While talking about the potential for Internet disruption in 1999, popular economist Milton Friedman said: The only thing missing, but that will soon develop, is a reliable e-cash: a method by which on the Internet one can transfer funds from A to B without A knowing about B or B knowing about A – the way I can get a $ 20 bill and give it to you.
Since then, payments have surely become more digital. However, they have followed a path clearly different from that envisioned by Friedman. What all have today is a system of reliable authorities, where banks are the guardians of payment records. When you pay something digitally, either with a credit card at a store, through PayPal on a website or by transferring money through a banking application, you are not actually sending the money directly. Instead, a relatively long cascade of events starts which involves a large number of intermediaries. This eventually results in debiting one’s account and crediting the recipient’s account.
What does this mean?
This means that the individual’s capacity to carry out transactions with a specific party today depends on one thing. That is whether the bank wants to proceed. Normally, if you have money in your account, you won’t have any issues. But inclusion in a given market is still driven by the criteria of the banks. They are the central point of failure. At least in the sense that if one’s bank system is down, operating options are limited.
So: how could a P2P digital payment system be developed?
When all begin to think about this, all will present two structural concepts: the problem of double spending and the problem of the Byzantine general.
The problem of double spending
In essence, this is to ensure that a given unit of money can only be spent once. If all think about cash, there are only a certain number of bills and only one person can be in possession of a certain ticket at a time. So, once it is spent, it disappears. While this is obvious in any monetary system, it is potentially difficult to solve in a digital system if you think about the way in which other digital documents are transferred. When a document is sent by email, what is received is actually a copy of that document. The sender retains the original. This is fine when you send a spreadsheet or a photo, but not when you send money.
That is why banks, considered as a reliable third party, have acted as a central authority so far; If everything digital can be copied infinitely, then what do we need? We need a reliable third party to keep track of how much everyone has.
Therefore, to solve this and create a P2P value transfer form, we need a way in which all states in the world agree to publish each transaction without a central authority (that is, one that establishes who owns what). This would solve the trust issue. A common analogy for this is the problem of the Byzantine general.
Byzantine General’s Problem
The Byzantine general’s problem is a term that describes a situation in which all the participants in a system need to agree on a strategy to avoid catastrophic failures of the system. However, some participants are unreliable or malicious.
In the context of an electronic payment system, for the system to function without a central authority of trust, all participants must have faith in the integrity of the system. When there are millions of participants who do not know each other who want to transfer money, there is a huge trust problem that is difficult to overcome.
By combining these two concepts, what you get is a technology that allows people to send value electronically without a single third party controlling it. Also while ensuring the permanent registration of the transaction. If everyone in the system agrees that the transfer is valid and a record of all transactions is maintained, then participants cannot act fraudulently and may dispense with a reliable third-party institution. This would solve the problem of double spending.
Blockchain is a record keeping technology that ignores the individual trust factor.
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