Bitcoin 107 (101 part 7): irreversible transactions
Wednesday 20 July 2016
We’ve compared bitcoin to physical cash, and it shares an important property with cash: once a transaction is complete, there’s no going back.
Back in the first article in this series, we wrote how bitcoin is a lot like handing cash to another person, just over the internet. ‘When I hand you $10 in cash, that is a direct transaction. It’s just you and me. When I send you $10 through the banking system, it’s not just you and me any more. I’m not really even giving you money. What I’m doing is asking the bank to deduct $10 from my balance and add $10 to your account.’
Bitcoin, of course, doesn’t have a bank. There’s no central authority to carry out transactions on your behalf. There’s just you, and me. This means there is no one to appeal to in the case of a mistaken or fraudulent transaction.
Bitcoin uses 'push' transactions: they can only be sent, never taken
If someone clones your credit card and uses it to pay for goods, you can ask the bank to cancel that payment - in fact, the first you hear of it may be the bank calling you to tell you of a suspicious transaction. If you’re shopping on eBay and have a problem with the merchant, you can ask PayPal to reverse the transaction. Not so with bitcoin. Because it’s like cash, once you hand over the money you can’t get it back unless the recipient wants to send it to you. No one can force them to do that in the way that a bank can take money from one account and put it in another.
Pros and cons
This has both positive and negative implications. It means you have to be careful not to make mistakes and send funds to the wrong account. It means you have to keep your private keys very safe, because anyone who has them can control your funds. And it means if you lose the keys, you lose access to the bitcoins in those addresses.
But there are advantages to bitcoin’s irreversibility, too. It eliminates the problem of fraudulent chargebacks - where someone claims they have not received goods and asks the bank to reverse the transaction. Payment processors typically side with the customer in these instances, at the expense of merchants. It also means that no one can take money out of your account, as a bank can do. Bitcoin uses ‘push’ transactions: money can only ever be sent, not taken. That also eliminates the problem of credit card fraud through your details being skimmed when you use the card - that kind of theft simply isn’t possible with bitcoin. If your private keys are safe, no one can access your account.
This property doesn’t make bitcoin better or worse than regular payments systems: it is simply different, in the same way that cash is different to using a credit card. There will be situations where bitcoin is the better solution (merchants like it due to the lack of fraudulent chargebacks, for example). Equally, there will be times when you feel it might be better to have the safety net of a bank.
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