Problems that Bitcoin Solves

Key Takeaways
  • Bitcoin solves different problems that have plagued humanity for so long. These problems include:
  1. Double-spending: the ability to spend the same currency twice. 
  2. Byzantine Generals Problem: "How can a distributed network of different parties agree on a single truth?"
  3. Inflation: the rate of decrease in a money's purchasing value.
  4. Financial Exclusion: inaccessibility to banking and financial services. 
  5. Transparency: the Bitcoin network is completely transparent and open to all.
  6. Inefficient Energy Usage: Wasted energy is put to use through bitcoin mining.

Aside from being a reliable form of money, Bitcoin also helps solve several problems that affect you, me, and everyone else in the world. Some of these problems include trust systems, authorization, and transparency. 

Let's take a quick look at what these problems are.

Double-spending

Double-spending refers to the ability to spend the same currency twice. 

This is a common problem that digital currencies often face because conventionally, digital money can easily be multiplied, which gives the holder an “unlimited supply” of that aforementioned currency. 

Imagine just copy-pasting your digital money and spending it anywhere you wanted. 

This is less of a problem with money based on centralized systems such as Grab points since it's up to the company to make sure double-spending doesn't happen.

Bitcoin solves the double-spending problem through its consensus mechanism called Proof-of-work (PoW). You can review our topic on PoW in previous chapters.

When a user attempts to send Bitcoin to someone, that transaction will be added to the blockchain in the form of a block. Once confirmed onto the blockchain, the transactions in the block are time-stamped and irreversible.

The blockchain provides a way for all nodes to be aware of every transaction. Every piece of data in its history has been agreed upon by the Bitcoin network. Since miners all have access to the blockchain's data, it serves as a benchmark to determine which transactions are valid and which are double-spends. All double-spends are automatically rejected.

But what happens if bitcoin is sent to two parties at the exact same time? Both transactions will still undergo the mining process as usual. This is where block confirmations come in.

Remember: The blockchain is formed by blocks, which are clusters of approved transactions, on top of previous blocks. A block confirmation refers to the state of having another block on top of a confirmed block.

For example, let's imagine that Pedro buys both a phone and a computer with the same exact Bitcoin. Let's call these transaction #1 and transaction #2, respectively. 

As usual, both transactions undergo the mining process, sending both transactions to the mempool. In the improbable chance that two blocks are simultaneously mined and both contain Pedro's transactions, two branches of the blockchain would be created. One with transaction #1 and the other with transaction #2.

In this scenario, miners would have to choose which chain to next mine on. The first one to have another block built on top of it—called a block confirmation—would be the official one, while the other will be rejected.

This is why it is recommended that merchants require two to six block confirmations before the transaction is settled, just to be sure.

Bitcoin was the first decentralized digital currency to solve this long-standing problem of double-spending. By virtue of Bitcoin, thousands of other cryptocurrencies have ushered in today.

The Byzantine Generals Problem

The Byzantine Generals Problem is basically the question: "How can a distributed network of different parties agree on a single truth?" 

This problem plagued money for millennia until the invention of Bitcoin, so let's explore it further.

The Byzantine Generals Problem does not apply to centralized currencies like fiat money or company reward points since a central party maintains everything.

Imagine four armies are trying to attack a kingdom in the middle. Each army has its own general. Let's call them General A, B, C, and D. The thing is, the kingdom can only be conquered if the four armies attack simultaneously.

Given that, the generals must agree with each other on what time they will attack the kingdom.

However, there are no cellphones or radios available. They can only communicate through a courier.

Now, this is where the problems enter:

Problems

  • What if the courier dies while delivering the message?
  • What if general B wants to sabotage the attack? He can kill General A's courier and send his own courier to General C with a different message.
  • What if the courier does not deliver the message in time before the invasion?


With the generals' communication relying solely on the courier, their invasion is vulnerable to numerous risks. These risks can make everything go wrong in a snap of a finger.

So, think about it… How can the four generals communicate and agree on a single truth without a courier?

In the context of decentralized money, how can society agree on a form of money and its state? 

This is one of the problems Satoshi Nakamoto solved with Bitcoin. Bitcoin is the first decentralized cryptocurrency where participants can objectively agree on information without a central party or intermediary.

How? Through Proof-of-Work (PoW).

