Dollars and other traditional currencies were conceived in a time of cash. The model that extends these currencies to the digital world of electronic payments is a fragile one that relies too heavily on third party financial institutions; Bitcoin was invented to provide an improved alternative.
In the world of cash, once $1 enters circulation, no third party needs to mediate its passage between hands. I can take my dollar to the corner-store, select my candy, and pass my dollar to the vendor in return for the candy. That transaction occurs between the vendor and myself, without any third party involved. The vendor does not need to know anything about me, I don’t need to know anything about her, and no one else needs to know that I ever bought a candy bar.
What if I buy my candy from a small business online? I enter my
credit card information and a third party institution acting as the
middleman, processes the payment.
A transaction as nominal as a $1 candy bar is unlikely to occur between a small business and I because the transaction costs imposed by the third party would be too high. Partly for good reason: Third party financial institutions must mediate transaction disputes and commit a large amount of resources to avoid fraud. Inevitably, transaction disputes must sometimes result in a reversed payment, and the costs of fraud must sometimes be absorbed.