Blockchain aims to solve many problems today but the first problem outlined in the Bitcoin whitepaper in 2008 was the lack of a trustless electronic payment system between two peers. The whitepaper addresses the current system that relies heavily on trusted third parties. The observation is that mediation drives the cost of transactions up and that small, casual transactions don’t make economic sense.
Trusted systems are still very popular today and they serve their purpose relatively well. Think online credit card payments. The whitepaper’s main issue with the trust based model is that casual low value transactions are impractical due to the high cost of mediation.
Digital cash before Bitcoin
Digital transactions are a key component of the internet. Packages of data are exchanged and displayed as information to the end user. On Web 1.0, users were mostly just receiving information, but this changed dramatically when users became co-creators on Web 2.0. These transactions were always limited to information.
Unfortunately, even though the internet was conceived with a built in payment system in mind, it was never developed. The infamous 402 Payment Required error is still “Reserved for future use”.
Bitcoin isn’t the first attempt at digitalizing cash but so far it has been the most successful. Before Bitcoin, there were attempts like DigiCash, Flooz.com, Beenz, B-money and Bit Gold, of which some of B-money’s elements are even referenced in the Bitcoin whitepaper. Bitcoin is open source which sets it apart from its predecessors and is probably an important aspect of its success.
Investopedia also counts PayPal as one of the predecessors of Bitcoin.
Transfer of value
Bitcoin and others before it were trying to address the lack of a simple, secure, and cheap way of transferring money between willing participants on the web. Since Bitcoin, there have been many attempts to do so and the industry has spread to cover a more broad array of problems.
For example, we now have solutions that cover advanced financial instruments (DeFi), arrays of web monetization solutions (see Coil for example), interoperability chains and solutions (like Flare), IoT solutions, and many, many more.
Since its inception in 2008 and the first blocks in 2009, Bitcoin has pivoted from simple peer to peer cash to a store of value currency. This provokes the question of whether a simple p2p solution has been created yet.
We have many cryptocurrencies that can be used for this but their main use case is different (BTC, ETH, XRP, BCH…). We have web monetization solutions like Coil or Basic Attention Token (BAT and Brave browser). And lastly, we have Apps that build upon these systems to allow users to transfer money easily. It is hard to find a solution that is truly secure, trustless, decentralized, easy to use, and cheap.
We have unprecedented variety and uncountable options, but the average user must still rely on software by a trusted third party to start transferring value. Next to mining or perhaps gifting, there is also no other way to enter the market in a trustless way. Most often new users need to buy in via a trusted party like an exchange.
It seems that peer to peer payments are not the main focus of the industry. This might actually be due to a multitude of apps and wallets that make peer to peer transactions so very easy. These systems still rely on trust.
New projects are increasingly tackling new and complex problems. For example, DeFi is a whole subgroup of projects within the space that is trying to tackle the problem of financial inclusion.
All this just goes to show how an idea that works can spawn so many new ideas and in turn create a thriving industry that looks like the future of finance and much more. The initial problem was apparently not so pressing at all, but new problems have been discovered that demand more attention.
In our next blog, we examine the Bitcoin whitepaper some more and point out two challenges. One - the double spend problem - is the first obstacle for any digital value transfer system. The other - fixed supply - has turned out to be a major philosophical and practical friction point between traditional and digital money.