In a Proof-of-Work system, there are clear cryptographic and objective rules everyone needs to follow to participate. Since the rules are objective, there can be no disagreements on the state of the network.

These rules serve as a benchmark for the Bitcoin network to approve valid transactions and reject invalid ones on the blockchain in real-time. Once transactions have been approved, it’s extremely difficult to reverse them, making the blockchain immutable.

Since all the miners have a copy of the entire blockchain, miners immediately recognize and reject any attempted fraudulent activity in the network. All information can be verified using the blockchain, which makes Bitcoin a trustless network.

Bitcoin's blockchain is a real-time manifestation of the network's agreement on every bit of information happening in the network, without the need for a central party.

Inflation/Debasement

Inflation is everywhere — in common goods like meat, bread, gas, electricity. They increase in price every year. One year, a liter of gas costs forty pesos. Next thing you know, it's sixty pesos. 

There can be many reasons for inflation, but one of the root causes is the increase in money supply by the government. When the supply of anything increases, its value decreases, and money is no exception to this. 

As the value decreases, people need to pay more money for the same goods and services as before.

In the United States, a cup of coffee costs around $0.25 back in the ’70s. Today, a cup of coffee costs no less than $1.70.

On the one hand, Bitcoin is an excellent way to prevent increasing money supply. Unlike traditional currencies with virtually unlimited supply, there will only be twenty-one million bitcoin. No one party can create more. You can review our chapter on Bitcoin's supply here. 

If goods and services are priced in bitcoin, inflation is less likely to happen due to the controlled money supply of bitcoin.

Note: Inflation may still happen since inflation is caused by many economic factors, not just money supply.

On the other hand, Bitcoin can be seen as a ticket out of this inflationary economy we live in. Extreme inflation—called hyperinflation—has already occurred in many countries such as Venezuela, which faced an inflation rate of 65,374% back in 2018. Other countries such as Zimbabwe, Sudan, Lebanon, Argentina, and Yemen face similar inflationary scenarios.

In the Philippines, the average inflation rate over the past 25 years is 5.8%, meaning your money has devalued at an average rate of 5.8% every year. The Philippines saw its highest inflation rate back in 1984, reaching a whopping 50.34%.

Bitcoin's supply is also the reason why Bitcoin is often referred to as digital gold. Other people perceive Bitcoin to be a “safe haven” against inflation, similar to gold.

Converting your fiat currencies into bitcoin assures the holder that their money would never be debased.

Financial Exclusion

Hundreds of millions of people around the world lack access to banking and financial services. This is caused by several reasons such as poor banking infrastructures, regulatory issues, lack of documents, or simply discriminatory reasons. 

Financial exclusion is expensive. It impacts the quality of life, deprives people of the chance to invest for their future, and deprives them of financial safeguards.

According to a report by The World Bank back in 2017, 1.7 billion adults remain unbanked. This means that 1.7 billion people lack access to any proper form of financial services such as savings accounts, insurances, mortgages, or loans.

The Philippines is one of the countries with the highest percentage of unbanked people. According to the Bangko Sentral ng Pilipinas (BSP), 71% of the adult Filipino population remain unbanked.

Unlike traditional financial services, a person only needs a mobile phone and Internet connection to access the Bitcoin network. With a few taps, anyone—regardless of age, ethnicity, sex, or status—can get a Bitcoin wallet and start handling their finances and be their own bank. 

That same phone can also be used to avail of other financial products such as loans and high yield interest accounts.

Borderless payments are also made more accessible, cheaper, and quicker than traditional services.

For example, an OFW located in Canada could send money back to their loved ones in the Philippines for just a minimal fee in a few taps. This is a complete shift from traditional services requiring a 10-20% fee and half-a-week processing time per overseas transaction.

Remittances are one of the main reasons why El Salvador recently adopted bitcoin as legal tender. As of writing, remittances to and from the country make up a fifth of the country's GDP.
Bitcoin has given El Salvadorians the option for a cheaper and more efficient way of sending money.

With Bitcoin, financial inclusivity and accessibility are advanced in ways traditional banking couldn't achieve in the past.

Transparency

Unlike banks today, the Bitcoin network is completely transparent and open to all. Every transaction between any person is accounted for no matter when or where you conduct a Bitcoin transaction.

