If the trends in the crypto economy over the past few years have taught us anything about real life use of virtual currencies, it’s that bitcoin is extremely unlikely to evolve into a universal communal ledger like many early proponents had claimed.
But to say that it is useless as a mode of payment is also as inaccurate as it can get.
That’s evident from the fact that despite all the cribbing about the lack of usability, the number of payments made using the bitcoin network is consistently on the rise.
For example, in the fourth quarter of 2017, it processed nearly $150 billion in transactions, up 10,000 percent compared to where the figure stood just a year prior. Worth noting that the actual number of transactions didn’t see any significant change. Instead, the average value of the average transaction saw an enormous surge.
Admittedly, it’s not the most practical method if you want to pay for a bag of chips or a cup of coffee. That’s primarily because all transactions made using bitcoin compete against one-another to be picked up by miners.
The miners, meanwhile, tend to prefer the bigger payments as they offer bigger fees. This essentially means that the smaller a transaction, the more it needs to wait to be processed by a miner. Although there are transaction accelerators, they’re not mainstream enough yet.
Yes, there are a few workarounds to use bitcoin in your everyday transactions. The most popular of these workarounds usually involves wallet providers and exchanges such as Xapo and Coinbase. What these third-party platforms do is hold the bitcoin on behalf of all their users.
Coinbase in 2017 estimated that they were storing roughly one in every 10 bitcoin in circulation. Other major exchanges and walled providers are using the same strategy wherein they would store high volumes of cryptocurrencies for the benefit of the user.
People using the same platform can make bitcoin payment to one-another within the metaphoric blink of an eye. This method involves no transaction fee or delays.
For example, Xapo processed nearly 500,000 transactions per day off the blockchain, and just 30,000 on.
This essentially means that transactions can be affordable and quick so long as the user is willing to put their faith on a trusted central counterparty. Ironically, that’s precisely the kind of system that bitcoin was originally developed to subvert.
Moreover, for most investors, it’s hard to shrug off the fact that wallet providers and exchanges are becoming an increasingly lucrative target for hackers as more and more people jump into the booming crypto market.
So if you haven’t heard about it already, a relatively new network called Lightning offers an alternative to the run-of-the-mill crypto wallet and exchange. Lightning enables users to create two-way channels which can be used to make multiple small transactions. Only the final balance (the net sum of all smaller transactions) are registered by the blockchain.
In order to circumvent the issue of trust, Lightning makes it necessary for users to put down deposits that can be canceled anytime in the event they fail to comply with their obligations.
Note that this method is still in its early days and might not suffice to turn bitcoin (or for that matter, any other cryptocurrency) into a universally accessible mode of payment. But having stated that, the Lightning network does a pretty neat job when it comes to offering low-cost payment processing without compromising the permissionless nature of bitcoin.
Interestingly, many proponents are optimistic that other more advanced solutions based on the technology that powers Lightning could soon pave the way for decentralized exchanges.
Feature image by Michael