By Ryan Taylor, Director of Finance at Dash
Since an anonymous inventor first introduced Bitcoin in 2009, the world has slowly gained an appreciation of the awesome potential of digital currencies and the blockchain technology that underpins them. These currencies can be sent across the Internet quickly and cheaply without the need for costly intermediaries. By the end of Q1 2016, more than $1.1 billion in venture capital funding had flowed into Bitcoin and blockchain startups.
Yet, nearly eight years after its creation, Bitcoin remains little more than a toy for geeks and a source of gossip and controversy for fintech journalists. Bitcoin – despite all its promise and media coverage – has yet to gain widespread adoption.
In many ways, this is quite understandable. The mainstream payments business is exceptionally difficult for new entrants to penetrate.
First, consumer payment behaviors are generationally slow to change. Despite decades of digital alternatives, cash and checks still comprise nearly a third of global consumer payment volume.
Second, when new payment technologies enter the market, they face a classic “chicken and egg” dilemma… consumers won’t try a new service if there aren’t many places to use it, while merchants won’t accept it unless a large share of consumers prefer it.
However, in the end, the “payments is hard” excuse is just that… an excuse. Many new payment methods including M-Pesa, PayPal, Klarna, and iDEAL have all emerged in their respective geographies as everyday payment methods.
So, what is “wrong” with Bitcoin? Why hasn’t it painted the globe orange by now?
Many would point to Bitcoin’s broken governance model as a reason. Even seemingly simple changes such as increasing the network’s capacity remain mired in endless debate, for example. However, while governance is critical, that’s not the main reason Bitcoin hasn’t yet reached mass adoption.
Bitcoin’s main problem, to be frank, is that it’s core development is run by backroom programmers and cryptographers – all of whom lack a basic understanding of the payments industry, the type of software consumers want, and the mechanisms through which adoption occurs. This lack of expertise has resulted in a brilliant piece of software that was set to fail from the very beginning, and lacks effective mechanisms to adapt in the necessary ways.
Bitcoin’s Report Card
Why do I say this? There are three (and only three) mechanisms through which mainstream adoption of a new payment method can happen. No new payment method has ever succeeded without excelling in at least one of the following areas.
- Make transactions faster or easier
- Provide richer consumer loyalty rewards or discounts
- Improve security for the consumer or merchant
Credit cards reached mass adoption by being faster and easier than obtaining cash or writing checks, while enticing the consumer with points, cash-back bonuses, and merchant offers such as zero percent financing. Merchants were willing to pay the high fees to accept these cards, not only because consumers demanded them, but because cards reduced cash handling costs and offered significantly lower fraud risk than checks. The trifecta!
PayPal reached mass adoption because it solved how to transact more securely between buyers and sellers over the Internet. It also made those transactions much faster and easier than mailing cashier checks. And it offered a $20 sign-up bonus to encourage new users to try the service. The trifecta again!
In contrast, Bitcoin leaves much to be desired, especially for the critical decision maker… the consumer.
Is Bitcoin “faster and easier”?
While funds settlement occurs much more quickly for merchants compared with credit cards or bank transfers, Bitcoin is hardly “instant” to the consumer the same way that credit cards appear. Bitcoin confirmations take an average of 10 minutes, if network congestion doesn’t cause hours-long delays. This restricts Bitcoin’s usefulness to a subset of online ordering and money transfer use cases, where speed is of less importance.
Bitcoin is also notoriously intimidating to use. New users are confronted with all manner of foreign concepts including long cryptographic keys, device-residing “wallets”, and QR codes. Users must first trade their local currency for Bitcoin in order to use it. Balances are typically available on only one device at a time (unless users access a centralized service). Needless to say, Bitcoin is much more difficult to use than most other payment methods.
What about the low fees?
On the surface, Bitcoin’s low fee structure seems to offer a strong “discount” incentive for adoption. But this “discount” is directed toward the merchant. In fact, in the strange world of Bitcoin, it is the sender that pays transaction fees rather than the receiver. This is a non-starter in the world of payments. Consumers simply hate paying fees to spend their money.
