Why Cryptocurrency Hasn’t Changed Peer-to-Peer Commerce (Yet)

Investment in cryptocurrency is heating up. Retail investors, hoping to become overnight millionaires, have poured in, and more are expected to enter the fray as zero-commission trading services from Robinhood and Square make this process more affordable. Institutional investors recently started trading in the space, boosted by the introduction of futures in late 2017. Regulation is a matter of weeks away as the SEC clamps down on ponzi scheme ICO’s in an effort to protect many of these same retail investors from fraud and market manipulation. Many crypto tokens will be classified as securities and platforms such as Polymath, Trust Token, and Harbor (in particular their ‘R Token’) will be used to enter into this new era of real world assets being securitized on the blockchain in a regulatory compliant manner. As utility tokens maintain their status as functioning utilities versus speculative securities, we will see protocols and dapps further along in their life cycle and closer to actual launch before tokens are distributed, than we have so far today (where hundreds of millions is raised off of a whitepaper and a handshake).

While digital currencies are becoming popular for trading and speculation, however, it’s worth remembering that this was never their intended purpose. The whole point of cryptocurrencies was to introduce the ability to make payments without relying on a third party. Bitcoin’s ultimate aim, revealed in Satoshi Nakamoto’s white paper, is to be a purely peer-to-peer version of electronic cash.

There are a number of reasons cryptocurrency adoption for consumer commerce in the U.S. has stagnated, but perhaps the most prominent are a current lack of need for the mass population, scalability challenges, price volatility, and poor user-experience.

A solution in search of a problem

The value proposition of cryptocurrency is most impactful in an environment where the trust-based model is broken. But in the U.S. and other developed countries, there is a strong foundation of trust. We largely still put our faith in financial institutions and fiat currencies, as evidenced by our continued use of cash, debit and credit cards and other payment methods.

If anything, consumers are becoming more trusting of payments solutions orchestrated by third parties: Peer-to-peer services are positively buzzing, for instance. Venmo processed more than $34 billion in payments in 2017, doubling 2016’s throughput. Zelle is growing; Apple and Square are also competing in this arena. Global mobile payments are expected to hit $1 trillion in 2019, up from less than half that in 2015. Even in emerging markets like Kenya and China, M-Pesa and WePay provide innovative payments solutions.

So how does cryptocurrency become a mainstream vehicle for consumer commerce? Bitcoin might dominate existing payment methods, New York Fed economists argue, “if we lived in a dystopian world without trust.” What does that world look like? It doesn’t have to be a zombie apocalypse. It could simply be the next financial crisis, which could erode the remaining trust in the status quo and accelerate cryptocurrency’s adoption for payments. But hopefully it’s not something that drastic; the economists believe as cryptocurrencies improve scalability and convenience they may be able to compete with established payment methods. 

Growing pains

Much of the technical discussion around blockchain revolves around scaling, and it probably consumes more intellectual energy in the space than any other single problem. Why? Everyone knows cryptocurrencies cannot become a dominant payment system without overcoming their scalability issues. To put it into perspective, the Bitcoin network’s maximum throughput is currently three transactions per second (TPS); in comparison, Visa’s network is approximately 24,000 TPS.

This won’t be solved overnight. The same Fed economists noted that “the process of picking random validators takes time, is expensive, and consumes tremendous amounts of energy.” If tech advances are mostly the function of time multiplied by brainpower applied to the problem, then this problem likely disappears over the long run.

There are a manifold of scaling solutions on the way: Lightning Network, Raiden, Skale Labs, etc. There are also many more sophisticated chain solutions themselves, such EOS (launching in June 2018) and Dfinity that will solve some of these challenges. Nothing is live nor up and running at scale yet though and even when they are, it will be some time before the average consumer’s day to day life will be impacted by them.

Roller coaster pricing

An additional hurdle exists: price volatility. As observed in monetary disasters ranging from Venezuela today to Zimbabwe ten years ago to Depression-era USA, currency price instability wreaks havoc on commerce. Losing more than half its value in a month, as Bitcoin and crypto writ large have done recently, is unacceptable for any currency that wants to be a true medium of exchange.

In national economies, the central bank is tasked with maintaining currency stability. As befits its origins as a technolibertarian fantasy, the solution proposed by the blockchain world leans on innovation and circumvents centralized control: a batch of new cryptocurrencies called stablecoins that are programmed to self-regulate prices through manipulating the cryptocurrency supply. Think of them as cryptocurrencies with an automated central bank built in. The need for successful and broadly adopted stablecoins has been underlined by the popularity of Tether, a cryptocurrency pegged to the U.S. dollar, whose apparent lack of trustworthiness has inspired and underpinned much of the excitement around decentralized technology. More exciting projects here include Basecoin, Havven, and Trust Token’s TrueUSD.

Terrible UI

Cue Steve Balmer’s hilarious ‘developers developers developers’ speech (watch the youtube link, it’s funny).

Right now, the user interfaces and experiences around most wallets, exchanges, and applications are hideous and unintuitive and built with developers in mind. In the early days of the web, folks cared about pretty browser applications such as Netscape rather than HTTP, email clients such as AOL mail rather than SMTP, and Google Maps rather than GPS. My point is, underlying protocols aren’t usable by everyday consumers without user friendly applications built on top of them. The question becomes, how much are we willing to trade off user friendliness for decentralization and cost to provide some of these services. MetaMask is far easier to use than clunky MyEtherWallet, but both of them link to your private section of the Ethereum blockchain. Decentralized exchanges allowing for on-chain transactions such as Ether Delta will make you run for the hills because they’re so difficult to use. Coinbase is a user friendly crypto-wallet for staple currencies, though they charge fees on each trade (above and beyond the standard trading spread that they keep) to provide you with simplicity and a mobile app interface that you’re familiar with.

I think we’ll see the Facebook Connect of crypto games and consumer applications so you can sign into various Dapps (decentralized apps) more easily. We’ll see buddy lists for wallet addresses you regularly transact with. We’ll see digital item asset exchanges (e.g. Rarebits) that allow gamers to trade virtual items as was the case in the early days of social games, versus Bloomberg terminal / NYSE looking financial exchange interfaces.

Laying the pipe

Cryptocurrencies are fast becoming a mainstream investment vehicle, but their potential is much more than a store of value. They can bring unprecedented independence to peer-to-peer payments by eliminating the middleman, removing institutions from the equation entirely. While cryptocurrencies will likely become the go-to way to pay each other in emerging economies where trust is in short supply before advanced economies, the industry is laying the groundwork to make this future a reality everywhere.

N.B. none of the above is to be taken as investment / financial planning advice or recommendation. I am not a financial advisor.