How bitcoin makes transactions Cheaper


There are many reasons to be excited about bitcoin‚ it could enable totally new business and technology models‚ it resembles the internet in the early 90s in the sense that it is a network that no one owns and everyone can contribute to‚ it could revolutionize legal concepts of ownership‚ it could disrupt the payments industry‚ it could even become a tax haven. it could also flop.

The most exciting about bitcoin is the solution to the double spending problem and why this could drastically reduce the cost of non cash transactions.
The double spending problem: why it costs so much to transact electronically

The double spending problem is the risk that a person could pay for two different things with the same unit of currency. This problem really only arises if you want to make a purchase electronically ( i.e. with something other than cash ).
Say I make tshirts and you want to buy one. In the offline world‚ we could transact with cash. You give me a 20 dollar bill and I give you a tshirt. As Im now in physical possession of the 20 dollar bill‚ I can be certain that you wont spend it on something else. My only risk is that you′re a professional counterfeiter but that′s pretty unlikely.

Now‚ say you want to buy one of the t shirts from my online e-store. As it happens‚ my shop is overseas. Would not it be cool if we could replicate the offline experience by you simply sending me a digital version of a $20 bill? Until recently you couldn′t ‚ you needed at least one financial institution involved and either you or I (or both of us) had to pay them a fee to facilitate things. A credit card payment is a good example. You would send me your card details and‚ in order to process it‚ I would involve the credit card provider‚ a merchant services company and my bank.


We needed the financial institutions because unlike physical bills digital information is so easy to copy. If  you try to send a unit money directly‚ you will know that it is real or you have not sent the same thing to someon else. The role financial institutions play here is to serve as a trusted third party to identify you and me‚ to ensure that the money is spent only once and to process the payment. In Order to retain their trusted status, financial institutions also become involved if there is a dispute between us. this takes time and resources for which financial institutions charge fees.

see full article at Coindesk 


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