Bitcoin kinda doesn’t work — j’accuse!
Over the last couple of weeks I looked deeper into Bitcoin et co. I have to say, at this point, the system is tragically imperfect, for mere mortal practically unusable and not bringing any significant benefits from everyday perspective. Despite that, I personally see a lot of potential in many ways.
DISCLAIMER: I am deliberately not opening the philosophical questions about decentralised currencies liberating folks from money-printing central banks evil. As a product designer, I am just able to outline what a regular user perception of the current state of affairs might be, what works for them and what doesn’t. For crypto folks, this is supposed to be a reminder how imperfect and unacceptable some things still are, because crypto geeks tend to lose this perspective quickly.
But a few notes about current state of affairs:
It’s ridiculously complex. You need to generate a “public key”, which is akin to address or a bank account number, and a “private key”, akin to password to access that account. You save both in an application called “a wallet”. Just these initial steps are a bit difficult to grasp, but lets say that’s the fate of every innovation. “The wallet” is a bit misleading term, because it doesn’t really store any money, just those keys. So maybe more apt name would be “a keychain”.
Once you set up all that, you can buy Bitcoin. That basically means you need to open an account at some crypto exchange. There are many, differing in complexity and trustworthiness, and it might not be easy to figure. Setting up an account requires a verification process where you take photos of your personal ID and fill in basic data, but the whole process is automated and within a few minutes everything is ready — this is where traditional banks should learn.
Once you have exchange account, you can buy Bitcoin. The easiest way is to simply pay with a card, although it does incur some extra fee. So now you have a crypto account, you have a cryptocurrency on it, you can sell it, exchange it, send it, lend it (a bit like savings account, but up to 10% p.a. interest) and you can get a debit card with that account.
All this is basically the closest thing to the current system of having a bank account. The previous convoluted step with an own wallet can be skipped altogether, basically. The problem is that everybody in crypto community will be telling you that your own wallet is the core benefit of the whole blockchain system and the principal reason why it all exists — if you have your own keys and wallet, you are de facto becoming your own bank, you have full control of that account and nobody can ever access it. Which in turn also means that if you lose those keys, you’re screwed…
Once you have the “money”, you want to spend it and transact with it. Both is a big problem with Bitcoin! Each transaction is ridiculously expensive ($25–50 these days) and ridiculously slow (a few minutes or a few tens of minutes). This is great if you need to send a few thousand $$ to your auntie in Honduras — she really gets the money in a few minutes and the fee is acceptable. (Another thing is how she gets the cash, but specifically in Honduras there are many Bitcoin ATMs where she can do that).
But it’s a big problem if you want to buy a coffee for $5. Waiting for 10 minutes for the transaction to be approved and paying $25 fee for that is not an option… Even if I want to pay my phone bill and 10 minutes waiting is ok, $25 fee is not ok.
Another impractical thing is the value of the currency itself. Those $5 equals to 0.00009315 BTC. That’s a number with which a mere mortal can’t work. Just imagine a store with price tags showing numbers like that…
So the whole crypto world is working on solving these problems for the last couple of years. Some solutions are in early stages now, but it’s still not very practical.
One of the promising solutions is called Lightning Network. It’s a kind of extension of Bitcoin, with transactions taking a few seconds and fees being negligible. Lightning also uses Satoshi unit, which is something like “a cent” for Bitcoin — so the coffee is not 0.00009315 BTC but 9315 Sats — something one can work with again. The problem is that if you want to pay with Sats, you still need to convert BTC to Sats. Which is a paradox, coz Sat is still a BTC — it’s like converting dollars to cents + the conversion incurs a fee. And then if you want to pay with Sats, you still need to “establish connection” with the merchant, which is again that slow and expensive operation. So when you come to the coffee shop for the first time it still sucks, only when you come the second time you can finally make quick and cheap payments. People are working on sorting out this problem, but honestly, I haven’t seen a decent principal proposal how to solve this.
You’ve probably noticed there’s not only Bitcoin, but several other networks and currencies, the most famous ones being Ethereum (currency is called Ether) and Doge coin. Simply put, they are almost the same as Bitcoin, facing the exact same problem of slow and expensive transactions.
However, Ethereum is a very promising endeavour, maybe more promising than Bitcoin. Bitcoin was sort of first generation, Ethereum is sort of second generation. It allows for more complex things, mainly “smart contracts” — these are basically transactions with some underlying condition or logic. For example sending something regularly every month, sending it only if some condition is met, etc. Basically a sort of legal contract that is fulfilled automatically. Which is a huge field itself. It opens up a lot of opportunities, but also a lot of questions — it’s pretty much impossible to convert more complex contracts into a “program” that evaluates them executes them — the artificial intelligence is definitely not that advanced yet.
And so besides those 3 networks, we have dozens or hundreds more.. But transactions between those networks are super cumbersome. One network worth mentioning is Stellar, and it’s currency Lumen. To my best knowledge, at this point this is practically the only fully functional network in the world where transactions really take something like 2 seconds and the fees are almost zero. On top of that it can do some other cool stuff, like issuing other currencies on top of that (which Ethereum can do too, Bitcoin can’t), so there also crypto versions of USD and EUR which are interchange for cash 1:1. That’s fairly important at this point, coz Bitcoin can fluctuate in value by 20% in a single day, which would be a massive problem when e.g. selling a house. Another interesting thing is that currency conversion can be embedded in the currency transfer, leaving no room for criminally high fees, bad exchange rates and similar predatory practices of traditional banks. Basically you send EUR and the recipient can receive USD, no separate conversion transaction. But at the end of the day, you still need to forward it to some crypto exchange where you can withdraw it using the debit card they gave you.
By the way, you probably know that classic VISA/MasterCard payments are immediate, SEPA payments typically within 24 hours, but often within minutes… Also there’s something called SEPA Instant Payments spreading though Europe which guarantees transfers within 10 seconds and works non stop (=also during the weekends, unlike traditional transfers), and fees are low.
All in all, Bitcoin and other crypto currencies have a looong way to go to even match the current classic systems (which are also improving due to that pressure). From the historical point of view, I would say we’re still basically at the very beginning. There is still a lot of way too complex details, too many unresolved problems, a lot of things that I personally don’t understand at all, despite being close to it, and it’s not always easy to find answers.
So if you feel you’re late to the game and the boat has already sailed, you are definitely not! There’s about 25 thousand banks across the world and additional 60 thousand quasi-banks. Compared to that, there’s still just a few dozens of crypto exchanges and “banks”.
So I hope this snapshot of current situation might help some folks, who are maybe not yet in crypto, and try to understand what’s the story.