Blockchain’s advantages over traditional payment systems
There is an ongoing discussion about Blockchain’s advantages over traditional payment systems. Some commonly referred to advantages include anonymity, transparency, and independence from governments and central banks. However, Blockchain offers multiple other benefits when it comes to operational efficiency and trust.
In order to send bitcoins to another party, only two intermediaries are required to enable the transfer to successfully occur. The first is a user’s wallet provider, and the second is the Bitcoin network. Nodes and miners are viewed as sub-parts of the network and not as intermediaries. Adding or removing a few of them does not influence the network’s ability to function. However, in a traditional network such as the card payment system, a minimum of four intermediaries are required to execute a transaction, and in reality, more are often required.
The Bitcoin protocol, as a distributed system, enables components (nodes) of the system to access and verify all pending transactions, as well as past transactions. This is possible 24/7 and simultaneously generates time efficiency advantages. Also, errors and mistakes cannot occur during the process of the confirmation of a transaction; if the user entered the correct wallet address when initiating and signing the transaction, then the funds will 100% reach their intended destination.
On the contrary, the traditional payment system not only has more intermediaries but also multiplies the complexity of communication exchanges back and forth that need to happen sequentially. This process is time consuming, tedious, and can greatly increase the risk of errors occurring along the way.
Distributed Trust & No Single Point of Failure.
So far, we have discussed two very important advantages of Bitcoin, but the most crucial one lies in the way the bitcoin blockchain network handles trust in transactions and eliminates single points of failure.
In the traditional system, people must trust that the rules, mechanisms, and regulations will avoid errors from occurring and that every single counterparty involved operates properly and truthfully. In the case that one counterparty in the chain is compromised in some way, then the whole system will be compromised.
In the case of Bitcoin, however, the set of rules and mechanisms underlying the system makes fraudulent transactions, manipulation, and errors impossible to occur. Bitcoin’s software, the blockchain technology, is open source, meaning that anyone across the world can access it, review it, and verify it. In fact, in Bitcoin’s track record of more than 10 years, no security issue has ever been discovered. Also, no single party has ever found a method to change or alter a signed transaction or modify the blockchain’s ledger in any way. Moreover, the distributed system’s unique advantage is that one does not need to trust any single party of the other participants in the network as there is no single point of failure. Specifically, if one or a few nodes are compromised in the network, the network is not compromised in any way. Furthermore, if one were to fraudulently modify any pending transactions or the blockchain of past transactions, one would need to be able to take control of the majority of the computing power of the network (obtaining more than 51%) and work to solve the Proof of Work problem to add all the subsequent blocks following the modified one.
This makes it impossible for the network to be attacked.
Nevertheless, the risk lies in one’s digital wallet, as it is the place where a user’s private keys are stored. If a malicious user manages to access another’s private keys, they can spend the funds in the wallet. Some of the most famous cryptocurrency hacks have happened in this way, due to points of failure in wallet solutions, but never due to points of failure in the blockchain system. This is why offline wallets, also referred to as ‘cold-storage’, have become an increasingly popular option to prevent hacking.
From the moment a user’s transaction is signed, it is completely safe. There are no single points of failure in the blockchain ecosystem. Therefore, as mentioned before, one does not need to trust the other parties in the system, but instead, they only need to trust the system itself.
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