Will cryptocurrencies be the main tool for the payments?

My answer to the question "Will cryptocurrencies be the main tool for the payments?" is: "Not now but with the technological improvements they might."

Let`s have a look at the payments business today and its shortcomings that would lead the cryptocurrencies to be the main tool for payments.

As mentioned earlier in my articles, there are real time payment rails which allow the customers to make real time payments account to account. But the solutions at the moment are either local or regional (like SEPA) but there are no global solutions at the moment. Cards payments are global and they are very much advanced for global payments but then again they are B2C or B2B payments and do not cover the account to account payments in an extensive way. (And they are also coming short for big B2B payments in many use cases). As a summary, global payments, especially account to account, are still very slow and if it is between 2 small local banks it is even slower due to the number of correspondent institutions. So there is some good chance for the cryptocurrencies to cover that area and change the game.

First things first. What is Cryptocurrency and how can it be used for payments?

Cryptocurrencies use Blockchain, which is a decentralized technology, as the underlying technology of, and manages and records transactions across a network of computers. Cryptocurrency enthusiasts champion it for three main reasons: its potential to become the currency of the future, its ability to eliminate central intermediaries from the payment value chain, and the higher degree of security offered by blockchain compared with traditional payment systems.[1]

Focus has been on how their value against a fiat currency has performed, much like a commodity. But by their very name, cryptocurrencies are seen by some as a currency. As their whole existence relates to transactions and records of transactions, it is difficult not to see cryptocurrencies also as a payment system. Cryptocurrencies can be used as a payment mechanism. An individual can make a payment to another individual in a cryptocurrency which is recorded on blockchain. Consequently, the key question is not whether they can be used as a payment mechanism, but whether cryptocurrencies are, or could be, a viable challenger to the existing fiat currency payment systems for anything more than a few ad hoc barter transfers.[2]

There are some problems at the moment for cryptocurrencies to be the main payments tool. These are:

·???????High volatility of value

·???????High energy consumption

·???????Capacity to handle the transactions and cost

·???????Blockchain size

High Volatility of Value

High volatility is a problem for the unbacked cryptocurrencies. Bitcoin and Ethereum, for example, 2 of the biggest cryptocurrencies, have reach to their peak in 2021 but started to lose value until the second half of 2022. Stablecoins, which are pegged to a fiat currency or gold, and CBDCs (Central Bank Digital Currencies) seem to be solutions for the high volatility against the fiat currencies (More detailed article about Stablecoins and CBDCs will come in the upcoming weeks)

High Energy Consumption

In order to understand the energy consumption of cryptocurrency mining, it’s important to first look at the power consumption of individual miners. Miners use specialized computers to solve complex mathematical problems, and these computers require a large amount of electricity to run. The amount of electricity used by each miner depends on the type of hardware they’re using and the amount of electricity they’re consuming. According to a recent report from the University of Cambridge, the total energy consumption of the cryptocurrency industry is estimated to be around 121.36 terawatt-hours per year, or 0.6% of the world’s total energy consumption. This is equivalent to the annual energy consumption of countries such as Argentina and the Netherlands.

The energy consumption of different types of cryptocurrencies can vary significantly. For example, Bitcoin, the most widely used cryptocurrency, consumes more energy than other cryptocurrencies such as Ethereum and Litecoin. This is largely due to the fact that Bitcoin requires more computing power to verify transactions, as well as the fact that it is mined using specialized hardware, such as ASICs.In contrast, other types of cryptocurrencies, such as Ethereum and Litecoin, can be mined using consumer-grade GPUs, which consume less energy than ASICs. In addition, some cryptocurrencies, such as Monero, are designed to be more energy efficient than others. As such, the energy consumption of different types of cryptocurrencies can vary significantly.[3]

Capacity to Handle Transactions and Cost

Visa and Mastercard are used to process payments worldwide. Mastercard’s network is estimated to process up to 5,000 transactions per second, making it far superior to Bitcoin’s seven per second. Visa’s transaction throughput is even more impressive, being able to?process?up to 24,000 transactions per second. In a recent interview, Visa chief financial officer Vasant Prabhu said that the network could, in theory,?handle?up to 65,000 transactions per second.

The Bitcoin blockchain can handle up to seven transactions per second, which means that network demand has seen the average transaction fee on the network reach?an all-time high above $62?during specific periods.In order to address low throughput and high transaction fees, developers made the Lightning Network — a layer-2 scaling solution that allows for off-chain transactions.

The?Lightning Network?creates a P2P payment channel between two parties in a transaction. The channel “allows them to send an unlimited number of transactions that are nearly instant as well as inexpensive. It acts as its own little ledger for users to pay for even smaller goods and services such as coffee without affecting the Bitcoin network.” However, that the network’s scalability “isn’t so great,” as users need to open a channel with each party and tie up BTC on it, which affects their liquidity. Per his words, tying up liquidity can be avoided by “using other routes and other payment channels,” but the solution “isn’t very scalable, as payments channels keep opening and closing.”[4]

Blockchain Size

In first-generation distributed networks, each node has a copy of the entire blockchain. If we again take Bitcoin as an example, the current Bitcoin blockchain is about 360 GB. Every new block adds 1 MB, and a new block is created every 10 minutes. That’s 144 MB per day, 53 GB per year. This data must be transmitted between nodes and stored across the distributed network. Scaling this to handle the volume of transactions needed to make it a realistic competitor to the existing fiat payment systems is impracticable. Third-generation cryptocurrencies are trying to tackle this head on. Pruning, subscriptions, partitioning and/or compression can reduce the amount of data each node has to store significantly. Viability at scale is a key objective of the new entrants.[5]

There are obviously some problems to overcome as mentioned above but with new technologies and new ways they are all being solved. There is big opportunity especially for international payments in the upcoming years for cryptocurrencies. Not only for big B22B transactions, there is even good opportunity for remittances. As a person living in a different country I am having difficulties to send money to my home country (high costs and slow transaction). I tried to use stablecoins but it was also difficult for me. Hope things will be faster, easier and cheaper in the future. I personally am waiting for that day to come and feel like it is soon.

[1] Moving toward a cashless society with crypto payments (tcs.com)

[2] Cryptocurrency Payments: Will Cryptocurrencies Provide Viable Alternate Payment Mechanisms? | Teneo

[3] Why Does Crypto Use So Much Energy? Understanding the Power Consumption of Cryptocurrency Mining - The Enlightened Mindset (lihpao.com)

[4] Bitcoin Lightning Network vs Visa and Mastercard: How do they stack up? (cointelegraph.com)

[5] Cryptocurrency Payments: Will Cryptocurrencies Provide Viable Alternate Payment Mechanisms? | Teneo