This is an article about using bitcoin for real life transactions, buying and selling physical goods and services. We first cover how bitcoin works when you make a transaction, and some of the unique things about transacting with bitcoin. Then we cover the advantages and disadvantages of using bitcoin, and outline what needs to be changed about it to improve in the future, and reach wider adoption.
Bitcoin is a digital asset, like gold, rather than a digital currency. For more information on this distinction, and how it evolved, please see our Introduction to Decentralization parts I and II on this blog. Most people simply use bitcoin for speculation; they buy it and hope the price will go up, and hope to sell it at the peak of a price. More often, people feverishly buy bitcoin when the price is on a steep surge, and panic sell at the first drop. Debating the ethics and usefulness of this phenomenon is entirely other topic, so today we will be focusing on the direct use and utility of bitcoin as a method of exchange of value, in trades such as purchasing physical goods and services.
When two people want to engage in commerce (let’s take for example, e-commerce, with normal fiat currency) they need to both trust each other first. The risk on the seller is that the buyer will promise payment and then fail to make payment, or make payment and somehow reverse it. The risk on the buyer is that they will make payment and the seller simply will not send the promised goods, or will send something other than what was agreed. This problem is mostly one-sided in the real world, because, when a seller has transacted for a long time with many other buyers, they have an established trust and reputation, so the buyer’s risk is significantly reduced. Lots of mechanisms exist to facilitate this: eBay‘s feedback system, or Amazon‘s star-rating system. Less well known about, and less well understood is the mechanism to reduce the risk to the seller. Sellers are at risk, because the buyers could use a stolen credit card (for example), meaning that the seller not only loses the money (after it’s refunded), but they also lose the goods.
Bitcoin is irreversible, which means that once you send a payment, you can’t get it back. There is no such thing as a charge back in bitcoin; once you send a payment, it’s final. This used to be a big issue for the seller, because, if a buyer uses a stolen credit card, and the seller is forced to refund the money, then the seller is out that money. But with bitcoin, it’s not a risk. That said, this creates another problem for the seller, because now they really need to put a lot of effort into proving or convincing everyone that they are in fact trustworthy, and won’t just run off with the irretrievable bitcoin, and not provide the goods or service. That scenario can be a big issue for the buyer, because, if they send the money by accident (perhaps due to a software bug), then they cannot retrieve the funds, as they are broadcast to the network and beyond.
Let’s now look at how a real world transaction occurs using bitcoin. Let’s take a real concrete example. Suppose you want to buy some physical item, say, a foot and calf massager, from a seller. You go to their website and they only accept bitcoin as a payment method. You happen to have bitcoin, and really want a massage, so you conclude that you wish to purchase the item, entering your shipping details and seeing the total price, in bitcoin. Next, the seller provides their public address (publishing it safely on their website), for everyone to see. Because it’s only the public address, no-one can take the seller’s bitcoin, it’s completely impossible for anyone to steal the seller’s bitcoin with just the public address. Next, you open your bitcoin wallet and transfer the correct amount of bitcoin to the seller’s public address. This is the only time you will see the seller’s public address, as it’s a one-use address. Nor will the seller ever see your private address. All transactions are one way, meaning that seller never needs to worry about the other party not fulfilling their end of the bargain. Once the seller has the bitcoin, it is irreversible. The seller does not need to worry about being scammed, or having to initiate a dispute with some arbitrary court, or anything like that. Because of this, the seller doesn’t need to worry about the reputation of the buyer.
When you pay with a credit card, the transaction is processed nearly instantly. This is because there is a big company (either Visa or MasterCard, usually), who is being paid to run all those servers and make them fast and responsive, and makes sure that they never go down. They of course get paid by the merchant who is accepting the payment, but sometimes the merchant passes that fee onto the customer. So, you trust the credit card company with you money, and you also have to pay for the speed. However, with bitcoin you don’t have to trust anyone, but the downside is the speed. Bitcoin transactions can take 20 minutes to go through, which is a long time to wait if you are ordering food. It’s not necessarily a bad thing for online sellers, because it’s only a few minutes for the seller, they aren’t waiting around, but it’s a really long time for the buyer to wait for the satisfaction of knowing that their item is on the way. The delay is also a big problem for brick and mortar, physical merchants, because they don’t have the option to wait 20 minutes to be sure that payment is confirmed, they need to immediately start cooking the food (for example). This can be a hassle. In fact, if a merchant waited 20 minutes to ship, then they would probably lose all their business, because all their competition would have already provided the goods by that time, and the customer would already be waiting for their confirmation.
In summary, two problems need to be solved for bitcoin to reach mass adoption. The first problem is that we need a way to trust sellers (or anyone who accepts bitcoin), and secondly we need the bitcoin transaction to occur rapidly, and not take 20 minutes. Hopefully, these things will emerge in the future and we can all reap the benefits of bitcoin.