Bitcoin is no longer a new concept. There is also a lot of information and articles on the Internet: about its principles, how to use it, what are the benefits and problems, etc. And among my friends, it seems that many people don’t know much about it, but they know it well. Very interested in it. So here I try to explain what it is based on my own understanding.
The best way to understand something new is to compare it with something you are particularly familiar with. Bitcoin emerges as a new virtual currency, and many of its features are easier to understand than existing payment methods. Let me mention here that the implementation technology and principles of Bitcoin are mainly P2P network node technology, cryptography and the super computing power of modern computers. If you want to know the technical details, it is recommended to refer to more official documents.
What is Bitcoin trading?
The most familiar payment methods are probably cash, bank cards and e-wallets. Cash is relatively simple. After being issued by the national banking system or government departments, it serves as a symbol and represents a certain value. At the same time as "payment" is made, a transaction is completed. Most of the time, an e-wallet is actually associated with one or more bank cards, and its essential transaction process is similar to that of a bank card. As for the use of bank cards, although there are differences according to different types of cards, in general it is a relatively unified model. First, the parties involved in the transaction are the customer, the customer’s issuing bank, the merchant, and the merchant’s acquiring bank. When a customer purchases something from a merchant, regardless of the overall processing, the issuing bank records the debit (debit) of the transaction, and the acquiring bank records the revenue (debit) of the transaction. As long as there are these two accounts, even if the issuing and acquiring accounts are from different institutions or even different countries, later settlement (possibly in real time) can accurately transfer funds between different users' accounts based on these two accounts. This is the so-called accounting method, also called -accounting method (double-entry accounting method).
Bitcoin's accounting method is based on - but not exactly the same. Each transaction will also have a debit (one party’s income and another’s expense), plus additional cryptographic signatures and verifications (also called verifications or receipts) to ensure the signature was initiated by a legitimate Bitcoin account. Therefore, Bitcoin’s accounting method is also called the three-party (-ledge) accounting method.
In addition, there are two differences between Bitcoin transactions and traditional bank card transactions:
(1) Traditional (bank card) transactions must involve a bank
If the two accounts structuring the transaction are from different banks, multiple banks are involved. All the above "bookkeeping", that is, which account deducts money and which account receives money, are initiated by the bank and processed by the bank's relevant processors. Identity verification etc. are also taken care of by the bank. Only the bank can see these "accounts".
All Bitcoin transactions are initiated by users themselves. Processed on P2P networks. The key identity verification, that is, whether the user has the right to use the Bitcoin in an account, is completed by Bitcoin's own encryption system and algorithm. This processing requires extremely high computing power. Therefore, machine nodes in the Bitcoin network that verify these transactions will be "rewarded" accordingly. It's like a traditional bank processing transactions and collecting fees. All "accounts" are on the Internet and are not private.
(2) The traditional banking system is centralized management and control.
This is a centralized way of interaction. That is, customers and merchants must complete transactions through the banking network. Bitcoin adopts distributed interaction and distributed management. The currency used is also a virtual currency that does not belong to any country or bank.
The reason why it is a virtual currency is that all transactions, how many Bitcoins each person should hold, what his/her balance is after all transactions are completed, etc., are completed through double-column accounting in the P2P network. Decisions, rather than being represented by paper money as a symbol like cash.
Bitcoin common sense
Now that you know how Bitcoin completes and records transactions, let’s take a look at some common sense about it:
Bitcoin was proposed by Satoshi Nakamoto in 2008 and launched as open source software in 2009. The main applicable technologies are P2P and cryptography. In fact, many concepts of virtual currencies have been proposed before, but none of them were very successful. Bitcoin is by far the largest virtual currency by market capitalization. There are two main ways to obtain Bitcoin: one is to exchange or buy it in the market. The second is to provide high-performance computing resources and win handling fees by verifying and recording some (to be verified) transactions submitted by others on the network on the P2P network. It is also possible to obtain extremely small amounts of newly minted Bitcoins. There are very few merchants around the world that accept Bitcoin, only about 100,000 two years ago. The benefit for merchants is that fees for Bitcoin transactions are often lower than credit card fees. In the absence of unified legislation and regulatory bodies, some returns, refunds and actions are not protected and are therefore also a risk for customers. (Note: This is a term in credit cards that means a customer can state that a transaction was not initiated by him/her. Depending on national law, in this case the merchant or bank is often responsible for refunding the full amount to the customer, which is a mechanism to protect customers, but also increases the risk for merchants and banks in payment processing.) As mentioned above, in a blockchain network, you can participate in the verification and recording of transactions in the network by: “Mining "mine" (using its own high-performance computing resources)) to earn profits. But as the computing resources provided by participants become more and more powerful, profitability will become increasingly difficult. From a user perspective, if you submit a transaction and want others to verify it, you can choose how much commission you want to offer (or even 0 commission). However, the level of the handling fee will affect the priority of the transaction you submit, so processing delays will also be affected. (Transactions with high fees are usually prioritized).
