Can Blockchain Finally Break into Retail?
Ever since bitcoin was unleashed upon the world in 2009, its evangelists have claimed that it would quickly revolutionize the way we handle money. Advocates across disciplines have argued that the decentralized cryptocurrency would replace legacy systems thanks to its ease of use and fast transactability — despite the ironically slow processing.
Nearly a decade later, the world has seen unprecedented hype around cryptocurrencies, but the vision remains largely unrealized.
Due to a confluence of factors—some external, many self-imposed—the original cryptocurrency remains a speculative asset more so than a real financial tool. However, blockchain’s growth beyond bitcoin means that novel solutions are constantly emerging that resolve many of bitcoin’s inherent problems.
Especially in the field of retail—a sector bitcoin should be perfectly suited for—most merchants still do not accept cryptocurrencies for a variety of reasons.
Two of the biggest areas where the technology has been lacking are trust and speed. The former is a natural outcome of cryptocurrencies’ design, as anonymity is baked into bitcoin. The second more self-imposed limitation that has harmed adoption is the unreasonable transaction times that companies simply cannot tolerate.
Now, many new blockchain-based platforms have started to tackle these issues with solutions that can complement cryptocurrencies, and in certain cases, even replace them.
Trustless systems still need trust
One of the cornerstones of financial transactions is trust between parties. In any transaction, there must be a degree of certainty on both the buyer and seller’s side that the other party is who they claim to be, and that they can fulfill their obligations. In modern finance, this manifests in a few different ways: credit scores to determine how likely individuals are to pay their debts, identities help put a face to a number, and simply the ability to contact and talk with the other party.
Bitcoin and other cryptocurrencies claim to be ‘trustless’, a slight misnomer that nonetheless has big implications for the retail sector.
Trustless systems don’t necessarily remove trust from the equation, but rather distribute it differently relative to traditional models.
In the current paradigm, financial transactions require a trusted intermediary—such as a bank or payment processor—to vet each party and confirm both the authenticity of the sender’s payment and the validity of the currency being used. Blockchain replaces intermediaries with smart contracts, removing the ‘trust’ element by implying that the underlying system can effectively replace an intermediary’s duties.
The system is ideal in theory, but has yet to fully demonstrate its potential in practice.
There are several factors that still hold back these trustless interactions. For merchants, cryptocurrencies still pose too many problems, and completing such transactions might leave them vulnerable due to inherent volatility. Moreover, a lack of understanding of these trustless systems means merchants are hesitant to take the plunge.
Cryptocurrencies aren’t equipped to deal with these issues, as they are simply another payment method, albeit one that is more technologically advanced than fiat.
Henceforth secondary systems based on blockchain have emerged that can handle the trust portion of transactability.
TenX, for instance, provides credit cards that can be used to simplify transactions and add a familiar trust element to a process that is trustless on the backend. Systems like TenX and competitor Monaco offer a seamless transactability by hiding the trustless aspects behind a familiar model and simplifying the conversion of cryptocurrencies into fiat, thus reducing time and money.
These merged systems may be the tipping point that thrusts crypto into motion for the next wave of adopters–namely retail — as they act like a bridge between the known technologies and emerging cryptocurrency.
Improving speed and shaving transaction costs
If trust itself doesn’t play a factor in crypto adoption among merchants, the speed and cost of transactions will. Credit card payments—the most popular non-cash payment option—are processed in seconds, meaning transactions can be completed almost instantaneously. This is vital for financial systems, as the transfer of money needs to happen rapidly or risk fluctuating values that impact profitability.
In a world where we are accustomed to speed and efficiency, slow-moving systems will not be embraced. This is probably one of the biggest reasons bitcoin has yet to become a major payment option.
Most cryptocurrencies have a hard cap on how many transactions can be processed per minute—one that is fully self-imposed. Bitcoin currently processes roughly 7 transactions per second, a limitation derived from their maximum block size. By comparison, Visa can supposedly process 24,000 transactions per second, although this is up to speculation. Regardless of the accuracy, this disparity between the processing time poses a major roadblock in for cryptocurrency in retail.
The disproportionately long transaction processing times creates bottlenecks that result higher transaction fees for bitcoin. For an industry that is heavily dependent on cash flow, having funds sequestered for hours before transactions clear can be damaging to businesses. Even so, blockchain has found a workaround that both improves speed and reduces costs significantly, putting it on more equal footing with traditional payments.
New platforms have started exploring their own blockchains, with companies like COTI creating their own ‘trustchain’. The company’s platform allows for trustless payments that still pass the trust threshold for retailers (and other sellers) without sacrificing speed or overwhelming the cost structures merchants need to remain profitable. COTI adds a second layer of trust by paying independent ‘mediators’ who are remunerated by the system to settle disputes. Most importantly, instead of fully abandoning traditional models, companies like COTI look to build on them to create a more comprehensive financial ecosystem.
Breaking free of self-made shackles
In the near decade since Satoshi Nakamoto introduced the world to bitcoin, the seminal cryptocurrency has experienced highs as a tradeable asset but remains far from Nakamoto’s grand vision for a truly decentralized currency. Mostly due to the community’s intransigence regarding the factors holding it back from mass adoption, the market has been forced to innovate to arrive at viable solutions.
However, new platforms are quickly emerging that could fulfill Bitcoin’s ambitions and do so more efficiently, by displaying greater flexibility while adapting to market demands and needs. Even though adoption remains a major roadblock, offering a more appealing option to both sides of the transactional coin is a major step in the right direction.