It is often said that Bitcoin allows everyone to be their own bank. If you know anything about the philosophy and underlying technology of Bitcoin, you've probably heard of this concept before. But do you know exactly how it works and why Bitcoin is more suitable as a store of value than your bank?
To get the big picture, it's important to understand how banks operate today and how Bitcoin differs from the traditional financial system.
The problem with banks
The first problem with banks is their conservation nature, and with that, the rehypothecation risk inherent in fractional reserve banking. If banks were simply a means of storing cash for their customers, their use would simply involve counterparty risk. While not ideal, it wouldn't necessarily be a problem if banks simply let customer funds sit there, but that's not exactly what's happening. To explain, banks lend your hard-earned money, often buying government bonds to earn a return on that money. Sometimes a bank can lend too much and not maintain enough liquidity to meet redemptions, and unfortunately there's nothing you can do about it. If the bank fails, your funds often follow the decline.
What's more, the traditional financial world is subject to controls. Simply put, traditional financial institutions must comply with state and local regulations that place restrictions on how individuals can use their hard-earned currency. This problem is exacerbated in countries with strict capital controls. If government regulations can change in the blink of an eye, your funds in the bank could be put at risk. Banks and traditional financial institutions, which depend on their government's legal and regulatory system, have no choice but to comply.
In either of these situations, you would lose through no fault of your own. Your funds are entirely dependent on the integrity of the bank. It's a big risk. The banks have failed before and they will fail again. Unfortunately, centralized financial institutions carry these types of risks.
Why is Bitcoin the solution?
To avoid this uncertainty, you want 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 circumvents these risks with a few features that centralized financial institutions cannot offer.
Without limits
Unlike banks, Bitcoin has no borders. You can access and use your funds in any country, and you can send BTC to anyone in the world. The beauty of no borders is that it costs you nothing 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, 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 to use trusted third parties who facilitate transactions. This implies that a third party can approve or deny a given transaction, thereby preventing the expression of an individual's financial agency. In contrast, Bitcoin's permissionless peer-to-peer network avoids middlemen, allowing individuals to unilaterally dictate transactions between themselves.
Ownership
An added benefit of Bitcoin is the ability for individuals to control their funds through the power of cryptography. Essentially, if someone has access to a given Bitcoin private key, they 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. Although there are challenges when it comes to storing your data privately and securely, Private key (generated from a starting sentence), you can securely use this private key to sign messages and interact with the Bitcoin network. Although storing funds in a bank account allows the bank to lend or use your funds, this is not possible with a non-custodial Bitcoin wallet. This is true ownership.
To truly be bankless, how to manage your Bitcoins
If you want to become truly bankless, it's important to understand the connection 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 bitcoin at any time, just like a bank can with your fiat currency.
Each of these centralized institutions relies on the integrity of the banks they use. They all involve counterparty risk. If you use a crypto platform that relies on a bank and it goes down, your funds follow it. So, if you are determined to become bankless, make sure you take these aspects into account.
Challenges on the road to becoming unbanked
To use Bitcoin without a bank, you know you need to adopt self-custody, but custody isn't the only challenge. Of course, Bitcoin works a little differently than fiat currencies, so going truly bankless with Bitcoin also has its challenges.
Daily payments
Bitcoin's suitability as a store of value is unmatched, but it can pose 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 increase both the transaction speed and total throughput of Bitcoin. For example, the Lightning Network, a Bitcoin layer 2 solution, allows for near-instantaneous and global final settlement of transactions while minimizing the use of the Bitcoin base layer. While Lightning is limited by some aspects of its design, such as the need to sit on top of Bitcoin itself to close and open payment channels, Layer 2s like the Lightning Network open up the opportunity to greatly expand usage. of Bitcoin as a means of exchange.
One proposal to overcome the design constraints of the Lightning Network, as mentioned above, is the use of Chaumian cash, where federated currencies can issue redeemable certificates to users in the same way that cash was at some point, a certificate of deposit exchangeable for gold.
In a cash implementation, a network of federated currencies would use Lightning to settle with each other, and retail payments would take place using the cash itself. This implies that Lightning could become more of a business solution to scale Bitcoin financial services and that retail payments would happen on solutions built on Lightning.
Widespread adoption
Of course, it is impossible to truly do without a bank account with Bitcoin if it is not accepted as a medium of exchange. For now, businesses that accept Bitcoin are still in the minority in most places around the world. At first, you may be looking for in-person and online stores willing to accept cryptocurrencies.
However, Bitcoin adoption is growing significantly. While Bitcoin is still in its teens, countless major brands accept Bitcoin today. Disney, Playstation, Microsoft, Starbucks, KFC, Burger King: the list of Bitcoin-friendly companies is only growing.
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 becoming truly bankless doesn’t stop there. You need to evaluate the platforms you use and how you use them. And finally, you need to put measures in place to make your daily transactions more feasible.
But, with these pieces in place, you're on your way to finishing