The financial world changed when in 2008, Satoshi Nakamoto published his white paper on Bitcoin and delivered the first Bitcoin client via SourceForge in 2009. A major factor in Bitcoin’s success is its ability to solve the double-spending problem. Prior to Bitcoin, attempts at creating digital currencies, such as Bit Gold, had failed due to the inability to stop double-spending.
What is double-spending and why is it important to the future of digital currency? Double-spending is when you use the same money to make a purchase twice. Cash is a good example to understand the concept. In the example of cash, if you pay for something with a $10 bill the cashier puts it in the till and unless you steal it back, you cannot use it for another purchase – double-spending is prevented.
The digital currency uses software that supports the currency to receive and confirm transactions. However, this transaction takes time and gives a window for someone to copy the transaction and double-spend. Digital currency is different from digital money which is controlled and monitored by financial institutions and banks. We can go into the many flaws of this system, but one of the sticking points for many in the industry is that when banks are the mediators in financial disputes, transactions can be reversed. Who pays for all of this? While it might seem like the banks, it’s actually the end consumer and commerce that have to deal with higher fees and slower transaction times.
Bitcoin uses cryptographic proof creating a banking system without banks. It’s a chain of digital signatures that moves from one owner to the next owner through digital wallets that have a public key and a private key. Meaning an address and a secure password that only the owner knows. When Bitcoin is transferred from one owner to the next, there is a hash that is transferred and added to the end of the bitcoin. So, every Bitcoin has a record containing the information of previous owners. It is important to note that each time Bitcoin is transferred, a new hash is added, and the chain and the ownership can be verified.
It is true that a payee cannot verify that double-spending didn’t take place on that coin with a previous owner. But having a central bank or financial institution monitor double-spending is not the purpose of bitcoin. The solution lies in the blockchain, which is a universal ledger and can provide a way for nodes, or computers that run the software on which the currency is supported, to check transactions.
Bitcoin publicly checks all nodes and then finds the agreement to a single coin history and its order. The solution for double-spending is that when the nodes agree on the first transaction to be received, later attempts to double-spend are moot issues. Every Bitcoin has a timestamp which reinforces the previous transaction and cannot be duplicated. Therefore, the problem of double-spending is solved.
How is this possible? Bitcoin’s blockchain has maintained a record of every transaction since day one. Records cannot be changed because the information is stored in the previous block because they are mathematically related to the previous ones and are irreversible and impossible to tamper with. The record is called blockchain because a new group of transactions or “block” is added every ten minutes.
So, what does this mean for the future and what happens when all of the Bitcoin has been mined? According to Ben Gelfand, CEO, of Bluesky Digital Assets, “No one really knows when it will happen, but once Bitcoin has been completely mined the miners of it may move on to other currencies such as Ethereum, Litecoin, Bitcoin Cash, Ripple, or find other ways to be paid on Bitcoin. The challenge is always matching the level of security that Bitcoin networks have achieved.”
As of January 2021, there are 5,000 cryptocurrencies and tokens available. That’s a big number but take into consideration that under 1,000 are actively traded on exchanges and even fewer have been deemed to be viable economic prospects. That’s why on many levels, investors like cryptocurrency, but on the other hand it is considered to be volatile and risky. Each currency offers a different advantage to Bitcoin from speed to a larger supply of coins.
What we do know for right now is that PayPal has opened the opportunity to easily invest in Bitcoin to over 300 million of its users around the world on a platform that is easy to use and trusted. On the investment side, many think that the fiscal stimulus will debase fiat currencies, leading the way for cryptocurrencies like Bitcoin to be an attractive hedge against inflation. Proof of this is almost weekly announcements by major institutions and local governments that are backing Bitcoin.
What keeps things exciting is that truly no one really knows what is next. If for some reason central banks tighten monetary policy or governments focus on reducing deficits, Bitcoin and cryptocurrency become less of a hedge against inflation. But perhaps by that time it will be even more well accepted. What we do know for now is that the double-spending dilemma is an issue of the past and what lies ahead is the future of digital currency.