Although no human names are tied to the addresses, all the other important information such as transactions, balances, senders, and receivers can be viewed and tracked.

Transactions can be checked in real-time on websites like www.blockchain.com/explorer.

It is way more complicated for fraudulent and malicious transactions to occur with the blockchain since everything happens in the open — nothing happens behind closed doors. This is different from traditional fiat money since not every peso or dollar, for example, is tracked. A bad actor can easily launder, steal, or corrupt with the right connections and resources.

One unfortunate example is the Red Cross Haiti Relief scandal back in 2010. Red Cross set up a fundraiser to help the earthquake-struck Haiti rebuild its roads, schools, and homes. The fundraiser was a huge success, raising almost half a billion dollars. However, many doubt that the money was used properly due to all the upsetting accounts, doubtful figures, and questionable documents that surfaced.

There have been countless financial crimes like this in the past decades done by different organizations, institutions, and governments worldwide. Bitcoin's inherent transparency helps solve this.

Inefficient Energy Usage

Despite numerous initiatives to help fight against climate change, "dirty energy" is still rampant in most industries and economies. As a result, the need for renewable energy production has never been greater, and Bitcoin plays a significant role in promoting this movement.

Being a miner in the Bitcoin network is like running a business. As a Bitcoin miner, you have your costs (hardware and electricity) and your profits (bitcoin rewards per block mined). 

Now, for miners to stay profitable, they always look for the cheapest energy source possible. The great thing about Bitcoin mining is that it is location and energy-agnostic. Any miner can operate anywhere in the world and on any type of energy source. It doesn’t require emissions. 

This means that miners are free to canvas worldwide for the cheapest energy sources they can find.

With this, Bitcoin miners turn to renewable energy such as hydropower, geothermal power, solar power, and even “wasted energy” that is meant to be thrown into the atmosphere. 

Crusoe Energy

One example is Crusoe Energy, a mining company based in Montana that converts wasted energy into energy used for Bitcoin mining. When drillers hit drill for oil, they often hit patches of natural gas too.

The problem is the drillers often lack the infrastructure to sell and transfer the natural gas they struck. With that, they have no other choice but to burn all those in a process called flaring, which is harmful to our atmosphere.

This is where Crusoe Energy comes in. Crusoe Energy takes that supposedly wasted natural gas and instead uses it to power the computers they use to mine bitcoin. This conversion effectively reduces the CO2 emissions by up to 63% — the equivalent of taking 1,700 cars off the road.

(Source: https://markets.businessinsider.com/news/currencies/bitcoin-mining-flare-gas-btc-energy-crusoe-energy-coinbase-winklevoss-2021-6)

El Salvador

Another example is how the El Salvador government uses their volcanoes' untapped geothermal energy for powering their bitcoin mining. The energy used is 100% clean and renewable. Because of their volcano-powered bitcoin mining, an untapped clean energy source has been put to work. 

In Brandon Arvanaghi's words, "Bitcoin is the greatest accelerant to renewable energy development in history."

(Source: https://apnews.com/article/cryptocurrency-technology-business-bitcoin-central-america-e0074a2343a3e3a9beb08723ff65ecf5)

In one way or another, bitcoin miners worldwide emulate the same set-up as the El Salvadoran government. This is why currently, the bitcoin mining industry has the highest sustainable energy mix at 67.7% compared to other countries like the European Union, the United States, and South Korea.

Another common misconception is that the Proof-of-Work system of Bitcoin consumes a lot of energy when compared to the energy consumption of other countries. 
The fact of the matter is that as of 2021, Bitcoin mining consumes only 189 TWh per year, which is only 0.1% of the world's energy at 162,194 TWh. It is also minuscule when compared to other countries like China, the United States, or India.

At first glance, Bitcoin doesn't seem to be something that would help with environmental issues. But once you take a closer look, you’ll see how Bitcoin helps with energy consumption and renewable energy acceleration worldwide.

Bitcoin is more than just an orange digital coin that people trade. It helps solve several financial and social problems present in our world today, and we've only scratched the surface.

As adoption grows, Bitcoin will help more and more people across the globe. You couldn't say the same about banks or gold. 

In the next chapter, we'll be looking at the pop culture that has formed over the past few years with Bitcoin.

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