Reminder: Bitcoin Doesn’t Need Centralized Exchanges or Online Wallets

Kyle Torpey @kyletorpey
February 26, 2014 14:00 UTC
Decentralized exchanges and hardware wallets will make Bitcoin practical and secure.

Although the current situation at MtGox does not reveal any real issues with the Bitcoin protocol, it’s important to realize that, at this moment, centralized exchanges and online wallets are still necessary for someone to experience this new technology in a user-friendly manner. While many Bitcoin proponents will talk about cold storage and paper wallets all day long, the reality is using those forms of storage aren’t that practical for real world situations. When you move your bitcoins to your phone, you then have to deal with with the fact that your private keys are being stored on a device that is compromised by default. The Bitcoin protocol is all about avoiding third parties and allowing users to transact with each other directly, but the technologies to actually make this work in an easy-to-use fashion are still missing. Having said that, decentralized exchanges and practical hardware wallets are on the way.

No More Goxxing

Decentralized exchanges have been talked about in the Bitcoin space for years, and the reality that they are needed for the Bitcoin ecosystem to turn into a success has never been more obvious. Both NXT and Mastercoin are releasing their versions of decentralized exchanges over the next month or two, and there are a countless number of other projects, most notably Open Transactions, that will also provide solutions for people who wish to buy or sell bitcoins in a decentralized manner. Whether it’s Open Transactions, Mastercoin, Ethereum, Colored Coins, Invictus Innovations, or any other project that gets the job done doesn’t really matter. The point is that we are going to be able to exchange bitcoins for other assets in a P2P manner, just like Bitcoin, in the near future.

The main issue with buying and selling bitcoins on a liquid exchange right now is that you need to trust a centralized third party. This goes against the entire point of Satoshi’s invention of the Bitcoin network. Bitcoin has allowed people to sent funds directly to each other in a P2P manner, so there is no reason that the same concept cannot be applied when it comes to trading any other kind of asset. If we can trade bitcoins in a P2P manner, then there is no reason that we cannot trade some other type of crypto-asset in the same way. Anyone in the world will soon be able to trade bitcoins for euros, dollars, gold, Google stock, or anything else on a decentralized exchange. There will be no reason to use MtGox. In fact, there wouldn’t really be a reason to use any other centralized exchange either. While most of the other exchanges are run by seemingly trustworthy individuals, there’s no reason to trust someone when that trust is not necessary in the first place. Even if you feel like you could trust another individual with your life, not having to trust them at all is still a much better option.

A Secure Bitcoin Wallet You Can Hold in Your Hands

Although decentralized exchanges are an incredible option for people who want to hold their bitcoins on their own computer, there are still many security concerns with that proposal. The reality is that most people don’t know how to secure their own personal computers, and the revelations from Edward Snowden have continued to show that the NSA is working day and night to make truly secure and private data an impossibility. This is where the hardware wallets come into play.

With a hardware wallet, such as TREZOR or Pitbull, you don’t have to worry about anyone gaining access to your private keys. All transactions are sent to a secondary hardware device connected to your computer that does nothing but sign transactions with your private keys. This means that we will eventually have a situation where people are able to use Bitcoin with the convenience of Kryptokit or and the security of cold storage. This holy grail is what will make Bitcoin a practical option for the masses, and it will finally allow us to use this currency and payment system in the way that Satoshi intended.

Bitcoin’s Upper Layer of Failure

With these two technologies, many of the businesses built on top of the Bitcoin protocol will no longer be necessary. The points of failure built on top of the Bitcoin network have always been the main thing holding back mass Bitcoin adoption. Many people have talked about creating trustworthy, reputable replacements for those current, centralized structures, but the real solution is to make the base layer of Bitcoin practical and secure for everyone to use on their own. Let’s not forget the original intentions of the Bitcoin protocol. The Bitcoin experiment will only be a success if we can remove all the middlemen and put the control over currency and finance in the hands of the individual.

Last modified: April 20, 2014 18:34 UTC