Frictionless Tokens Create Friction
We’re gonna need another intermediary…
In 2013-15 it was trendy for online merchants to pretend to accept bitcoin as payment. It was a very cheap way to get positive media mentions and seem innovative. Overstock, Dell, Tiger direct… they were all at it after they realised it was all media upside. Even Virgin Galactic accepted bitcoin as payment for trips to space at some point (Note: I think paying for a trip to space with bitcoins is actually quite cool).
Of course, the vast majority of merchants didn’t really accept bitcoins and hold them on their balance sheet – they didn’t even touch bitcoin. They used third party intermediary processors such as Bitpay and Bitgo to give the illusion of accepting bitcoins (or other cryptocurrencies), while receiving dollars (or other fiat) into their third party intermediary bank account, facilitated by third party intermediary messaging networks such as SWIFT.
Here’s how it works:
- The merchant prices things in dollars (of course it does – its costs are in dollars, its accounting is in dollars, and the value of a dollar is relatively stable and predictable).
- The customer chooses to “Pay with bitcoin”
- The payment processor checks the price of bitcoin vs dollar on a bunch of cryptocurrency exchanges and uses a proprietary algorithm to determine its own view of the exchange rate.
- The payment processor displays the derived amount of bitcoins the customer should pay, for a short period on the screen – sometimes as short as 30 seconds before repricing (30 seconds! Not a good unit of account!).
- The customer chooses to accept the price and makes a bitcoin payment to the payment processor.
- The payment processor tells the merchant that the payment is made, and later wires the dollars to the merchant the old fashioned way.
- The payment processor is now long bitcoins and short dollars, and decides how and when to hedge this risk.
Fast forward to today. There is a proliferation of token-based businesses. With some notable exceptions when tokens are actually useful, such as to make permissionless blockchains ‘go’, the ICOs are selling basically securities, then trying to make the securities appear useful for something other than speculation – usually by saying “the tokens will be used to pay for an unquantified amount of my product or service at some unspecified point in time”. This, for the time being, seems to keep the regulators happy.
Think about this. You’re going to need a token for each of these things. The tokens are volatile. You earn fiat currency, you spend fiat currency, you account in fiat currency. Why on earth would you hold a bunch of volatile tokens in your wallet just in case you want to use some online service at some point in the future? Tokens that tie up your wealth and can only be used for one thing? It’s like having a bunch of book vouchers, air miles, and half stamped loyalty cards – they are a modern scourge (and ironically, some blockchain companies are trying to make it easier to turn your loyalty points back into something useful, like money!).
You would prefer to have money than air miles.
You would prefer to have money than loyalty points.
You would prefer to have money than casino chips.
You would prefer to have money than fairground tokens.
You would prefer to have money than jukebox credits.
The convenient thing about money is that it can be used for more than exactly one thing.
So, here’s how it’s going to work: Normal people who aren’t token speculators will hold fiat, and they will exchange them for tokens at the very last minute via a new third party intermediary payment processor whose job will be to turn whatever stable currency you have into tokens for the purpose of paying for that service. Like the cashier at a casino.
But isn’t that a cryptocurrency exchange?… Yes but to buy cloud storage you probably don’t want to set up an account with an exchange, send in an id-selfie, wire in dollars, wait a few days, buy the token, request a withdrawal, then make the token payment. You probably just want to click a button. So it has to be as seamless as possible.
So, despite the much adored “frictionless” narrative, we’re actually adding more intermediaries, who have to be paid and who cause more friction.
Ideas on solutions are welcome in the comments!
You are spot on that it is very similar to frequent flyer and loyalty programs. People seem very happy to sign up to a plethora of reward and loyalty programs at present, so why would tokens be any different?
There is of course some real limit to how many different tokens people will be willing to hold and use on a regular basis and I wouldn’t be surprised if we start seeing some consolidation token which flips into the relevant token and uses it when interfacing with a site/platform with some kind of smart contract, like a master coin…
Great perspective!
Regarding the loyalty rewards angle. I believe that loyalty rewards show up as Accounts Payable on the books of the reward program issuers, who want to get the point value off their books. And that is one of the motivations for reward program companies being open to “some blockchain companies are trying to make it easier to turn your loyalty points back into something useful, like money!”
I’m trying to propose this scenario –
What if a whole country, Philipines for instance creates it own blockchain – gives every citizen a wallet – using biometrics(fingerprint, dna, etc) , then puts in say 10,000 units of Philcryptomoney on everyone’s wallet. Of course in the beginning that would have zero value – but we may convince local philanthropists to support the currency say by accepting cryptos in exchange for basic commodities. Like at first its a good way of distributing charity. And later everyone might saart using it till its value goes up.
Hmmm – I guess I should be asking the economists where tis will work
But techonology wise, this is possible right? Would you want to be art of a team that puts this up in the Philippines?
Another great piece Anthony. I love your writing.
That’s exactly the point of Interledger (interledger.org)! You hold whatever assets you want to hold, the merchant tells you their Interledger Address (like an IP address), and the packets of money are routed to them by a network of connectors (like routers) that exchange the currencies.
Hi Antony, the solution to the problem are conventional quick conversion services (shapeshift) decentralized exchanges (kyber- currently testing mainnet MVP) and smart contracts like Bancor. Each of these add a bit of frinction to the transaction but do allow you to go directly from the primary crypto currency like bitcoin or either to the required payment token for the network you wish to use. Some platforms like bancor are working to connect this to systems like paypal so that you can go direct from fiat to the token.
Agree with David, there are already exchanges like etherdelta, but until they are better designed, less buggy and easier to use (more accessible), it’s going to be difficult. These new decentralized exchanges coming up do look much more promising.