insight
Currency of the future? The Bitcoin, a digital currency, has been around for over ten years. It may be the currency of the future. But why was the Bitcoin actually created? The Bitcoin, a digital currency, has been around for over ten years. Everyone should be able to use this coin without being dependent on an intermediary. But is this currency future-proof? A digital currency faces four problems: there may be no counterfeit currency in circulation, the number of new coins created must be finite, no one may be allowed to monitor a payment, and, finally, there may be no intermediaries who can stop transactions. Our current financial system already solves two of these problems, but not the other two. That is why the Bitcoin was invented.
The current financial system: centralized control
Below is a schematic representation of the organization of our current payment systems. Each system, for example your bank, is Âcontrolled centrally. In the network, one party (the bank) controls all transactions that take place. If that party disappears, the system will no longer function. This financial system solves two out of four, but unfortunately not all, problems.
Financial system solution
Financial system problem
The centralized party always monitors a transaction. In this system, there is no privacy within a transaction between two points.
Thanks to the control by a centralized party, money can only be spent once.
Privacy
No counterfeit money
The centralized party in this system is involved in every transaction. It must be completely reliable.
The centralized party has control over how much Âmoney is printed. If a lot of money was printed, that money would not have value.
Limited issue
No intermediaries
10 | New Scientist | Tilburg University Economics and Management | Research Special
