Transaction costs can take up a significant portion of income when they add up. In fact, according to SmartAsset , the average credit card processing fee for a card-swiping retail business is roughly 2 percent. The cost can even be even higher, given that most payment card providers are not transparent about their charges.
The case is similar for online shops, where CardFellow estimates the costs to be somewhere between 2.3 percent and 2.5 percent. Customers paying in cash can pay even higher fees, with a study by Tufts University estimating the cost of transacting in cash for the average American family to be about $1,739 per year.
For credit card payments, the charged amount is shared between two intermediaries - namely the card issuing bank and the card network, e.g., Mastercard and Visa. In online shopping, the fees go to the e-wallet provider. People who pay with cash incur costs when withdrawing money from their bank account.
Blockchain technology seeks to eliminate these intermediaries by decentralizing money and enabling transparent and anonymous peer-to-peer transactions. Simply put, the distributed ledger technology is providing a platform where third parties such as banks and other financial institutions are not needed in order to exchange value. With intermediaries being nudged out of the game, transaction costs could become a thing of the past.
While the idea behind decentralized payment systems is a noble one, the pioneer blockchain-powered payment solutions face significant challenges, among which are scalability and volatility.
Regarding scalability, blockchain platforms such as Bitcoin and Ethereum have been painstakingly slow, with the former allowing seven transactions per second and the latter supporting roughly 15 transactions per second. This means that with payment methods such as Bitcoin, there can sometimes be a need to wait as long as 16 hours for a transaction to be processed. The slow transaction speeds are indicative of the resources required to facilitate the transactions and often translate into high energy consumption.
Another problem with blockchain-based payments is that most cryptocurrencies are highly volatile and therefore not fit to serve as media of exchange. No one wants to hold money that can drastically change in value within seconds unless doing so for price speculation. This explains why most cryptocurrency holders are short-term speculators, attracting to the space even more speculators rather than long-term users. However, all is not lost, given the rate at which new solutions are being worked on.
For instance, Ripple can now process over 1,500 transactions per second and can scale to handle the same throughput as Visa. Its main goal is to enable smooth and less costly cross-border money transfers between financial institutions, digital asset exchanges and corporations rather than day-to-day transactions by the average person.
Stellar is another highly scalable cryptocurrency with the capacity to facilitate over 1,000 transactions per second. However, just like Ripple, Stellar is targeting cross-border transactions with a focus on payment systems and banks. Also, it is highly volatile and therefore not fit to be a payment option for day-to-day use.
Perhaps the project closest to addressing the issue of scalability and volatility simultaneously, while focusing on day-to-day transactions, is the Singapore-based company Tosblock . In terms of scalability, the project can process over 1,000 transactions per second, making it a good candidate for retail and commercial payments.
Tosblock is targeting crypto volatility from a unique angle. It has separated between the investment function and the medium of exchange function by introducing two coins, namely TOSC and TOSP, giving TOSC all the characteristics of traditional cryptocurrencies and making TOSP usable in payments exclusively, tying its value to fiat currency.
This means that users can buy TOSC for speculative purposes and convert their holdings to the supposedly more stable TOSP or fiat currency. TOSP is as stable as the fiat currency backing it and incurs very low commissions when used as a medium of exchange.
Even though TOSP dependence on the fiat system does not sit well with most blockchain enthusiasts, it is one of the closest examples that cryptocurrency has to being accepted as a payment method for the masses.
This is just the beginning, and there are high hopes that in the near future, crypto will be able to maintain stability without having to depend on traditional systems. The journey to blockchain-powered payment systems is on course, and with new solutions and innovations being brought to the space, it's possible that in the near future, we won't have to depend on costly intermediaries to facilitate transactions. Undoubtedly, projects such as Ripple, Steller and Tosblock are just the beginning of better things to come.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
