions from PayPal. Just like physical cash in the physical world, digital cash such as Bitcoin is untethered from legacy constraints and is ‘free’.

The existence of ‘digital cash’ is transforming the way in which value is transferred over networks because it theoretically enables any amount of money to be sent to anyone (or thing) at any time, extremely cheaply. The money itself is ‘programmable’, meaning it can literally do anything a programmer is able to fathom.

To make it real, imagine a scene back on the beach. Leo is lying in his hammock, sipping out of a coconut whilst reading an article about cryptocurrencies on his smartphone. His digital wallet ‘streams’ bitcoin directly to the London based author in real-time as he reads. Leo enjoys the article so he shares it on Twitter. He’s especially incentivised to do this because the author has applied some basic code that pays Leo a small amount of crypto every-time one of Leo’s followers click on the article link. Note that this can be difficult or impossible to do with PayPal, as it would depend on the dollar amounts being sent, the number of payments, and whether both author and reader had bank accounts. This is just one application of programmable money; over time money will flow over the internet as freely as information does today.

With PayPal or other fiat currency payment mechanisms you have to: a) store your money with a bank, b) trust the bank not to fail, c ) trust the bank to let all your payments go through and not freeze your account, and d) trust the government of the bank not to inflate the currency. Moreover, PayPal is not as freely programmable as Bitcoin and other cryptocurrencies.

Millions of people, maybe even hundreds of millions of people may become attracted to cryptocurrencies like bitcoin as an alternative to trusting banks, governments, and centralised forms of money with their life savings. However, in my view the driver for billions of people to use crypto will not be due solely to a breakdown in trust. It will be because this programmable digital money will be fundamentally more useful than anything that went before it, at the beach or at the bank.

For updates on future posts follow me on twitter

Source: https://medium.com/blockchain/what-does-bitcoin-provide-over-paypal-19e48656183e?source=rss—-8ac49aa8fe03—4

Blockchain

Indian government cautious about crypto-adoption, CBDC is a possibility

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Indian traders and exchanges might be bullish about the crypto market, but the Indian  government doesn’t seem keen on rushing into the scene. At least, not until studying its homegrown fintech industry and the anti-Bitcoin protests in El Salvador.

Tracking global news

Indian finance minister Nirmala Sitharaman in a recent interview with Hindustan Times explained why the country seemed to be falling behind when it came to crypto adoption.

Though she admitted, El Salvador wasn’t “the best example,” Sitharaman said,

“You’d think common people don’t care about digital currency; but the public took to the streets against the move. It’s not a question of literacy or understanding – it’s also a question of to what extent this is a transparent currency; is it going to be a currency available for everyone?”

Sitharaman referred to CBDCs as a “legitimate” cryptocurrency and admitted there could be a “possibility,” in hat regard. She noted that India held the “strength of the technology” and acknowledged the need to formulate a Cabinet note. However, Sitharaman wondered if India was ready to follow El Salvador’s way.

Facts on the ground

Though accessibility is a pressing concern, more Indians have discovered crypto than perhaps expected.

Nischal Shetty, CEO of the Indian crypto exchange WazirX – a subsidiary of Binance Holdings – has stated that WazirX sign-ups from India’s tier-two and tier-three cities overtook those from tier-one cities this year. Even so, sign-ups from tier-one cities themselves saw a 2,375% rise. Furthermore, WazirX added one million users in April 2021 alone.

Adding to this, the cost of electricity and Internet data in India are relatively cheaper, which could boost both crypto trading and mining in the future. However, at the last count, there was only one Bitcoin ATM in the whole country.

As per data by Useful Tulips, which combined data from Paxful and LocalBitcoins, India saw transfers worth around $4,502,369 in the last two weeks.

Could anti-Bitcoin protests happen in India?

There is evidence to support both sides. India has a strong history of mass protests, with the farmers’ protests against the government’s agricultural laws being one such example. The 2016 demonetization of part of the country’s paper currency still haunts many, and Internet penetration is yet to cross 50%.

However, India also has the largest diaspora in the world, with approximately 18 million people living outside the country. Crypto innovation could lead to hundreds of millions of dollars being saved on remittance charges as money is sent across borders.

But for the time being, it seems India’s urban residents are more bullish about crypto than its government.

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Source: https://ambcrypto.com/indian-government-cautious-about-crypto-adoption-cbdc-is-a-possibility

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BTG Pactual becomes first bank in Brazil to participate directly in the crypto market

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Financial institutions have been increasingly keen on being part of the booming $2 trillion cryptocurrency market, with over 13 of the world’s largest banks pushing roughly $3 billion in funding so far, into cryptocurrency. The latest major news came from Brazil.

One of the leading Brazilian investment banks BTG Pactual has been trending within the crypto community. It launched a new platform enabling customers to make direct investments in cryptocurrencies. Ergo, making it the first major financial institution in Brazil to participate directly in the crypto market.

According to local news outlet, The Rio Times,

“…the launch of Mynt, a platform that allows BTG Pactual Digital and BTG+ clients to trade directly, cryptocurrencies such as bitcoin and ether.”

Andre Porthilo, BTG Pactual’s head of digital assets, stated,

“At this first moment, we will have the two main assets of the market, but we will include other cryptos for trading over time. We will have a complete platform with blockchain-based assets.”

One thing that remained in common with different banks incorporating these tokens is the fact that they have been responding to “demand from our customers who wish to trade crypto.” This news is no different.

Plans

BTG Pactual CEO, Roberto Sallouti laid out his plan of action with this development. He opined, “As a new asset class, we will also have content to educate and inform our customers about these assets and the technology.”

Needless to say, Brazil has witnessed an immense amount of crypto traction. That said, regulators too have taken steps to curb illicit activities. As asserted by the CEO, the said bank will be regulated by both the Brazilian Securities Commission and the local central bank. Moreover,

“With the support of BTG Pactual, Mynt has fundamental differentials in security and credibility…”

Past

The said bank had previously incorporated digital assets in previous operations as well. In 2019, it launched its real estate-backed security token ReitBZ. This step was executed post-examining digital assets for a couple of years. Just recently, the bank announced collaboration with Gemini, the U.S.-based crypto exchange. Gemini provided custody services to the first Bitcoin fund issued by a Brazilian investment bank.

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Source: https://ambcrypto.com/btgpactual-becomes-first-bank-in-brazil-to-participate-directly-in-the-crypto-market

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Basel Committee Crypto Rules Face Backlash

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The information on or accessed through this website is obtained from independent sources we believe to be accurate and reliable, but Decentral Media, Inc. makes no representation or warranty as to the timeliness, completeness, or accuracy of any information on or accessed through this website. Decentral Media, Inc. is not an investment advisor. We do not give personalized investment advice or other financial advice. The information on this website is subject to change without notice. Some or all of the information on this website may become outdated, or it may be or become incomplete or inaccurate. We may, but are not obligated to, update any outdated, incomplete, or inaccurate information.

You should never make an investment decision on an ICO, IEO, or other investment based on the information on this website, and you should never interpret or otherwise rely on any of the information on this website as investment advice. We strongly recommend that you consult a licensed investment advisor or other qualified financial professional if you are seeking investment advice on an ICO, IEO, or other investment. We do not accept compensation in any form for analyzing or reporting on any ICO, IEO, cryptocurrency, currency, tokenized sales, securities, or commodities.

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Source: https://cryptobriefing.com/basel-committee-crypto-rules-face-backlash/?utm_source=main_feed&utm_medium=rss

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