This is the 4th article in the series of Bitcoin authored by Syed Hassan Talal.
This article analyzes the myth of the Bitcoin being the ultimate solution for the micropayments. Although, the main aim of the Bitcoin is to facilitate the micropayments but still it has a long way to go.
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CryptoCurrencies; Bitcoin - The Myth of Micropayments' Solution
1. 14 | StateBank NEWS FEBRUARY 2017
Satoshi Nakamoto proposed a pay-
ment system in 2009 – Bitocoin - which
has the potential to be viable for mi-
cropayments keeping in view the de i-
ciencies in the current inancial system.
This system is a peer to peer, autono-
mous, decentralized, cryptographically
secured with the ability to carry out mi-
cro-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 mi-
cropayments is a ‘Buried Treasure’ as
the emerging technology of Bitcoin has
a gap between its ‘Should-be-technolo-
gy’ and ‘Current Abilities Today’ (Riz-
zo, 2015). The potential of the Bitcoin
Micropayment markets is estimated
at USD 925 billion by 2025 (Wedbush,
2015).
Micropayment is a term which is rel-
ative to its respective payment system;
e.g., PayPal de ines a micropayment as
less than roughly USD 5, whereas in Bit-
coin, 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. Howev-
er, 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 condi-
tions; 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-prior-
itized or not relayed by various anti
looding algorithms built into the Bit-
coin network; there is a minimum
amount of value that a single transac-
tion can send, determined by the num-
ber of bytes required to send and claim
it along with the fees charged. The re-
cipient of the micropayments will end
up with a wallet full of ‘dust’ which can
be expensive to spend (fee-wise). (Bit-
coinj, 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 dif icult to be used as mode of pay-
ment for higher amounts.
Lets’ assume the scenario to under-
stand the constraints; imagine a soci-
ety 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 min-
imum output size is 1.3 cents or 5,430
Satoshis which would incur an addi-
tional 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 mass-
es, the majority of the transactions
won’t be tens and hundreds of Bitcoins,
but in fraction of bitcoins.
Bitcoin enthusiasts and tech entre-
preneurs see a whole new set of oppor-
tunities to ill this gap of the emerging
technology. Numerous startups have
sprung out to address this issue and
trying to come up with a viable solu-
tion which is cost effective for the Bit-
coin users along with pro itable for the
company. This means that they have to
come up with protocols (rules) for how
two parties can carry out the transac-
tion 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 inancial sector, especially work-
er remittances and inancial inclusion,
as sending/receiving of minor amounts
would really enable the masses to be
the part of the payment system. Bit-
coin has already proved itself to be a
disruptive phenomenon in the inancial
sector recently, its ability to be a mi-
cropayment 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 inancial
inclusion?
Syed Hassan Talal
Assistant Director, BID–I
Crypto-Currencies; Bitcoin – The
Myth of Micropayments Solution
OFF THE RECORD
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’.
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