It can be seen that in the entire Bitcoin mechanism, there is no unified supervision, but openness, transparency, and computing power competition. This is also more in line with the characteristics of the Internet era.
Who will use Bitcoin?
We first need to understand the issuance of Bitcoin. The issuance of Bitcoin is related to the rate at which data blocks are generated in the blockchain algorithm. The expected data block generation rate is 1 every 10 minutes, but the number of newly issued Bitcoins in each data block cannot exceed 50, and this number is halved every 4 years, so the total number of Bitcoins by 2140 will not be will exceed 21 million. The guarantee of circulation determines that this "currency" will not inflate, which means that it can theoretically maintain its price like gold and diamonds.
Therefore, the first people willing to use or store Bitcoin are countries with extremely unstable currency exchange rates.
Having said this, I thought of an interesting thing. At the end of 2016, the price of Bitcoin rose from more than 400 US dollars a year ago to more than 900 US dollars, close to historical highs. Generally speaking, when the U.S. dollar rises, Bitcoin falls. But this time it was unusual. The reason is said to be that someone in the "Chinese Dynasty" is exchanging large amounts of Bitcoin to bypass current foreign exchange controls. On the first day of the New Year in 2017, the Bitcoin exchange rate exceeded the $1,000 mark. It's just one step away from its all-time high three years ago. According to statistics, 90% of transactions are in RMB and Bitcoin. It seems that the otaku product of blockchain is finally going to have a political impact.
However, because Bitcoin is convenient, valuable, and easy to store. In addition, transactions are not controlled by governments and state institutions in the traditional sense and can easily be exploited. There are two most common ones: one is money laundering and the other is illegal transactions. Because of this, many countries, such as China, do not recognize the legality of Bitcoin transactions.
In fact, that year (2014), several people in our group gained support for Bitcoin. But aside from the problem that users rarely use it, one problem is that since the exchange rate of Bitcoin can float at any time like stocks, the issue of "returns and refunds" for buying and selling goods becomes extremely complicated. Imagine that a user purchases something for 0.01 Bitcoin. He wanted to return it a month later, by which time the price of Bitcoin had changed significantly. Are you returning the money in US dollars? Or Bitcoin? Either way, merchants must bear a certain risk of exchange rate losses. Additionally, the aforementioned returns and refunds are not protected. In addition, at that time, the public was still on the fence about this new payment method. Due to various reasons, the project ultimately came to nothing.
Will Bitcoin become popular?
Bitcoin is a product of the Internet. It has its own magic power, attracting more and more people to know and use it. It also makes international transactions and internet payments easier and faster. But as a regular person, I don't think Bitcoin will be widely used in the near future.
The reason can be seen from two aspects:
The first is the Bitcoin system itself. Bitcoin is a new creature in the Internet era. Although its algorithm and theory have matured, there are still many problems in practical operation. For example, the management of user wallets (or passwords). Compared with the already mature banking system, trading platforms and websites still have security holes. Just like there are people robbing banks, there are also hackers trying to attack trading websites. For example, in September 2012, the trading center was hacked and 24,000 Bitcoins (equivalent to approximately $250,000) were stolen. On May 24, 2013, the server where the website was created was hacked and about 40 Bitcoins were stolen. And in many cases, customers will not be compensated. Some websites are even scams themselves. For example, in May 2015, the Bitcoin trading website founded by Hong Kong Peng Weihua used pyramid schemes to conduct transactions. In the end, the Bitcoin turnover failed and he absconded with the money.
More importantly, this is the natural law of payment systems. It can be seen from the payment changes from currency to checks to various bank cards to mobile payments that every large-scale new payment form must meet the following conditions:
It is more convenient and solves the pain points of usage scenarios. All things related to money must be guaranteed to be almost 100% accurate and safe. It's usually easier if only the customer and merchant need to change. And it's often more difficult to create egg and chicken variations simultaneously. All new things require "user education". No matter how perfect your technology and products are, it will take time to be accepted.
Of course, the above is just a personal opinion and may not be mature yet.
Although Bitcoin can be used to store and maintain value, without strong purchasing power, it can still only be used for collections like gold and diamond stocks. Today, there are actually very few merchants in the United States that accept Bitcoin. This is very similar to the difficulty of promoting electronic wallets such as Apple Pay.
Author: Zhu Yun, engineer, doing payment
标签： #Bits #Trading #Currency #Banking #Accounting
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