The 8 challenges to overcome to enable cryptocurrency payments

In this series of posts, Aditus’ Lead Blockchain Developer Tony Chew sheds light on topics relevant to the development of Aditus Pay and that of the wider crypto-currency space.

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In this post I will address how a cryptocurrency payment gateway ecosystem works:

Most of us are familiar with digital payments. However, there are unique challenges when implementing them for cryptocurrencies and blockchain technologies. Here, we’ll break down complex blockchain concepts and make them easier to understand.


Catalogue

The series will shed some light on the following topics:

  1. Under the hood of a cryptocurrency payment gateway
  2. Adoption and use cases in the real world for merchants and consumers
  3. The future evolution of blockchain technologies and cryptocurrency markets

Introduction

At Aditus, we believe that cryptocurrency and blockchain technologies represent a shift that is disrupting the financial service industry. Like how Amazon considerably reduced the dominance of hyper-retail chains like Walmart, cryptocurrencies and blockchain is also reshaping how the payment industry operates.

Cryptocurrency is largely unregulated in most jurisdictions and that introduces interesting challenges for both businesses and consumers. Currently, we still can’t spend cryptocurrency easily and that hampers its potential as a widely adopted currency.

This is illustrated by the following challenges:

  1. Transaction Speed & Confirmation
  2. Price Volatility
  3. Transaction Cost
  4. Market Liquidity & Convertibility
  5. Security
  6. Counterparty Risk
  7. Operational Transparency, Auditability & Anonymity
  8. Blockchain Specific Issues

We firmly believe that in order for crypto-currencies to become more than merely a speculative asset, it needs to be used by more users and merchants, and thus the above challenges have to be tackled.


1. Transaction Speed & Confirmation

Scenario

Sam is looking to purchase a cup of coffee but the blockchain network is currently congested. The slower transaction confirmation results in the merchant taking a longer time to receive payment and process his coffee purchase.
This creates a hassle for both Sam and the merchant.

Problem

Payments are only confirmed once “bounded” into a block. Transaction speed is determined by a fee market *[memory pool] and payment confirmations are prioritised according to the amount of fees paid.

This is a fundamental limitation of how fast a transaction can be processed based on blockchain confirmation. The amount of time for confirmation differs based on the underlying blockchain [ Average block time: Bitcoin — 10 minutes, Litecoin — 2.5 minutes, Ethereum — 15 seconds ] with varying “double-spending” trade-offs.

This renders cryptocurrency an unrealistic means of payment.

Solution

We need to look at this based on high valued, median valued and low valued transactions:

High Valued Transactions

Transaction speed will not be a concern if you are buying international property with bitcoin. This is because alternative means of payment would likely take even longer due to banking approvals required for large fund transfers.

Median Valued Transactions

Transaction speed will also not be a concern if you are buying a television set with bitcoin. This is because it takes time to have to product delivered and thus there is no real urgency for immediate payment confirmation.

Low Valued Transactions

However, transaction speed will matter if you are buying coffee with bitcoin. This is because it is unlikely that you will be patient enough to wait 15 minutes for your coffee. Nevertheless, this can be mitigated by accepting 0 confirmation transactions. As long as the transactions appear on the blockchain’s memory pool.

There are arguments that 0 confirmation transactions are unsafe for the merchant. It is worth noting that similar issues exist with other mediums of payment such as forged notes and chargebacks for credit cards.

While this is not an ideal scenario, second layer solutions such as Lightnight network and Sidechains will soon be available.

As demonstrated, transaction speed is not that different from other payment methods.


2. Price Volatility

Scenario

Sam is looking to buy a cup of coffee.
However, he realises that the price of cryptocurrencies are constantly fluctuating. This presents a dilemma for both Sam and the merchant since both feel uncomfortable making this transaction due to the uncertainty of paying or receiving more/less at the end of the day.

Problem

The speculative nature of cryptocurrencies makes it harder for merchants to accept it as payment without taking on price risks. Consumers anticipating a rise in the prices of their cryptocurrencies will also not adopt it as their preferred payment method.

