It is often said that with Bitcoin anyone can become their own bank. If you know anything about the ethos and underlying technology of Bitcoin, you’ve probably heard of this concept. But do you know exactly how it works and why Bitcoin is better suited than banks as a store of value?
To get the full picture, it’s important to understand how banks work today and how Bitcoin differs from traditional financial systems.
bank problems
The first issue with banks, in addition to their custodial nature, is the rehypothecation risk inherent in fractional reserve banking.If a bank is simply a means of storing cash for customers, then using a bank simply means storing cash for customers Counterparty Risk. While not ideal, it wouldn’t necessarily be a problem if banks just left their customers’ funds alone, but that’s not the case. To explain, banks lend you your hard-earned cash and often buy government bonds to collect the yield on that cash. In some cases, banks may over-lend and not maintain enough liquidity to meet redemptions, but unfortunately there is nothing you can do about it. When a bank fails, your funds are often lost with it.
Not only that, but the world of traditional finance is closely guarded. Simply put, traditional financial institutions must comply with national and local regulations that place limits on how individuals can spend their hard-earned currency. This problem is exacerbated in countries with strict capital controls. Sudden changes in government regulations can put your banked funds at risk. Banks and traditional financial institutions exist because of the government’s legal and regulatory system, so they have no choice but to comply.
In both situations, you lose through no fault of your own. Your funds are completely dependent on the integrity of the bank. This is a big risk. Banks have failed before and will fail again. Unfortunately, these risks are inherent in centralized financial institutions.
Why Bitcoin is the solution
To avoid this uncertainty, you want to keep your capital outside the jurisdiction of a centralized organization. The only answer is to use a purely decentralized store of value: Bitcoin. Bitcoin avoids these risks due to several features that centralized financial institutions cannot provide.
borderless
Unlike banks, Bitcoin has no borders. He can access and use his funds in any country and can send his BTC to anyone in the world. The advantage of Borderless is that it costs no more to send BTC to the person next door than it does to someone on the other side of the world. Additionally, unlike banks, there are no exchange fees. Additionally, the permissionless nature of Bitcoin allows users to seamlessly conduct transactions across political jurisdictions.
Peer-to-peer value transfer
The main difference between traditional financial systems and Bitcoin is that the former requires a trusted third party to facilitate transactions. This means that third parties can approve or deny certain transactions, which prevents personal representation of financial institutions. In contrast, Bitcoin’s permissionless peer-to-peer network bypasses intermediaries and allows individuals to unilaterally direct transactions between each other.
possession
An additional benefit of Bitcoin is that it allows individuals to control their funds through the power of cryptography. Essentially, if someone has access to a particular Bitcoin private key, they can control the flow of funds from her public address associated with that private key.
Unless no one else has access to your private key, you are the only one in control of your Bitcoins. There are challenges when it comes to keeping it private and secure; private key (generated from seed phrase), this private key can be securely used to sign messages and interact with the Bitcoin network. Storing funds in a bank account allows the bank to lend or use your funds, but that is not possible with a non-custodial Bitcoin wallet. That’s what real ownership is all about.
In order to become truly bankless, it is important to know how to manage your Bitcoin.
If we aim to become truly bankless, it is important to understand the crossover between traditional financial institutions and centralized Bitcoin custodians.
A centralized exchange is a business registered in a specific country. Therefore, just like banks, we must comply with local laws and regulations. Additionally, you don’t have control over your own private keys. Just as banks have access to fiat currencies, businesses can access Bitcoin at any time.
Both of these central institutions rely on the integrity of the banks they use. All of these involve counterparty risk. If you use a crypto platform that relies on a bank and the bank goes bankrupt, your funds will be lost with it. So, if you are serious about going bankless, be sure to consider these aspects.
Challenges on the road to bankruptcy
We know that going bankless with Bitcoin requires accepting self-custody, but custody is not the only issue. Of course, the mechanism of Bitcoin is slightly different from that of fiat currency, so there are challenges in achieving true banklessness with Bitcoin.
daily payments
While Bitcoin’s suitability as a store of value is unparalleled, it can present challenges for everyday payments. Bitcoin’s average block time is 10 minutes. This means that simple payments for goods such as a cup of coffee are severely constrained by Bitcoin’s design.
That said, there are solutions that scale both Bitcoin’s transaction speed and total throughput. For example, Lightning Network, Bitcoin layer 2 solution, provides near-instant and global final settlement of transactions while minimizing the use of the Bitcoin base layer. While Lightning is constrained by certain aspects of its design, such as having to settle on Bitcoin itself to open and close payment channels, Layer 2 like the Lightning Network supports the use of Bitcoin as a medium of exchange. Opens up possibilities to expand significantly.
As mentioned above, one proposal to overcome the design constraints of the Lightning Network is the use of Chaumian eCash. This allows the United Mint to issue redeemable certificates to users, much like a certificate of deposit, where cash can be redeemed for gold at some point.
In the eCash implementation, the United Mint network uses Lightning to settle payments with each other, and retail payments are made using eCash itself. This means that Lightning could become a commercial solution for extending Bitcoin financial services, with retail payments being made on solutions built on Lightning.
widespread adoption
Of course, it is impossible to become truly bankless with Bitcoin unless it is accepted as a medium of exchange. For now, businesses that accept Bitcoin are still in the minority in most places around the world. Initially, you may be looking for an in-person or online shop that accepts cryptocurrencies.
However, Bitcoin adoption is undergoing major changes. Although Bitcoin is still in its teens, countless big brands accept it today. The list of Bitcoin-friendly companies continues to grow, including Disney, PlayStation, Microsoft, Starbucks, KFC, Burger King, and more.
road to bankruptcy
In conclusion, going bankless with Bitcoin requires due diligence. First, you need a non-custodial wallet, such as a Ledger device. However, becoming truly bankless does not end there. You need to evaluate which platforms you use and how you use them. And finally, you need to take steps to make your daily transactions more viable.
But if you put these elements in place, you’ll be well on your way to the finals.
