Bitcoin Applications are changing the way we think about money and financial systems. While Bitcoin is primarily known as a digital currency, it has also revolutionized various other industries. Its decentralized nature, transparency, and security make it an ideal candidate for a wide range of applications.
In this article, we will explore the top 3 real-world Bitcoin applications, including efficient micropayments, green addresses, and escrow transactions. These applications have the potential to transform how we conduct transactions, improve financial security, and increase efficiency. So, let’s dive into the exciting world of Bitcoin applications and see how they are changing the game.
These applications include escrow transactions, green addresses, and efficient micropayments. We will dive deep into each of these applications and see how they are transforming the financial world. Bitcoin’s ability to enable secure, fast, and efficient transactions has opened up new possibilities for businesses and individuals alike. So, let’s take a closer look at these exciting Bitcoin applications.
Exploring the Top 3 Practical Bitcoin Applications
Bitcoin, the first and most well-known cryptocurrency, has opened up a world of possibilities beyond just digital currency. The technology behind Bitcoin, blockchain, has enabled the development of various applications that extend beyond simple financial transactions. Three such applications of Bitcoin are Escrow Transactions, Green Addresses, and Efficient Micropayments.
Escrow Transactions, for instance, provide a secure way to perform transactions between two parties who do not trust each other. Green Addresses allow users to maintain complete control over their funds while enabling fast transactions. And Efficient Micropayments allow for the quick and easy transfer of small amounts of money, which can be beneficial for content creators, musicians, and other online services.
These applications showcase the potential for blockchain technology and Bitcoin to revolutionize not just the financial industry, but many other industries as well.
Escrow Transactions
Suppose that Alice and Bob want to do business with each other—Alice wants to pay Bob in bitcoins for Bob to send some physical goods to Alice. The problem is that Alice doesn’t want to pay until after she’s received the goods, but Bob doesn’t want to send the goods until after he has been paid. What can we do about that? A nice solution in Bitcoin is to introduce a third party and use an escrow transaction.
Escrow transactions as one of bitcoin applications can be implemented quite simply using MULTISIG. Alice doesn’t send the money directly to Bob, but instead creates a MULTISIG transaction that requires two of three people to sign to redeem the coins. And those three people are going to be Alice, Bob, and some third-party arbitrator, Judy, who will come into play in case there’s any dispute.
So Alice creates a 2-out-of-3 MULTISIG transaction that sends some coins she owns and specifies that they can be spent if any two of Alice, Bob, and Judy sign. This transaction is included in the block chain, and at this point, these coins are held in escrow among Alice, Bob, and Judy, such that any two of them can specify where the coins should go.
At this point, Bob is convinced that it’s safe to send the goods over to Alice, so he’ll mail or deliver them physically. Now in the normal case, Alice and Bob are both honest. So, Bob will send over the goods that Alice is expecting, and when Alice receives the goods, Alice and Bob both sign a transaction redeeming the funds from escrow and sending them to Bob.
Alice and Bob are honest
Notice that in this case where both Alice and Bob are honest, Judy never had to get involved at all. There was no dispute, and Alice’s and Bob’s signatures met the 2-out-of-3 requirement of the MULTISIG transaction. So in the normal case, this isn’t that much less efficient than Alice just sending Bob the money. It requires just one extra transaction on the block chain.
But what would happen if Bob didn’t actually send the goods or they got lost in the mail? Or if the goods were not what Alice ordered? Alice now doesn’t want to pay Bob, because she thinks she has been cheated, and she wants her money back. So Alice is definitely not going to sign a transaction that releases the money to Bob. But Bob may deny any wrongdoing and refuse to sign a transaction that releases the money back to Alice. This is when Judy needs to be involved. Judy has to decide which of these two people deserves the money.
If Judy decides that Bob cheated, Judy will be willing to sign a transaction along with Alice, sending the money from escrow back to Alice. Alice’s and Judy’s signatures meet the 2-out-of-3 requirement of the MULTISIG transaction, and Alice will get her money back. And, of course, if Judy thinks that Alice is at fault here, and Alice is simply refusing to pay when she should, Judy can sign a transaction along with Bob, sending the money to Bob. So Judy decides between the two possible outcomes. But the advantage of this method is that she won’t have to be involved unless there’s a dispute.
Green Addresses as one of bitcoin applications
Another one of cool bitcoin applications what are called green addresses. Suppose Alice wants to pay Bob, and Bob is offline. Since he’s offline, Bob can’t look at the block chain to see whether a transaction that Alice is sending is there. It’s also possible that Bob is online, but doesn’t have the time to look at the block chain and wait for the transactions to be confirmed.
Remember that normally we want a transaction to be in the block chain and be confirmed by six blocks, which takes up to an hour, before we trust that it’s really in the block chain. But for some merchandise, such as food, Bob can’t wait an hour before delivering. If Bob were a street vendor selling hot dogs, it’s unlikely that Alice would wait around for an hour to receive her food. Or maybe for some other reason Bob doesn’t have any connection to the
Internet and is thus not able to check the block chain.
To solve this problem of being able to send money using Bitcoin without the recipient accessing the block chain, we have to introduce another third party, which we’ll call the bank (in practice it could be an exchange or any other financial intermediary). Alice talks to her bank: “Hey, it’s me, Alice. I’m your loyal customer. Here’s my card or my identification. And I’d really like to pay Bob here, could you help me out?” And the bank answers “Sure. I’m going to deduct some money out of your account. And draw up a transaction transferring money from one of my green addresses to Bob.”
Green address
Notice that this money is coming directly from the bank to Bob. Some of the money, of course, might be in a change address going back to the bank. But essentially, the bank is paying Bob from a bank-controlled address, which we call a “green address.” Moreover, the bank guarantees that it will not double spend this money. So as soon as Bob sees that this transaction is signed by the bank, if he trusts the bank’s guarantee not to double spend the money, he can accept that the money will eventually be his when it’s confirmed in the block chain.
This is a real-world guarantee, not a Bitcoin-enforced guarantee. For this system to work, Bob has to trust that the bank, in the real world, cares about its reputation and so won’t double spend. And the bank will be able to say, “You can look at my history. I’ve been using this green address for a long time, and I’ve never double spent. Therefore, I’m very unlikely to do so in the future.” Thus Bob no longer has to trust Alice, whom he may know nothing about. Instead, he places his trust in the bank to not double spend the money that it sent him.
Of course, if the bank ever does double spend, people will stop trusting its green address(es). In fact, the two most prominent online services that implemented green addresses were Instawallet and Mt. Gox, and both ended up collapsing. Today, green addresses aren’t used much. When the idea was first proposed, it generated much excitement as a way to make payments more quickly and without accessing the block chain. Now, however, people have become quite nervous about the idea and are worried that it puts too much trust in the bank.
Efficient Micropayments
Our third example of bitcoin applications is one that makes micropayments efficient. Suppose that Alice is a customer who wants to continually pay Bob small amounts of money for some service that Bob provides. For example, Bob may be Alice’s wireless service provider and requires her to pay a small fee for every minute that she talks on her phone.
Creating a Bitcoin transaction for every minute that Alice speaks on the phone won’t work. That will create too many transactions, and the transaction fees add up. If the value of each transaction is on the order of what the transaction fee is, Alice will pay quite a high cost to do this.
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