Bulldozer00's Blog

The figure below shows a simplified view of the ever growing, world-wide, Bitcoin network. Miners are awarded bitcoins for keeping the network secure and maintaining the immutable integrity of the blockchain. Mobile, PC, and web-based wallets exchange bitcoins with each other in a fluid, borderless, friction-free environment unencumbered by centralized institutions.

In the picture, the Bitcoin economy is a closed system. For it to really thrive and zoom to the moon, it must interface with, and “play nice” with, the existing international finance system. Fiat currencies, which will never cease to exist, must make their way into the system and bitcoins must make their way out of the system.

As the next figure illustrates, the purpose of BTC exchanges (Coinbase, Bitstamp, Kraken, etc) is to bridge the tenuous interface gap between traditional, highly regulated, centralized, banking systems and the decentralized Bitcoin network.

Users open an account on a bitcoin exchange, link it with their bank account, and trade dollars for bitcoin:

Since bitcoin transfers are blazingly fast and they can be used seamlessly and cheaply for both legitimate and criminal purposes, governments are right to be wary of the latter use cases. Thus, bitcoin exchanges, unlike the Bitcoin network itself, can be shutdown due to non-compliance with money laundering laws.

Since the laws of thermodynamics dictate that closed systems eventually die a slow death, opening up the Bitcoin system to the traditional world of finance and playing nice with its regulators is a win for both law abiding individuals who want more control over their money, and governments who want to stamp out criminal activity on the network.