Here is the third and last part of my paper on Bitcoin. Click here for parts one and two. If you have any thoughts/suggestions, comment them below.
Bitcoin: The Decentralized Solution to Traditional Currencies
Along with producing huge amounts of physical waste, traditional paper currency also wastes the resources of businesses. As a physical product, paper money is a major contributor to physical waste. In 2010, the United States destroyed a whopping total of 5.95 billion currency notes. Unlike digital bitcoins, the life of any US note is no more than 15 years, which requires many new resources to replace (Indiviglio, 2011, para. 16). Traditional currencies also waste the resources of businesses by having large transaction costs. These transaction costs arise because there are middlemen to pay when using traditional currencies (Turpin, 2014, p. 336). However, Bitcoin runs using a decentralized network of computer nodes that has no middleman, allowing online businesses to more easily provide their products and services (Tsukerman, 2015). Microtransactions (monetary transactions of a very small size) are impractical using traditional currencies since in most cases the high transaction costs are actually higher than the cost of the good itself. Bitcoin’s low transaction costs enable microtransactions to be practical. Bitcoin’s practicality facilitates businesses and governments by reducing physical and transactional wastes.
Although the volatility of Bitcoin deters many people, there are steps governments can take to combat volatility. On January 1, 2014, the price of one bitcoin was about $3,800. As of January 1, 2021, the price of one bitcoin rose by over 770% to a value of $29,400 (Coindesk, n.d). The lack of enough users and low support from retailers are primary reasons for the instability of bitcoin (Turpin, 2014). To grow the user base and attract retailers, confidence in the currency is essential. Despite government acts that regulate Bitcoin and further improve its security (like the BSA), many governments have outright opposed Bitcoin in the past. China banned cryptocurrency-based exchanges in 2017 and scrutinized other cryptocurrency-related businesses (Qi, 2021). Canada, on the other hand, authorized the creation of the first Bitcoin exchange-traded fund (ETF) in February of 2021 (Graffeo, 2021). A Bitcoin ETF will allow people to efficiently and indirectly invest in Bitcoin in a regulated market, which will also increase confidence in Bitcoin as well as participation in the cryptocurrency (Graffeo, 2021). Increased participation in the currency not only decreases volatility, but also attracts more retailers, increasing the liquidity and usability of bitcoins, which in turn reduces the need for currency exchanges to transact bitcoins for traditional currencies. If Bitcoin is widely accepted, currency exchanges will become obsolete and ultimately reduce crime rates since currency exchanges are where the majority of illegal activities occur, like in the case of the Mt Gox bankruptcy (Böhme et al., 2015, pp. 226–228). As Bitcoin becomes a more popular currency, the problems it experiences today become less severe.
Another concerning problem with Bitcoin is its high level of resource consumption, which can be remedied by the use of a proof-of-stake mechanism. In 2018, the entire Bitcoin network used around 42 TWh of electricity, which is comparable to the electricity usage in New Zealand (Hern, 2018). High levels of electricity usage also create carbon emissions and electronic waste. However, it is important to note that traditional, centralized currencies also have their inefficiencies, in the form of physical infrastructure and notes. But what is even more important to note is that the high level of resource consumption of the Bitcoin network is a result of the proof-of-work mechanism, not the decentralized nature of the currency (Nguyen et al., 2019, p. 85729). In a proof-of-stake mechanism, miners no longer compete to create a specific hash through brute force; instead, the network selects a random user who has stake in the currency to verify a transaction and collect the reward for doing so. If the selected validator does not properly verify a transaction, his stake, or monetary deposit, in the currency is taken away. The probability of a user becoming a validator for a specific transaction scales linearly with the user’s stake in the currency, instead of exponentially with the user’s computational power, which lowers electricity consumption, increases transaction speeds, and provides disadvantaged users an increased chance of collecting validator rewards (Nguyen et al., 2019, p. 85730). A simple change in Bitcoin’s consensus mechanism from proof-of-work to proof-of-stake can drastically increase the efficiency of Bitcoin, making the currency even more competitive with traditional currencies.
Bitcoin’s success comes as a result of eliminating traditional forms of trust. Bitcoin relies on the entire network of users, not on a central authority. Bitcoin is borderless, apolitical, and can reach the world’s unbanked population. Bitcoin clearly addresses the wastes and inefficiencies of traditional, centralized currencies and has the potential to grow even more successful. However, the cryptocurrency is still in its early stages, which means Bitcoin needs some attention from businesses and governments to increase confidence and participation, potentially in the form of international policies similar to the Bank Secrecy Act in the United States. Although the current implementation of a consensus mechanism requires improvement and regulation of the currency needs more international backing, a growingly digital and interconnected world calls on a digital and interconnected currency, a call which Bitcoin can answer.
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