2022-02-24
Payment Sector in Cryptocurrency
Cryptocurrency kickstarted the blockchain technology into the Industrial Revolution 4.0 (IR4) era. Beginning with bitcoin, now there are thousands of cryptocurrency with innovative solutions available on the internet. One type of innovation in cryptocurrency is the payment sector.
Bitcoin is the first ever cryptocurrency. It was created with the aim of becoming a decentralised digital cash system as Satoshi Nakamoto’s bitcoin white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System”. As Satoshi envisioned, Bitcoin can be used as a medium of exchange, that does not require any intermediaries such as banks or any other financial institutions. Bitcoin is the first cryptocurrency to solve the double spending problem, which was the main problem of issuing a decentralised digital currency.
Conceptually, bitcoin can become a global decentralised currency. It does not need any intermediaries for transactions, it does not require any KYC information and it is fully digital. However, there are several factors that prevented bitcoin from becoming the global currency. These factors are low transaction throughput or transaction per second, high transaction fees and long confirmation time (1 hour).
These factors translate into failures of bitcoin’s original purpose, which was to become a digital currency. Low transaction throughput means bitcoin is not scalable. With the capacity of only less than 10 transactions per second, it is difficult to foresee bitcoin as a replacement of fiat currency or current payment systems such as VISA which can handle more than 100,000 transactions per second. In addition, bitcoin transactions have high fees, making micro-transactions next to impossible.
With all these factors taken into account, many developers have innovated new solutions for payments in cryptocurrency. Any payment solutions, would need to have high TPS, low transaction fees and fast confirmation time. However, there are other elements needed to be factored in as well such as financial inclusion and adoption.
Achieving high TPS is not an easy task without compromising other features. This problem is known as the scalability problem, or in general, the blockchain trilemma. In short, blockchain projects face issues on balancing between scalability, security and decentralisation. Having high TPS usually means some tradeoffs in security or decentralisation. This can be seen in a number of crypto projects such as XRP and XLM.
XRP can handle around 1500 transactions per second, with the ability of scaling even more. Meanwhile, XLM is able to process more than 4000 transactions per second. However, high TPS often translate into more centralised approach or less security, although this is not always the case. XRP for example, have high requirements to become a full node, thus reducing decentralisation. In addition, both XRP and XLM are highly centralised as more than 70% of the XRP in circulation, are owned by Ripple, while more than 50% of XLM in circulation are owned by Stellar.
Low transaction fee is vital to be considered as an acceptable medium of exchange. Micro-transactions involving fiat currency usually have very low fee, sometimes with no fee at all. BTC and ETH are examples of cryptocurrency with very high transaction fees, or sometimes called ‘gas fees’. The ETH gas fee have reached $100 at some point when the network traffic spiked. Transaction fees are required to compensate miners or stakers who run the blockchain. Therefore, having low transaction fees may deter miners or stakers from running the blockchain, reducing decentralisation. Both XRP and XLM have very low transaction fees, which can be tracked using this screener.
Confirmation time is the time taken for a transaction to be confirmed as valid or vice versa. For example, when we transact in-store, we assume the transaction has been confirmed when the cashier issue a receipt for our purchase. In cryptocurrency, confirmation time usually refers to when a transaction is confirmed to be valid, with very low chance of being tampered or reversed. Sometimes it is called block finality, which refers to the number of blocks needed to be produced after the transaction has been recorded. The confirmation time is essential in ensuring that no double-spending occurred in the transaction, and to have high assurance that the transaction cannot be reversed or altered. Cryptocurrencies in the payment sectors usually have very fast confirmation time, usually less than 5 seconds, such as CELO.
In addition to these three factors, there are other factors as well that drive developers into working on innovating solutions for financial problems, such as financial inclusivity and adoption.
Financial inclusivity refers to the inclusiveness to the financial system. This can mean access to banking system, fiat currency, and even cryptocurrency. In certain countries, people have limited access to banks and ATMs. Thus, their day-to-day lives are limited to their local area. However, certain crypto projects discovered that mobile phone access are wider than financial inclusivity. Thus, they began tapping into telecommunication providers to utilise their cryptocurrency as a mean of connecting with these people. An example of such project is Telcoin. Other projects provides mobile applications to store, and transact cryptocurrencies, such as Utrust and Metal Pay.
Bitcoin has been around for more than a decade, yet it has only been adopted by a small number of business and enterprises. Adoption of cryptocurrencies is difficult due to the wide adoption of fiat currency and the regulations from central banks and governments. To circumnavigate this problem, some developers provide bridges between fiat currencies and cryptocurrencies in the form of stablecoins. Stablecoins are cryptocurrencies that are pegged, or attempted to be pegged with a fiat currency. The most popular stablecoin is the USD Tether or USDT. Stablecoins allow users to convert between fiat currency into cryptocurrency, and vice versa, allowing adoption of cryptocurrencies in many ways.
Payment sector in cryptocurrency has gone through a decade of innovations, with more cryptocurrency projects providing solutions to financial problems. Bitcoin provided the foundation for future projects on decentralised digital currency. With the rise of awareness on blockchain technology, it is only time before cryptocurrencies will be adopted worldwide.
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