It is often said that bitcoin allows anyone to be their own bank. If you know anything about the spirit of bitcoin and the underlying technology, you've probably heard of this concept before. But do you know exactly how it works and why bitcoin is better suited as a store of value than your bank?
To get the full picture, it's important to understand how banks operate today and how bitcoin differs from the traditional financial system.
The problem of the banks
The first problem with banks is their custodial nature and, with it, the remortgage risk inherent in fractional reserve banking. If banks were simply means of storing cash for their customers, using them would only involve counterparty risk. While not ideal, this wouldn't necessarily be a problem if banks simply left customer funds there, but that's not exactly what happens. To explain, banks lend out their hard-earned money, often buying government bonds to earn a return on that cash. Sometimes a bank can lend too much and not maintain enough liquidity to pay the repayments and unfortunately there is nothing you can do about it. If the bank fails, your funds often go with it too.
Not only that, but the traditional financial world is under surveillance. Simply put, traditional financial institutions must comply with national and local regulations that place restrictions on how people can use their hard-earned currency. This problem is exacerbated in countries with strict capital controls. If government regulation can change in the blink of an eye, your funds in a bank may be at risk. Traditional banks and financial institutions, which exist thanks to their government's legal and regulatory system, have no choice but to comply.
In any of these situations, you would lose out through no fault of your own. Your funds depend entirely on the integrity of the bank. This is a big risk. Banks have failed before and will fail again. Unfortunately, centralized financial institutions simply carry these types of risks.
Why bitcoin is the solution?
To avoid this uncertainty, it is advisable to store capital outside the jurisdiction of centralized entities. The only answer is to use a purely decentralized store of value, i.e. bitcoin. bitcoin avoids these risks with some features that centralized financial institutions cannot offer.
Without Borders
Unlike banks, bitcoin has no borders. You can access and use your funds in any country and you can send btc to anyone around the world. The beauty of borderlessness is that it doesn't cost you any more to send btc to your next-door neighbor than it does to send it to someone on the other side of the world. Additionally, unlike banks, currency exchange fees are not necessary. Additionally, users can transact across political jurisdictions seamlessly due to the permissionless nature of bitcoin.
Peer-to-peer value transfer
A key difference between the traditional financial system and bitcoin is the former's requirement for trusted third parties to facilitate transactions. This implies that a third party can approve or reject a given transaction, hindering an individual's expression of financial agency. In contrast, bitcoin's permissionless peer-to-peer network bypasses middlemen, allowing individuals to unilaterally dictate transactions between each other.
Property
An additional benefit of bitcoin is the ability for people to control their funds through the power of cryptography. Essentially, if someone has access to a given bitcoin private key, she can control the flow of funds from the public addresses associated with that private key.
As long as no one has access to your private keys, only you can control your bitcoin. While there are challenges when it comes to privately and securely storing your private key (generated from a seed phrase), you can securely use this private key to sign messages and interact with the bitcoin network. While storing funds in a bank account allows the bank to lend or use your funds, that is not possible with a non-custodial bitcoin wallet. That's what true ownership is all about.
To not have a bank, it is important how to manage your Bitcoins
If you are serious about going unbanked, it is important to understand the crossover between traditional financial institutions and centralized bitcoin custodians.
Centralized exchanges are companies registered in specific countries. As such, they must comply with local laws and regulations, just like banks. Additionally, they don't allow you to manage your own private keys. The company can access your bitcoins at any time, just like a bank with its fiat currency.
Any of these centralized institutions depends on the integrity of the banks you use. All of them involve counterparty risk. If you use a crypto platform that relies on a bank and the bank closes, your funds will go with you. So, if you are determined to go bankless, be sure to keep these things in mind.
Challenges on the road to banklessness
To become bankless with bitcoin, you know you need to adopt self-custody, but custody is not the only challenge. Of course, bitcoin works a little differently than fiat currencies, so actually moving away from bitcoin has its challenges as well.
Daily payments
bitcoin's suitability as a store of value is unparalleled, but it can present a challenge for everyday payments. bitcoin's average block time is 10 minutes, meaning that a simple payment for an item like a cup of coffee is heavily limited by bitcoin's design.
That said, there are solutions to scale both bitcoin transaction speed and overall throughput. For example, the Lightning network, a bitcoin-layer-2s-what-they-are-and-how-they-work”>bitcoin Layer 2 Solution, provides near-instantaneous and global final transaction settlement while minimizing the use of bitcoin's base layer. While Lightning is limited by certain aspects of its design, such as the need to rely on bitcoin to close and open payment channels, layers 2, such as the Lightning Network, open up the possibility of greatly scaling the use of bitcoin as a medium. of exchange.
One proposal to overcome the design limitations of the Lightning Network, as mentioned above, is the use of Chaumian ecash, where federated mints can issue redeemable certificates to users in the same way that cash was at one time, a certificate of deposit redeemable for gold.
In an ecash implementation, a network of federated mints would use Lightning to settle with each other, and retail payments would be made using ecash itself. This implies that Lightning may become more of a merchant solution to scale bitcoin financial services, and that retail payments would be made on solutions built on top of Lightning.
Widespread adoption
Of course, it is impossible to become bankless with bitcoin if it is not accepted as a medium of exchange. For now, businesses that accept bitcoins remain a minority in most places around the world. At first, you may be looking for physical and online stores willing to accept cryptocurrency.
However, bitcoin adoption is changing significantly. While bitcoin is still a teenager, countless big brands accept bitcoin today. Disney, Playstation, Microsoft, Starbucks, KFC, Burger King: the list of companies compatible with bitcoin only increases.
Your path to bankruptcy
In conclusion, going bankless with bitcoin involves due diligence. To get started, you need a non-custodial wallet, such as a Ledger device. But truly running out of banks doesn't end there. You must evaluate the platforms you use and how you use them. And finally, you should implement measures to make your daily transactions more feasible.
But, with those pieces in place, you're on your way to getting there.
