Ethereum is Killing Bitcoin’s Payment Use Case
Fast Finality, No Volatility — all on Ethereum
For years, Bitcoin and its forks like Bitcoin Cash have tried to become the currency of the internet, but scaling issues have held it back. Now it seems an unlikely contender, Ethereum, is becoming the home of digital payments.
Tackling Bitcoin’s volatility and slow block times, a trio of stablecoins have appeared on Ethereum: Tether, USDC, and DAI. Leveraging Ethereum’s higher throughput and superior payment properties, they’re making Bitcoin and even Bitcoin Cash look like yesterday’s news.
Paying with Bitcoin
In May of 2010, Laslo Hanyecz paid 10,000 Bitcoin to buy two pizzas — the first real-world transaction using Bitcoin. Since then, Bitcoin has been used to buy countless things from computers to houses. The idea was Bitcoin is digital cash — a self-sovereign way to save and spend money.
But as the years went on and Bitcoin grew more popular, it also became more cumbersome to use. Blocks filled up, and so did transaction fees. Confirming a payment went from taking minutes to sometimes an hour or more.
The problem got so bad that Bitcoin split into two versions. Bitcoin Core, or BTC, took a conservative approach to scaling the block size, aiming to mainly scale via Layer 2 networks. Bitcoin Cash took the more direct approach of increasing its block size to 8MB.
Bitcoin Payments in 2020
Bitcoin payments today benefit from the Segregated Witness upgrade, as well as a more mature Lightning Network, but 10-minute block times and Bitcoin’s inherent volatility keep it a long way from mainstream payments.
In 2018, Bitcoin Core activated Segregated Witness. This increased the effective blocksize from 1MB to almost 4MB. Today, Segwit is widely supported and network traffic jams have almost disappeared. Transaction fees are once again low, and transactions get confirmed in about one block. However users still have to wait for about 10 minutes for their transactions to receive even one confirmation — far from ideal for a payment protocol.
The Lightning Network aims to solve the speed issue. Lightning Network is a layer 2 payment network for Bitcoin which uses smart contracts along with a payment routing network to allow users to transfer funds quickly and securely off-chain. It achieves fairly good decentralization, privacy and scalability, but it does so at the cost of usability.
Users of the Lightning network need to lock up the funds they intend to use for payment on the network for a certain amount of time, during which they are unable to use them on the main Bitcoin network. Furthermore payments cannot be made if the receiver is offline.
The Lightning Network is a very cool approach to Bitcoin scalability, but 2 years on from Segwit, adoption seems slow, and usability issues are still not resolved.
Both Lightning and Segwit still don’t address the final issue with Bitcoin payments — volatility. Most people are not interested in money which changes value from one minute to the next.
Even people who do believe in the self-sovereign money narrative of Bitcoin usually aren’t very interested in paying with it — they’d rather “hodl” it and see the price rise.
Bitcoin Cash — Faster But Less Secure
Bitcoin Cash took a more direct approach to solve Bitcoin’s throughput and speed issues. By increasing Bitcoin’s block size to 8MB, it increased throughput by 8x, and by allowing for 0 confirmation transactions, it was able to massively increase speed.
But these improvements come at the cost of security. Transactions that go through with 0 confirmations essentially have not gone through any meaningful form of blockchain consensus.
More troublingly, BCH shares the same mining algorithm with BTC. Miners who mine BTC can easily switch over their machines to mine BCH instead. Since BTC’s hashpower is currently over 50x the hashpower of BCH, even a small minority of BTC miners can easily overpower the network and perform 51% attacks on BCH.
These attacks are not theoretical, they’ve already occurred multiple times. In fact, someone has made a website where you can track double spends happening on Bitcoin Cash: doublespend.cash .
Ethereum to the Rescue
These days we don’t have to settle for insecure payments, 10 minute confirmation times, or volatility. Stablecoin payments on Ethereum generally confirm within a minute, don’t fluctuate in price, and are widely adopted enough to be used for payments.
These coins, whether its Tether, USDC, or DAI, offer fast finality because they run on the Ethereum Network. Best of all, as stablecoins, users don’t have to worry about volatility.
DAI — The Decentralized Stablecoin
DAI is possibly the most interesting stablecoin on Ethereum. As a decentralized stablecoin, each DAI token is backed 150% by cryptocurrency collateral. Better yet, unlike Tether, DAI’s cryptocurrency reserves are fully transparent and visible on the blockchain.
DAI’s price is protected through automated liquidation mechanisms that kick in if the price of collateral drops below safe levels. Even through 2018 when the price of Ether dropped 90%, DAI stayed very close to its target of $1 USD. Besides liquidation, even governance is handled in an automated manner, making DAI the most decentralized stablecoin on Ethereum.
USDC — Coinbase-backed Digital Dollars
USDC is a US Dollar-backed stablecoin that anyone with a US bank account can withdraw into US dollars. Created by Coinbase, the largest American cryptocurrency exchange, reserves are audited each month. USDC holders can rest assured that a responsible custodian is backing their funds.
USDC’s greatest strength is also its one weakness — centralization. As Coinbase is a US entity, anyone transferring funds to sanctioned entities or creating transactions Coinbase considers suspicious may be subject to having their USDC frozen.
Tether — The Most Liquid Stablecoin
First issued in 2014, Tether is the oldest stablecoin, and still the most liquid stablecoin in the world. According to Coinmetrics, it averages in the hundreds of millions of transaction volume per day.
Tether used to be solely on the Bitcoin Omni network, but it expanded to the Ethereum network as an ERC-20 in 2018. On Ethereum, Tether is much faster and cheaper to transact. Transfers on Omni that took up to an hour before now take under a minute on Ethereum. It’s no wonder that in 2019, growth of ERC-20 Tether exploded. ERC-20 Tether transactions now dominate Tether volume.
While popular, Tether is not transparent. It’s a dollar-backed stablecoin, but those dollars are held in opaque bank accounts. With Bitfinex often facing banking issues, and ordinary holders of tether unable to withdraw tether into fiat currency, Tether’s dollar reserves have been questioned. Due to these issues, competitors have popped up.
Better Wallets
Ethereum Wallets are also making vast improvements in user experience, making it easier than ever to use cryptocurrency in real life scenarios. Argent Wallet is seed-less — you don’t have to jot down 12 words on a sheet of paper and hide it somewhere. It uses human-readable names like tom.argent.xyz instead of easily mistyped addresses like 1BvBMSEYstWetqTFn5Au4m4GFg7xJaNVN2. It also has extra features like multi-sig, payment limits, and more, all without requiring the user to have a computer science degree to use it.
Faster, Cheaper, Better
Bitcoin pioneered cryptocurrency payments, but Ethereum has made it better. Whatever flavor of stablecoin you prefer, USDC, DAI, or Tether, payments are simply faster and cheaper than they are on Bitcoin-based blockchains. Since these are stablecoins, you also don’t have to worry about volatility — its just like paying with USD.
With faster transactions, cheaper fees, and better user experience, it’s clear: the future of crypto payments is on Ethereum.
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