10.8: Blockchain and Bitcoin
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Blockchain is a peer-to-peer network which provides an open, distributed record of transactions between two parties. A peer-to-peer (P2P) network is one where there is no server between the two nodes trying to communicate. Essentially, this means that each node acts as a server and a client.
Supporters see blockchain as a tool to simplify all types of transactions: payments, contracts, etc. Motivation comes from the desire to remove the middleman (lawyer, banker, broker) from transactions, making them more efficient and readily available across the internet. Blockchain is already being used to track products through supply chains. Blockchain is considered a foundational technology, potentially creating new foundations in economics and social systems. There are numerous concerns about Blockchain and its adoption. Consider the following:
- Speed of adoption. Initially there is a great deal of enthusiasm by a small group. However, adoption on a larger scale can take a great number of years even decades for a worldwide acceptance of a new method of doing business.
- Governance. The banking sector, both in individual countries (Bank of Canada and U. S. Federal Reserve System) and the world at large (the International Monetary Fund-IMF), controls financial transactions. One purpose of these organizations is an attempt to avoid banking and financial systems collapse. Blockchain will result in the governance of financial transactions shifting away from these government-controlled institutions.
- Smart contracts. The smart contract will re-shape how businesses interact. It is possible for blockchain to automatically send payment to a vendor the instant the product is delivered to the customer. Such “self-executing” contracts are already taking place in banking and venture capital funding. [1]
Many are forecasting some universal form of payment or value transfer for business transactions. Blockchain and Bitcoin are being used to transform banking in various locations around the world.
Bitcoin
Bitcoin is a form of digital currency sometimes referred to as a cryptocurrency which is a new form of money that is tradable throughout the world. It operates without the involvement of central banks or a clearinghouse and runs as a P2P network. Bitcoins can be transferred between individuals or between businesses to pay for goods and services, all without the use of a bank, so the fees for that exchange are lower. Bitcoins do have value and, as such, are subject to taxation just as with cash in your local currency. Records for transactions are recorded in the blockchain.
Advantages of Using Bitcoin
Some of the advantages of using Bitcoin over another online payment network, such as PayPal, or even your bank, are:
- It can be used in any country without the need for currency conversion;
- Sending money to a business or individual costs less per transaction;
- There are no limits to the number of transactions you can initiate each month;
- Your account cannot be frozen or suspended;
- Transactions are irreversible, unlike PayPal payments; and
- You can keep Bitcoins in a digital wallet that is accessible from your phone, tablet, or computer.
Several of these advantages exist because there is no central governing authority, as there is with a bank. Of course, that may also be a disadvantage. Bitcoin is still considered “experimental,” even by the organization itself, so be aware that there are also risks involved in accepting Bitcoins in place of cash. Bitcoin began trading in 2009.
Another potential advantage is that the fee to transfer Bitcoins from one person or business to another is unrelated to the amount being transferred. Unlike other payment networks that charge a percentage of the transaction value, Bitcoin charges based on the ability to reverse the transaction – the easier to cancel, the lower the fee.
That is, a Bitcoin transaction takes an average of 10 minutes to be resolved – 90 minutes at the most. During that process, there are confirmations that occur that the transfer of Bitcoins is occurring. The fewer the number of confirmations requested – you can request zero – the lower the fee to send coins; there is never a fee to receive Bitcoins. But you can also request as many as 36 confirmations to be absolutely sure that once the Bitcoins are in your account, they cannot leave without your permission.
This can be especially useful when selling expensive goods. On some payment networks, a buyer can claim to have an issue with an order and almost immediately receive a refund, even without your input. This would not happen with Bitcoins – once the payment is in your account, it is yours to keep.
Tanzania Bitcoin Project
A major bitcoin project is underway in Tanzania. Business transactions in this East African country are fraught with many challenges such as counterfeit currency and a 28% transaction fee on individuals who do not have a bank account. Seventy percent of the country’s population fall into this category. Benjamin Fernandes, a Tanzanian and 2017 graduate of Stanford Graduate School of Business, is co-founder of NALA, a Tanzanian firm working to bring cryptocurrency to a country where 96% of the population have access to mobile devices. NALA’s goal is to provide low cost transactions to all of the country’s citizens through cryptocurrency.[2] You can read more of this cryptocurrency venture in this article in TechCrunch.
- Iansiti, M. and Lakhani, K. R. (2017, January). The truth about blockchain. Harvard Business Review. Retrieved from https://hbr.org/2017/01/the-truth-about-blockchain ↵
- Fernandes, B. (2017, October 20). Personal telephone interview