What’s Preventing Crypto for Everyday Payments?
By Greg Magarshak, Founder of Qbix and Intercoin
Crypto as a medium of exchange
It’s been nearly 10 years since Satoshi Nakamoto launched Bitcoin and 13 years since Ryan Fugger designed the original Ripple network. Crypto-currencies are still nowhere near being a mainstream way to pay for things. Almost no one is using them to make actual everyday purchases, the way they use VISA credit cards, or PayPal, or WeChat in China.
Even though Bitcoin was conceived as a "peer to peer electronic cash system", it (BTC) became mostly a store of value, a commodity and a means of speculation. RipplePay was originally a peer-to-peer electronic credit system, but eventually Ripple (XRP) became a network for moving money between banks. What happened to the original goal of making a currency that people actually use to transact in everyday life?
Much of what we see is a result of the original architectural design decisions behind the networks and how they work. It’s tough to predict how something will evolve, especially when it’s built on a bold new idea.
Bitcoin’s bold idea was a novel use of Proof of Work to determine global consensus. But, this has led to an arms race of mining power, to the point where the Bitcoin miners now use more electricity than 159 out of 195 countries, all to secure a blockchain that can handle a few transactions per second globally, but may reverse them in the future.
RipplePay’s bold idea was to let people extend interest-free credit to one another via trustlines. Payments between friends require no third party at all, and payments within densely connected communities could be routed through intermediaries. In almost every way, this was the opposite of bitcoin: credit vs value, hyper-local vs globally recoded transactions, etc. But in the end, not enough people were willing to take on the risk of being financial intermediaries, and the project turned into a system of moving money between banks. It also introduced a global value-based token called XRP.
Both BTC and XRP networks today are monolithic global networks, requiring global consensus about every transaction. Ripple in particular is well-suited for settling debts between large institutions, but there is still a missing piece on the level of individuals.
It takes a serious amount of time and money to confirm Bitcoin transactions, making them impractical for everyday transactions. Today, fees range between $20 and $40 to get the confirmation time down to 10 minutes (well, several times that by most vendors who want "multiple confirmations").
Ripple’s XRP confirmation time is much faster, but it has achieved this by carefully and slowly building out its network of trusted validators. Handling validators that misbehave would still be a time consuming human effort.
However, Ripple’s technology is well suited for settling money between large organizations, without the need for them to trust one another. Intercoin aims to provide the missing piece: letting these organizations enable everyday transactions by users within their community, and between communities.
Adoption by Users
Another issue is that people can’t easily move money in and out of the crypto economy. These days, they have to set up an account with an exchange or portal such as Coinbase, verify their identity, scan their documents, and then wait up to a week as payments to the exchange clear. And this is the "user-friendly" way that replaced the old way of meeting up with someone on the street, for a value exchange that functioned similar to a drug-deal.
In general, it’s hard for people to join a monolithic, global network. For example, to really join the Internet, one would need their own IP address, rent technology, enter into agreements with upstream providers, pay lage sums, comply with regulations, and so on. Most people who "just want to get on the internet" walk into a coffee shop and get on the wifi, or connect their home to an ISP.
Thus, Intercoin is building technology to handle the second half of the equation: giving users the freedom to maintain accounts between communities, control their own data and assets, and move freely between them.
Adoption by Developers
There are tons of apps and websites out there. They adopt payment systems like PayPal or Stripe by integrating simple user interface flows to let people check out or start a subscription. Lots of services provide a simple way to integrate a "Pay" or "Subscribe" button on a website or app. ApplePay and AndroidPay have made it even easier by storing credit card information on the phone, and people can now pay merchants with just a fingerprint to authorize the payment.
In order for crypto payments to become mainstream, apps would have to be able to integrate such buttons, where people would be able to pay with their credit card or bank account or crypto account stored in their phone, or on ApplePay. The whole process would have to be seamless, with the user paying in the currency of their choice, and the merchant being eventually paid out in the currency of their choice.
Another issue is the fundamental difference in how the crypto world treats transactions, as opposed to the existing financial system. With Bitcoin and nearly all other Blockchain-based systems, transactions are final, so let the buyer beware. If the seller absconds with the money and never sends the product, there is no financial intermediary to reverse the transaction. If money is stolen from a wallet, there is no way to reverse it.
But more to the point, this difference presents a major problem for letting people pay with traditional financial instruments such as a credit card or even an ACH transfer, because both are reversible. If you’re running an exchange, or a service like CoinBase, you can get screwed by people who deposit money and then issue a chargeback, as this exchange was.
Wires are about the only mainstream transaction that’s electronic and non-reversible, and they charge significant – but fixed – fees ranging from $20 to $70 per transaction. So, individuals would have to make relatively large wires in order to have low fees in terms of percentage.
Intercoin allows the organizations to do the wires instead of the individuals, and handle chargebacks the same way that PayPal or Visa handles them. Coinbase has a few avenues available to them when dealing with chargebacks, but communities would be able to claw the money back from local merchants accepting their currency, providing a smoother transition to and from the traditional payment system. In a sense, Intercoin is letting each community "run its own open source PayPal".
Bitcoin’s rise in value makes it a good investment and store of value, but a lousy medium of exchange. And, its price volatility would lead many merchants to cash out to local currency, and pay fees (again). They can, however, exchange for tethers which run on top of Bitcoin, and are basically crypto representations of Dollars, Euros, etc. If more people accepted payments in tethers rather than the actual Dollars, etc. then merchants could keep their money in crypto. But that requires adoption of crypto as a medium of exchange in the first place.
Making it Work
On Intercoin, USD and GBP are represented by crypto equivalents similar to how Tethers do it on the Bitcoin ecosystem, but it’s done much more organically: USD and GBP are just another "local currency" which can be exchanged with Intercoin via market makers.
A community in the USA pre-purchases some Intercoin for a low fee by sending a wire to a Market Maker, which exchanges it for Intercoin. When a person comes and pays them $20, the community’s Payment Network begins keeping $20 Intercoin on reserve as an "asset". The person receives the corresponding amount of Community Coins as a "liability" or "claim" against that Intercoin asset. They go pay some local merchants.
Eventually, the merchants can cash out to Intercoin and exchange it for e.g. some USD Coins, all without paying any fees (just the bid-ask spread between Intercoin and USD Coins). In fact, even this bid-ask spread can be avoided if merchants keep their money in Intercoin and the ecosystem of Local Currencies backed by it. The exchange there is completely without market makers: the exchange rate at any point is just the number of Local Coins in circulation divided by the amount of Intercoin on reserve.
But even one step beyond that, the more businesses and employees accept USD Coins alongside USD, the more the whole crypto economy can proceed without the fees of cashing and in and out of it. For that, the ecosystem needs more adoption by users of crypto as a medium of exchange. And that’s why we need Intercoin.
From the user’s point of view, it works pretty much like in this video:
Originally Written by Greg Magarshak, Founder of Qbix, on December 26, 2017 :https://qbix.com/blog/index.php/2017/12/whats-preventing-crypto-for-everyday-payments/