Solution

Many businesses operate across international borders and deal with the fluctuations of multiple foreign currencies. It is the extreme volatility of cryptocurrencies that is the issue of contention here.

This price volatility is unavoidable as the cryptocurrency market matures. This will eventually be resolved as more cryptocurrency-based financial instruments and derivatives enter the market, which will increase market depth and liquidity.

However by using a cryptocurrency payment gateway, it is still possible for businesses to receive the exact payment amount denominated in their currency of choice without having to factor in price volatility.

Here’s a hypothetical scenario:

  • Merchant is selling his book for $50.
  • Consumer is looking to buy the book.
  • Merchant brings out his cryptocurrency payment gateway indicating that the book would cost 0.001 BTC.
  • Consumer pays 0.001 BTC.
  • Merchant receives his $50 while the payment gateway handles the operational settlement of the transaction.

Some price risk will always be present and there will be a need for the payment gateway provider to price volatility into the margins accordingly.


3. Transaction Cost

Scenario

Sam is looking to buy a cup of coffee.
However, the blockchain network is congested and he has to wait 10–15 minutes for his transaction to be confirmed. He is also unwilling to pay a higher transaction fee for his purchase to be confirmed. Likewise, the merchant is only willing to accept his payment only after his transaction is confirmed.

Problem

It is a nuisance for consumers to pay varying transaction fees for a cup of coffee. In addition, the often changing amount required to get the transactions exacerbates the problem.

Solution

We need to look at this based on high valued, median valued and low valued transactions:

High Valued Transactions

Transaction cost will be a low concern if you are buying international property with bitcoin. This is because it will be cheaper than traditional banking fees.

Median Valued Transactions

Transaction cost is a slight concern if you are buying a television set with bitcoin because it increases the final price of the product.
Compared to the charges that would be incurred by a conventional payment gateway of 2–3%, businesses can set lower prices for cryptocurrency payment to achieve similar profit margins.

Low Valued Transactions

However, transaction cost will matter if you are buying a cup of coffee with bitcoin. It is unlikely anyone will pay $3 worth of transaction fees for a $5 cup of coffee. This should be resolved as Lightning network is implemented and Sidechains are eventually adopted.

Alternatively, a “debit card” system can be used:

  • Consumer deposits 0.001 BTC to cryptocurrency payment gateway.
  • A book he wants to buy costs $50 (equals to 0.001 BTC).
  • He pays the amount in BTC to the merchant through the payment gateway.
  • The merchant’s account is credited with $50 (a conversion of the consumer’s 0.001 BTC).

This solution may seem centralised. At the end of the day, it is the same as what already exists in a conventional digital payment gateway.


4. Market Liquidity & Convertibility

Scenario

Sam is looking to buy a cup of coffee.
The merchant accepts cryptocurrency but is concerned about converting it back to cash. It creates a hassle for the business if cryptocurrency payments increases as he needs to avoid taking too much price risk.

Problem

Transactions through a cryptocurrency payment gateway is indirectly a conversion of cryptocurrency to sovereign currency on public exchanges. The conversion process is difficult to manage for businesses due to the lack of economy of scale which leads to price inefficiency during conversion.

Cryptocurrency markets are still maturing. Different cryptocurrencies have varying abilities to absorb high value transactions and large volumes of market sell orders. Price convertibility is crucial to estimate price on a real-time basis.

Solution

By enabling tiers of transaction based on the settlement amount, a cryptocurrency payment gateway can effectively mitigate insufficient market liquidity.

Examples of such proposal:

Bitcoin
24-hour exchange volume: $10 Billion 
Allowed single transaction amount: $5 Million 
Exchange volume to transaction amount ratio: 0.0005%

5. Security

Scenario

Sam is looking to buy a cup of coffee.
The merchant accepts cryptocurrency. However, he is concerned about the security of his cryptocurrency after reading about major hacks that have occurred.

Problem

It may be difficult to comprehend how cryptocurrencies are secured, especially to non-tech savvy users. This is concerning when major hacks occur almost yearly without any recourse to reclaiming stolen funds.

