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Bitcoin for payments: Why critics' view is wrong and will become more so

In the last 3 months of 2017, almost $150 bn was processed in transactions - nearly 10 times more than a year earlier and seven times higher than what Western Union moves among consumers in a quarter

Elaine Ou | Bloomberg 

Bitcoin

Critics of often argue that it’s useless as a means of payment, one of the key elements of any successful currency. That’s not quite right, and likely to become less so. First, a reminder on how works. If I want to send someone some Bitcoin, I simply broadcast my intention to the network. I then wait for the transaction to be picked up by “miners,” who process transactions in return for fees and newly minted If all goes well, my transaction will be included in a block, which becomes part of the global immutable ledger known as the blockchain. (Disclosure: I own some Bitcoin, because as a I sometimes receive it as payment.) Despite complaints about the lack of usability, the network is being used to make a lot of payments. In the last three months of 2017, it processed almost $150 billion in transactions, nearly ten times what it did a year earlier and more than seven times what moves among consumers in a typical quarter. It’s important to note, though, that the actual number of transactions hasn’t changed -- it’s the average value of each transaction that keeps growing. Granted, this is far from an ideal system if you want to pay for a cup of coffee. That’s because transactions must compete to get picked up by miners, who favor the ones that offer the biggest fees. Somebody who wants to move $1 million can easily afford to offer $20, but someone who wants to buy a pizza probably can’t. As a result, smaller transactions can languish -- a sort of inequality that has led some to accuse of becoming just another toy for the elite. What to do? One popular workaround involves exchanges and wallet providers such as and Xapo, which hold on behalf of millions of individual customers. last year estimated that they were storing about 10 percent of all in circulation, and have similarly large balances.

People who use the same provider can make payments to one another instantly, through the provider’s own books, without the cost or delay of broadcasting to the blockchain. Xapo, for example, processes about 500,000 transactions a day off the blockchain, and only 30,000 on. So transactions can be fast and cheap, as long as users are willing to rely on a trusted central counterparty -- but that’s exactly the kind of system that was designed to subvert. Not to mention the fact that wallet providers and exchanges have become prime targets for hackers. So how can regular folks transact in while remaining true to its peer-to-peer ethos? A fledgling network called Lightning offers one solution: It allows people to create two-way channels through which they can make numerous small payments, with only the final balances settled on the blockchain. To deal with the issue of trust, it requires users to put down deposits that can be forfeited if they fail to make good on their obligations. Lightning is still in its infancy, and might not be enough to make universally accessible. It does, however, have the potential to offer low-cost payment processing while retaining Bitcoin’s permissionless nature. Other solutions based on the same technology might even enable decentralized exchanges. will never be the universal communal ledger that many early advocates imagined. It’s simply not realistic to replicate every petty cash transfer on computers all around the world. That said, if the blockchain acts as a sort of wholesale settlement backbone for numerous such as Lightning, it could yet fulfill the goal of creating a genuine peer-to-peer payment system. That would be an impressive achievement in itself. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.


Elaine Ou is a at Global Financial Access, a company in San Francisco. Previously she was a lecturer in the electrical and information engineering department at the University of Sydney.

First Published: Tue, January 23 2018. 08:12 IST
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