Mumm-Ra
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Satoshi Nakamoto proposed a payment system in 2009 – Bitocoin - which has the potential to be viable for micropayments keeping in view the deficiencies in the current financial system. This system is a peer to peer, autonomous, decentralized, cryptographically secured with the ability to carry out micro-transactions with nominal values like 8th decimal place of a Bitcoin via its network (Nakamoto, 2009). Having said that, the micropayment ability of Bitcoin still remains a Myth. The ability of Bitcoin to serve as a protocol for micropayments is a ‘Buried Treasure’ as the emerging technology of Bitcoin has a gap between its ‘Should-be-technology’ and ‘Current Abilities Today’ (Rizzo, 2015). The potential of the Bitcoin Micropayment markets is estimated at USD 925 billion by 2025 (Wedbush, 2015).
Micropayment is a term which is relative to its respective payment system; e.g., PayPal defines a micropayment as less than roughly USD 5, whereas in Bitcoin, the payment is of million smaller units (called Satoshis), i.e,. fraction of a cent of dollar, or in our case a ‘Rupee’. It is quite fascinating that the user is theoretically able to send transaction in ‘Paisas’ in the Bitcoin Network. However, carrying out such transactions has to face some constraints. One of the major reasons of the non-realization of the true potentials of the Bitcoin Network is its own algorithm; pre-built conditions; and their coded reactions to deal the conditions:
If the micro transactions are carried out too fast i.e. multiple transactions are initiated from the same user in a small time frame, they will get down-prioritized or not relayed by various anti flooding algorithms built into the Bitcoin network; there is a minimum amount of value that a single transaction can send, determined by the number of bytes required to send and claim it along with the fees charged. The recipient of the micropayments will end up with a wallet full of ‘dust’ which can be expensive to spend (fee-wise). (Bitcoinj, 2016) This is more like dealing with metal coins, if the recipient gets a lot of coins (Re. 1, Rs.2, 5, 10) by the customers, recipient would end up with a bag full of tiny metal coins that would be difficult to be used as mode of payment for higher amounts.
Lets’ assume the scenario to understand the constraints; imagine a society which is completely cash-less i.e. utilizing Bitcoins for its daily routine transactions. A user has to pay a small amount to a merchant for a grocery item e.g. 0.1 cents or 400 Satoshis via Bitcoin network. The user won’t be able to send it via network because the minimum output size is 1.3 cents or 5,430 Satoshis which would incur an additional small fee of 2 or 3 cents (Rizzo, 2015). This makes the fee over 150% of the payment. That’s the practicality issue.
Initially, the payment processors utilizing Bitcoin network were unaware of the practical constraints created by the built-in safe keeping algorithms. One bitcoin is worth PKR 95,000 or USD 900.5(at the time of writing this article),(Preev, 2016) which means that if the system gets adopted by the masses, the majority of the transactions won’t be tens and hundreds of Bitcoins, but in fraction of bitcoins.
Bitcoin enthusiasts and tech entrepreneurs see a whole new set of opportunities to ϐill this gap of the emerging technology. Numerous startups have sprung out to address this issue and trying to come up with a viable solution which is cost effective for the Bitcoin users along with profitable for the company. This means that they have to come up with protocols (rules) for how two parties can carry out the transaction in the system by overcoming the constraints without compromising the security protocols. It is still a work in progress as no startup has claimed to come up with the ultimate solution yet. The unearthing of this buried treasure of Bitcoin will be a new game changer for the financial sector, especially worker remittances and financial inclusion, as sending/receiving of minor amounts would really enable the masses to be the part of the payment system. Bitcoin has already proved itself to be a disruptive phenomenon in the financial sector recently, its ability to be a micropayment processing system would be really interesting for the regulators. As far as the regulators are concerned, the question still persists: Is Bitcoin the viable solution for micropayments in terms of security, tracking and financial inclusion?
Author:
Syed Hassan Tallal
State Bank of Pakistan
Micropayment is a term which is relative to its respective payment system; e.g., PayPal defines a micropayment as less than roughly USD 5, whereas in Bitcoin, the payment is of million smaller units (called Satoshis), i.e,. fraction of a cent of dollar, or in our case a ‘Rupee’. It is quite fascinating that the user is theoretically able to send transaction in ‘Paisas’ in the Bitcoin Network. However, carrying out such transactions has to face some constraints. One of the major reasons of the non-realization of the true potentials of the Bitcoin Network is its own algorithm; pre-built conditions; and their coded reactions to deal the conditions:
If the micro transactions are carried out too fast i.e. multiple transactions are initiated from the same user in a small time frame, they will get down-prioritized or not relayed by various anti flooding algorithms built into the Bitcoin network; there is a minimum amount of value that a single transaction can send, determined by the number of bytes required to send and claim it along with the fees charged. The recipient of the micropayments will end up with a wallet full of ‘dust’ which can be expensive to spend (fee-wise). (Bitcoinj, 2016) This is more like dealing with metal coins, if the recipient gets a lot of coins (Re. 1, Rs.2, 5, 10) by the customers, recipient would end up with a bag full of tiny metal coins that would be difficult to be used as mode of payment for higher amounts.
Lets’ assume the scenario to understand the constraints; imagine a society which is completely cash-less i.e. utilizing Bitcoins for its daily routine transactions. A user has to pay a small amount to a merchant for a grocery item e.g. 0.1 cents or 400 Satoshis via Bitcoin network. The user won’t be able to send it via network because the minimum output size is 1.3 cents or 5,430 Satoshis which would incur an additional small fee of 2 or 3 cents (Rizzo, 2015). This makes the fee over 150% of the payment. That’s the practicality issue.
Initially, the payment processors utilizing Bitcoin network were unaware of the practical constraints created by the built-in safe keeping algorithms. One bitcoin is worth PKR 95,000 or USD 900.5(at the time of writing this article),(Preev, 2016) which means that if the system gets adopted by the masses, the majority of the transactions won’t be tens and hundreds of Bitcoins, but in fraction of bitcoins.
Bitcoin enthusiasts and tech entrepreneurs see a whole new set of opportunities to ϐill this gap of the emerging technology. Numerous startups have sprung out to address this issue and trying to come up with a viable solution which is cost effective for the Bitcoin users along with profitable for the company. This means that they have to come up with protocols (rules) for how two parties can carry out the transaction in the system by overcoming the constraints without compromising the security protocols. It is still a work in progress as no startup has claimed to come up with the ultimate solution yet. The unearthing of this buried treasure of Bitcoin will be a new game changer for the financial sector, especially worker remittances and financial inclusion, as sending/receiving of minor amounts would really enable the masses to be the part of the payment system. Bitcoin has already proved itself to be a disruptive phenomenon in the financial sector recently, its ability to be a micropayment processing system would be really interesting for the regulators. As far as the regulators are concerned, the question still persists: Is Bitcoin the viable solution for micropayments in terms of security, tracking and financial inclusion?
Author:
Syed Hassan Tallal
State Bank of Pakistan