Solution

The operational logistics of accepting cryptocurrencies is ideally dependant on a setup of Hot & Cold Wallet system. This limits security risk due to software coding errors while allowing flexible operational automation.

The proposed setup:

Hot Wallet
Intent: Used to operationally transfer funds for various means 
Access: Programmatically using software code
Cold Wallet
Intent: Used to store funds securely 
Access: Multi-signature address leveraging hardware wallet

There is no need for proprietary code to begin accepting cryptocurrency due to its decentralised nature. Thus payments should reference directly to the blockchain to limit potential security errors. Software code interfacing wallets should be used only to manage operational flow instead of managing funds.


6. Counterparty Risk

Scenario

Sam is looking to buy a cup of coffee.
The merchant uses a cryptocurrency payment gateway for the transaction. He wonders if trusting a third party is counterproductive since cryptocurrencies are all about decentralisation.

Problem

Integrating cryptocurrencies into business operations may not be so straightforward despite its decentralised nature. Some form of reliance on a third party is unavoidable — in this case being a cryptocurrency payment gateway.

Even cryptocurrency payment gateways will eventually rely on exchanges and other counterparties to provide access to markets. This presents counterparty risks cascading from one to another.

Solution

Business transactions rely on interaction, rendering counterparty risk unavoidable.

We try to keep true to what blockchain technology aims to achieve by decentralising as much as possible to reduce risk. Aditus will be working closely with our partners, Kyber Network & Digix, to fulfil this vision by leveraging their proprietary technology.

Kyber Network: Using their decentralised exchange network, we will be able to provide conversion services through cryptographically secured methods without being exposed to counterparty risk.
Digix: Using Digix’s DGX tokens that represent physical gold bullions allows Aditus to hedge price movements to the relatively stable gold prices.

This synergy allows us to provide additional assurance to merchants.


7. Operational Transparency, Auditability & Anonymity

Scenario

Sam is looking to buy a cup of coffee.
The merchant accepts cryptocurrency but is concerned about his financials being publicly available and accessible to competitors.

Problem

Privacy is always a concern with cryptocurrency payments. Businesses do not want their competitors to access their transaction records, yet they wish to enjoy the benefits blockchain technology brings with operational efficiency and transparency.

Solution

Anonymity Concerns Hierarchical Deterministic (HD) wallets enables the ability to differentiate transactions to provide auditability while preserving anonymity of all parties. HD wallets are essentially accounts that create a new address after every use.

Auditability concerns can be leveraged by the blockchain system. It enables and simplifies transparent record keeping [ Taxes, Audits, Operational purposes ] since all transactions are immutable and publicly available.


8. Blockchain Specific Issues

Scenario

Sam is looking to buy a cup of coffee.
However, various events occur on different blockchains every once in a while and the merchant has no time to research into how to deal with each specific event. He wishes it was simpler so he can just focus on his business while accepting cryptocurrencies.

Problem

Minute nuances lie across different blockchain systems. These impact various aspects of how operations are handled.

Bitcoin & Litecoin
BTC & LTC works on the concept of UXTO (unspent transactions output) which calculates transaction fee based on transaction size. To illustrate, consider the equivalence between accepting a thousand dollar note vs one thousand pennies. It results in certain inefficiencies that end up with higher fees.
Ethereum ERC-20 Tokens 
Ethereum tokens require Ether as gas to broadcast transactions on the blockchain. It might cost more Ether to send out your tokens than what it’s worth under certain price conditions.
Blockchain Forks
Blockchains are based on a system of consensus. There may occasionally be circumstances that result in soft or hard forks. Such events result in chain splits and periodical downtime for the cryptocurrency’s network.

Solution

There are no one-size fits all solution to the above problem. This is why a cryptocurrency payment gateway is essential to widespread adoption of cryptocurrency as a payment method.

The evolution of various blockchain technologies will only accelerate as the market matures. As a merchant, it will require too much effort to keep up.


The above-mentioned issues are exactly why Aditus Pay is unique in providing cryptocurrency payment while also abstracting the complexities present with accepting cryptocurrency.

Contact Aditus today to explore how we can better facilitate your businesses into accepting cryptocurrencies.

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