Ah, but on security, Bitcoin shines! Right?
Bitcoin transactions are indeed highly secure. However, it is hard to argue that Bitcoin’s security model is ideal for the consumer. Think about these attributes…
- Bitcoin transactions cannot be reversed (e.g., if a delivery never arrives or the incorrect amount is sent)
- Stolen Bitcoin cannot be recovered
- If users lose their private keys, the associated funds are lost
Bitcoin is great for merchants. They never have to deal with chargebacks or fraudulent transactions. But these merchant benefits all come at the direct expense of consumer protections.
In summary, across all three adoption mechanisms, Bitcoin’s design is an unbelievable failure, especially from the consumer standpoint. That is why crypto nerds, early adopters, and techno-geeks fascinated with the underlying technology are the only people ever likely to use Bitcoin, all the while arguing that everyone should be using this “superior” form of money.
Digital currency is doomed then?
Not so fast. Many of the faults of Bitcoin can be fixed, and other digital currencies are beginning to solve these problems. While most competing currencies are mere copies of Bitcoin which fail to address these issues, one currency in particular employs a number of payments industry and user design experts that might finally succeed at bringing digital currency to a mainstream audience.
Dash – a largely unrecognized but innovative competitor to Bitcoin – is in many respects a “better Bitcoin”. While it is based on Bitcoin’s code – making it simple to integrate into Bitcoin’s ecosystem – it is quickly differentiating itself by incorporating many of the payments industry’s best-practices that digital currencies have thus far lacked.
First, as Dash’s name suggests, its transactions are blazingly fast. Transactions lock within a couple of seconds, making Dash acceptance feasible for a wide variety of use cases, such as payment at the register. The mechanics of what makes this possible are a feat of programming genius on par with Bitcoin itself, and which can only be performed in the “multi-tiered” network design that Dash pioneered.
Dash is also working on a new release codenamed Evolution that will address most of Bitcoin’s shortcomings from the consumer perspective. For starters, it will eliminate all of the user-facing complexity of the network, delivering a clean PayPal-like user experience. Without relying on third-party centralized services, consumers will have the ability to log in to an account-like interface from any device, leveraging a username and password. Payments are made to other usernames rather than intimidating cryptographic addresses. Merchants that accept Dash will be searchable within an integrated marketplace. Users will even be able to send or receive bank transfers directly through their account screen. In short, Dash will behave in a way that makes consumers feel comfortable and engages them more deeply with its ecosystem of services.
Dash is also addressing Bitcoin’s consumer-facing fees. Merchants will be responsible for most of the network’s fees once Evolution launches, and peer-to-peer payments will be free.
Security issues are also addressed. It offers users greater financial privacy than Bitcoin through its optional PrivateSend feature, which makes it difficult for prying eyes to spy on transactions and balances. In the upcoming version, new “moderated transactions” will provide dispute arbitration services. Secure “vault accounts” will offer protection from hacking incidents that have notoriously plagued Bitcoin. Funds stored in these accounts are nearly impossible to steal. Dash is even providing a means to access lost account credentials, with password resets available via email.
In addition to these user-facing improvements, Dash is also notable because of its virtual corporation-like structure in which the holders of the currency determine the leadership team and funding allocation for its development, similar to shareholders of a corporation. Dash is also completely self-funded through the creation of new currency. As Dash’s value grows (it is up nearly 400% in the past year) this self-funding budget continues to expand, and now exceeds the budget of the Bitcoin Foundation. Self-funding enables Dash to maintain its focus on serving users and merchants, and immune to undue influence from financial benefactors.
It remains to be seen whether digital currencies – implemented properly – can gain widespread adoption, but it appears that Bitcoin is struggling to achieve that status in its current form. It might be that Bitcoin is simply a flawed attempt at a brilliant concept.
By injecting payments industry know-how, it is yet feasible that another digital currency such as Dash may surpass the early success of Bitcoin and turn the promises of digital currency into reality. Only time will tell.