The concept of a decentralized banking system is now a reality. Applications like Airbitz and Bitcoin Wallet let users make use of a new kind of money: Bitcoins.
But what are those Bitcoins and how can they change the way money is moved throughout the world? We will answer to this and other questions on this article about decentralized banking.
The Traditional Banking system
Regular banks are needed in today’s economy to circulate money. They raise funds through checking, saving and investing accounts. Then, they lend it to people who issue credits like the in credit cards, mortgages, personal loans, and loans to develop business.
Some time ago, all money was backed up somehow. Gold was used as a reserve to make valid the bills and coins we use. This was changed in the United States when Richard Nixon became president. There are a whole set of rules to back up US Dollars. That way they are prevented from being spontaneously created, thus preserving their value.
Banks are using this kind of money to make transactions. If you think it twice, money is more like a concept, meaning that people trust it to be real. That is why you can do transactions for goods and services with it. Since everybody believes in money, then anyone will accept it in exchange for good and services, making it a perfect trading vehicle.
The Issue with Traditional Banking
The problem with all of the today’s banking systems is that an institution controls them. There are rules, but certain people are in the position to manipulate those rules. That is a risk of the current system.
There is also the high cost associated with the centralized system. All transactions have a cost, and the costs are paid by people needing services from banks.
When you talk about worldwide operations, there is the issue of currency exchange. You need to add the exchange rates to the equation. Financial institutions use exchange rates to earn more money, making transactions even more costly.
A decentralized banking system is looking to overcome the issues of traditional banking. First of all, eliminating the institutional attachment of transactions, you can be confident that no single person can use the system to his benefit.
As a consequence of decentralization, end users get to pay fewer fees for each transaction. The operations are done peer-to-peer, which means there is no need for an intermediary.
Finally, since there is no attachment to an institution, then the new money has no flag. That eliminates exchange rates from the equation, making it a cheaper option for international transactions.
The coin traded on a decentralized banking model
The currency used on a decentralized banking model are bitcoins. They are not like traditional currencies. A bitcoin is also named cryptocurrency. It doesn’t exist in the real world, as you could hold a coin or a bill. It exists only digitally, and it can be used throughout a payment system. The Bitcoin is protected by being public.
Transactions are peer-to-peer, using only open-source software. They are done through a blockchain, which holds the history of all transactions.
Blockchain, a new way of Trading
The blockchain is the way bitcoins are traded. Whenever a new transaction is done, it is added to the blockchain. Then, for the transaction to be valid, it is verified by people around the world known as miners.
The miners’ verification is the only fee you’ll pay for operations. It is significantly less than what banks charge you for a similar transaction. The system works in such a way that they earn bitcoins from fees and from the mining activity itself. It produces new bitcoins that enter the system, thus adding more virtual money to the network.
Risks of using Bitcoins for Trading
A primary concern of bitcoins is that they can be used to support illegal activities. Despite the fact that the United Kingdom’s Treasury and Home Office found that money laundering was easier with banks than bitcoins, it is still a matter of concern for some governments and institutions.
Transactions of other illegal activities such as prostitution and pornography mainly on the Internet are also known to be done with bitcoins. Some groups insist that the deinstitutionalization of money transactions will help to promote such activities.
Finally, for the end users, there is the risk of hackers. Being a digital operation that only exists in the online world, it is an attractive target for hackers. Compared to the regular banking system, the rules are no different. With online banking services, you have a digital account and password. The same issues with those services are the issues you may have with a bitcoin wallet. When somebody steals your password, they have access to your funds and may take them directly from your account.
Who accepts Bitcoins?
There is an extensive list of companies who accepts bitcoins. Most of them are involved in online business, like WordPress or Fiverr. Others are related to technology, such as Microsoft, that accepts bitcoins to get content for Xbox and Windows.
The most popular providers accepting bitcoins include Wikipedia, Tesla, Home Depot, Kmart, Sears, Gap, JC Penney, Shopify, Lionsgate Films, T-Mobile Poland, and Badoo. Domino’s Pizza signed up for a service called PizzaForCoins that trades pizzas for bitcoins from a list of providers. On the other hand, Helen’s Pizza which is a smaller pizza place in New Jersey can do the transaction directly at the store.