One of the more controversial arguments for Bitcoin is the irreversibility of its transactions. The whole Bitcoin ecosystem was built to generate immutable transactions; the timechain, the mining, and the proof of work, all combine to create a history of transactions that becomes increasingly difficult to modify with the passage of time.
Yet, while fast unalterable payments should be considered a leading proposal of the top cryptocurrency, many disregard and underestimate the feature because it can be perceived as a concern more than a positive outcome.
In this article, we try to bring some clarity to the argument by examining the way Bitcoin transactions become irreversible and how they compare with other means of payment like PayPal and credit cards, as well as altcoins.
First, let’s debunk one myth: Bitcoin transactions can either be irreversible, or reversible. Before digging into an explanation of this dual attribute that makes Bitcoin a unique payment system, let’s quickly recall how transactions are confirmed and become irreversible.
Satoshi Nakamoto described the Bitcoin system as “The network that timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work”.
Imagine having 1 BTC and attempting to spend it twice in two separate transactions by sending the same bitcoin to two separate wallet addresses. Both of them will go into the Mempool of unconfirmed transactions. The first transaction would be approved via proof-of-work and then verified into the subsequent block, while the second would be recognized as invalid by the confirmation process and would not be verified. In case both transactions are taken from the pool for confirmation simultaneously, the one with the highest number of confirmations will be included in the blockchain, while the other will be discarded.
This is how the Bitcoin protocol resolved the double-spending problem, and transactions become more irreversible as the number of confirmations rises.
How many confirmations are necessary for a Bitcoin transaction to be irreversible?
To be secure against double-spending, a transaction should not be considered as confirmed until it is a certain number of blocks deep. The more blocks are generated from the transaction block, the harder it gets to reverse it.
In theory, one confirmation (one block) is enough but that is mainly recommended for small amounts as it’s less secure. The greater the amount, the longer time and confirmations are suggested. For example, in the case of >$1,000,000 transaction values, some recommend 60 confirmations should be applied.
Many online merchants wait for at least 6 confirmations of a transaction to safely assume that it is valid.
How to Reverse a Bitcoin Transaction to Protect Consumers
Although bitcoin’s base layer blockchain transactions are irreversible, consumer protection can be implemented on a layered escrow service so that bitcoin is secured by a third party and disbursed only after contract terms have been met. Furthermore, the use of a multi-signature escrow eliminates the risk of the intermediate stealing the held coins, or losing them to malware or hackers.
This type of service might be necessary or desirable to ensure customers’ reliance on Bitcoin payments in the case of returned items, disputes, or protection from fraud.
Using escrow on Bitcoin payments has its benefits over competitors like credit cards. Credit cards are not inherently secure, resulting in higher costs overall and the possibility of payments being reversed for months afterward. By contrast, when bitcoin has been released to the seller from escrow, it cannot be reversed since the coins are in the seller’s possession.
A Comparison With Traditional Payments
When it comes to the more traditional means of payment like credit cards and Paypal, transaction times, confirmations and chargebacks still provide advantages and disadvantages for merchants.
When Paypal was created in 1998, it represented a breakthrough in the payment processing system. For the first time, a payment processor was using encrypted information with the highest level of technology available; data were stored on servers that aren’t directly connected to the internet; a gateway could allow for payments using emails and passwords without full transmission of payment information to the merchant.
Certainly, the confirmation process of these methods of payment is extremely quick despite having to go through different steps and layers of authorizations across multiple financial institutions. Yet, in most cases, merchants’ confirmation of payments and their clearing with banks still necessitates a couple of days to go through.
In the case of chargebacks, things get even more burdensome and devious if we consider that all transactions, for both credit cards and PayPal, can be reversed up until 180 days following the payment with the chance that the transaction could have been reversed with fraudulent intentions.
Chargebacks are a real pain in the neck for merchants. They are so frequent that business owners have to regularly budget them into their expenses. The burden of payment reversals is often placed on businesses while major credit card companies tend to favour the consumer even in the most obscure cases. They’re not easy to fight, they’re expensive, and the process can be confusing and frustrating. This cost, of course, is largely passed on to consumers via inflated product costs to help cover losses and remain profitable.
From a merchant’s perspective, bitcoin offers an increasingly convenient and secure alternative to credit cards that ensures they can avoid chargebacks while cutting transaction costs and middlemen.
A Comparison With Altcoins
With regards to cryptocurrency payment processes, altcoin proponents often assert their platforms are faster and cheaper than Bitcoin but it’s hard for them to dispute that their transactions are more final and immutable.
While the number of confirmations per altcoin really depends on the purpose, the fees paid, and the amount transacted, just like for Bitcoin, it must be noted that it should not be considered the best indicator of transaction finality either.
Based on the essence of Bitcoin, in actual fact, energy is the dominant component that is traded for immutability. How much energy is consumed by 6 Bitcoin confirmations? How many Litecoin confirmations guarantee an equivalent energy cost? There’s only one way to measure the security of a blockchain and that is the amount of energy it costs to rewrite it and how much energy would be required to perform a 51% attack.
In order to provide a fair comparison, only cryptocurrencies that live on Proof Of Work protocols are considered in our inquiry. Howmanyconfs.com is a website created to calculate how much energy it would take other coins to achieve the same level of transaction finality and security against Bitcoin. Based on its computation, Ethereum is 2x slower, Bitcoin Cash 33x slower, Dash 165x slower, and Vertcoin an astonishing 2072x slower.
The methodology used by the website might be controversial and can certainly be disputed, however, there are statistical facts that bring more light to the irreversibility of transactions in the altcoins space.
In the case of Bitcoin Cash, for instance, the number of double spending attempts and successes leaves no space for uncertainty over the reliability of the coin.
It would seem that Bitcoin truly is in a league of its own when it comes to transactional finality. When it comes to being absolutely sure that your money is YOURS, Bitcoin manages to be on par with cash, with all other digital alternatives struggling to keep up.
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