Bitcoin: A Solution or a Bigger Problem?
Bitcoin was the first cryptocurrency that decentralized digital payments and solved a double-spending problem. The cryptocurrency now costs almost $30,000 and had touched an all-time high of almost $70,000. Let us take a closer look and find out if it is a solution to a problem or has it created more problems.
What are Bitcoin and Cryptocurrency in general?
Cryptocurrencies are digital pieces of code that are exchanged like fiat currency. The system is entirely decentralized and legitimacy is gained through validation by a majority of members that are designated as nodes or validators. Bitcoin was not actually the first cryptocurrency. The first cryptocurrency was Rather, it is the first successful one to solve the double-spending problem.
A fiat currency can be spent only once. You can buy chocolate with a dollar note only once. The same note cannot be spent twice.
The double-spending problem to be explained in simple terms is how could we use a piece of code only once like a fiat currency and how could we validate a transaction to make sure the same currency is not being spent twice. This issue was called the Byzantine General’s Problem.
What Bitcoin solved?
Bitcoin dealt with many issues with past digital currencies like e-gold. Below is a list of a few problems that were solved by the arrival of Bitcoin:
- double-spending making it equivalent to fiat in many respects
- validating a digital transaction decentrally without relying on any central authority
- a global currency that could be transferred faster in a cheaper way
- storage of value without constraints unlike other forex reserved that have limits on a per capita basis
The Solution to Double Spending Problem: Bitcoin Mining
Bitcoin proposed a simple yet difficult to implement method called MINING. Simple because every transaction was to be verified by a majority number of validators(i.e., 50%+1). This was easy to say than implement.
To solve this each node was made a validator based on its processing power. The node which verified more transactions was rewarded higher money in terms of Bitcoin. This way of earning money was called Bitcoin Mining. Each CPU could be identified as a node. To gain power over the system, a node had to be stronger than 50% of the system to acquire majority status. But if anyone had that kind of power, they could simply be a validator and earn a lot more.
Why do countries seek to ban Bitcoin Mining?
Bitcoin Mining was a solution to a much older problem of cryptocurrencies but it eventually created another problem: High Power Usage. Bitcoin uses a validation algorithm called proof-of-work where a node(a CPU or GPU) has to guess a number called nonce value. This process consumes a lot of electricity.
When such a system works at a mass scale this can cause wide power shortages across countries. China banned mining in cryptocurrencies due to this issue. Many European countries also sought to ban crypto mining but failed.
Recently it was discovered that Exxon Mobil, one of the largest crude-oil producers, diverts excess oil and gas to mine bitcoins. This can cause more environmental concerns and issues in the form of pollution, raised carbon footprint, and more.
Conclusion
Bitcoin solved issues with earlier digital currencies and presented a mechanism to validate transactions decentrally. However, this solution comes at a cost of higher energy consumption at unsustainable levels. If Bitcoin were to operate as a global currency, these energy demands would be unsustainable. Hence, weighing the benefits and losses of Bitcoin, we can say that cryptocurrencies in general have a lot of work to do before replacing their fiat counterparts.