How Blockchain Technology Stops Payment Scams
One of the most exciting payment trends to keep a close eye on is the blockchain. The reason is that the blockchain allows users to send and receive payments electronically without having to be concerned with third parties and fees. However, the main reason that there is so much hype surrounding the blockchain is that it’s so reliable and secure that can stop the most common payment scams that we’ve previously become accustomed to, like the following scams.
Protects Both the Buyer and Seller From Getting Played
We’ve all either had an experience where we’ve dealt with a deadbeat merchant or client. For example, you purchase an item from eBay, the money is withdrawn, and you never receive the item that you paid for. You do work for client and they bail when they receive the invoice.
Most of the time we’re protected. A site like eBay, will refund the money if you’ve been scammed. But, what if you contact the seller outside of eBay to make a deal? What if you purchased a vehicle, which isn’t covered? In most cases eBay can’t help you. And, since you transferred the funds willingly, don’t expect your bank to be much help either.
As JP Buntinx notes on Bitcoin.com,
“A solution has to be created to make sure events like these can be prevented, which is where the blockchain would come into the picture. By creating an escrow system that protects both buyer and seller, there is no reason to try and attempt fraudulent schemes, as there is no way funds will be given to you unless the transaction is completed and both parties are satisfied.
However, the blockchain offers something else as well, as there would be no human interaction involved in the escrow process. By employing smart contracts, data-driven computer algorithms will verify the authenticity of any transaction, and wait for confirmation from both parties before releasing the funds. As this is all based on a computer making the decision, there is no element of corruption involved.”
While the blockchain will most likely replace middle men like eBay, the idea is that it’s a payment alternative that will protect buyers and sellers, as well as freelancers, from any potential fraudulent scams so that everyone will get paid and receive the goods or services that that they purchased.
One of the most-talked about advantages surrounding the blockchain is the security that it can provide. As Chris DeRose says in American Banker, “blockchains enable users to own ‘things’ without the need (or ability) for a central party to secure this ledger.” Whether this is dollars, tokens, bitcoins, company shares, or land titles, “When users in a blockchain network ‘own’ a given item, they are the only ones who can transfer the right of ownership to another person.” This information is shared in tamper-proof public ledgers – which will make it more challenging to counterfeit or double spend.
What makes this process so secure is that, according to The Economist, “Mathematical scrambling is used to boil down an original piece of information into a code, known as a hash. Any attempt to tamper with any part of the blockchain is apparent immediately—because the new hash will not match the old ones.”
DeRose adds, it also takes a lot of energy to break blocks free. This is because miners defend a network “by burning electricity and creating a cryptographic “glue” out of the process.” In most cases, it’s not worth the energy to interrupt the blockchain.
Makes Counterfeiting, Double Spending, and Hacking a Thing of the Past
We took a brief glimpse at why the blockchain is secure. Because of that security, it will address the most common payment scams; counterfeiting, double spending, and hacking.
In fact, because of the way that the blockchain system works, it can address most of these at once. These characteristics include:
- A public ledger that validates each transaction worldwide.
- All transactions are authorized and backed by thousands of computers.
- The blockchain is decentralized so it can’t be manipulated by one person or entity.
- Transactions are solely peer-to-peer and do not rely on third parties or a central authority.
These characteristics can prevent counterfeiting and double spending because transactions use unique identifiers and placed in the public ledger. In layman’s terms, once a bitcoin is spent, it can’t be reused or duplicated. If so, the transaction will automatically be rejected.
As for hacking, that goes back to how much power it would take to extract coins. Austin Williams explains on Quora, that “you would need more than 51% of all of the hashing power of the entire Bitcoin network.” To give you an idea on what that would take, you could have network of the 500 most powerful supercomputers ever creates and still be short. Austin concludes that even if you were able to obtain “more than 51% of the hashing power of the network” the attack would be limited to censoring transactions for other networks and double-spending their own coins. The can not create their coins or steal someone else’s coins.
Prevents Companies From ‘Cooking the Books’ and Price Gouging
If you pay attention to news on any given morning you’ll come across familiar stories that involve companies like Enron and individuals like Martin Shkreli who became infamous for ‘cooking the books’ and pricing gouging. The blockchain has the potential to end that from happening again.
According to Charles Hoskinson, former CEO of Ethereum, “With blockchains, you have transaction histories back to the beginning. If you can internalise it and merge with GAAP [generally accepted accounting principles] then every single penny could be accounted for by this incorruptible entity.” While it may be a tough sell to get companies on-board to place all of their transaction onto the public ledger, Roger Willis, a tech entrepreneur, says, “You can hide the value of a transaction so that only authorised people can see its value, but it would still be recorded in a public ledger.” However, “This would allow the accounting systems, or potentially risk managers looking at a company’s stock, to say ‘the books add up, but we’re not allowed to know the values’.”
As for price gouging and shady individuals like Shkreli, Evan Faggart states in Bitcoinist.net;
“This pharmaceutical exec was able to ratchet up the price of Daraprim through abusing intellectual property. By purchasing the rights to the medication, his company held a monopoly over the legal ability to manufacture and sale the pill, giving them power to charge whatever they wanted to the the people depending on it for their health. This issue could have been avoided if the information for making the medication existed publicly on the blockchain, for all to see and use. Either by publishing it straight to the blockchain, or using a service like Factom, the original creators of a medication could secure its accessibility from people like Shkreli, who want to take advantage of sick people.”
While the blockchain won’t solve all payment scams, it does offer a promising solution in areas like security and preventing payment scams like fraud, double spending, hacking, and price gouging. And, because of that, it’s going to change how we shop and make payments in the future.