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Not All Transactions Are qual

There are a lot of discussions in scaling up blockchain transaction throughput— Bitcoin, Ethereum, etc. The common benchmark used is credit card transaction throughput, but the quoted card payment transactions do not include the clearing and settlement part; therefore, they are not the same as cryptocurrency transactions.

Cryptocurrencies are designed to be digital bearer instruments, like cash and gold coins in the physical world, once they are transferred from one hand to another, a transaction is final*. The distinct difference between ACH, wire, credit cards and cryptocurrencies is that cryptocurrencies — such as Bitcoin, Ether, Monero, etc. — are the trinity of payment systems, ledger, and currency.

A credit card transaction has two phases: 1) authorization from the issuing bank and 2) clearing/settlement for merchants to get paid. Most discussions on transaction throughput — 1,667 per second — are referring to 1), which is for a merchant to get a promise of payment from the credit card holder’s issuing bank. Merchants then need to submit those promises in batches for settlement and wait for 3 to 5 days for the money to show up their bank accounts. After that, those transactions are still not final: merchants can still get charged back from credit card frauds, or disputes from cardholders. Even for in-person credit card transactions, fraudulent customers could claim that they did not do the purchase; and merchants would still have the risk of being charged back if they had not kept customer signed receipts.

Therefore, the often used comparison between straight-through peer-to-peer blockchain throughput with the credit card authorization transactions is not a meaningful one. Regardless of transaction volume, a credit card transaction is settled in days and is not final until a few months later.

ACH, wire transfer and Paypal are more meaningful comparisons.

Physical constraints are also often ignored in the discussions about transaction throughput: i.e., the delay from the speed of light limit and the number of hops in the path, and global network capacity. The round-the-world speed-of-light propagation delay is around 0.2 second. The current global communication link capacity is around 20 Mbits/second. Without latency, the limit for global network throughput for message averaging 1K bytes (1 byte = 8 bits) is 2,500/second. (reference: Deconstructing the Blockchain to Approach Physical Limits)

Similar to Visa/Master card payment, the addition of “layer-2” protocols such as the Lightning Network for Bitcoin and Plasma Cash for Ethereum can increase blockchain transaction throughput. There will blockchain innovations that change and reshape global Internet commerce and payments. Nevertheless, any claims of replacing Visa/Master networks with blockchain protocols are probably greatly exaggerated.

From online merchants' perspective, receiving money in 10–15 minutes through blockchain based payment, versus 3-5 days through card payment is a great improvement, in addition to lower risk of loss from fraud and fees.

According to the Nilson Report, the global card payment fraud loss is projected to exceed $34 billion in 2020.

Note: *It is probabilistic, not deterministic. It is probably to have a “>51% “ attack, with which the attacker can double spend the money in his or her wallets — either through mining or acquiring from the market. The amount of double-spent transactions would have to be large enough to justify the costs of mining hardware and utilities.

For people who have invested a large sum in computing, facilities and utilities to gain > 51% of hashing power and also have a large stake in the cryptocurrency, e.g., Bitcoin, or Ether, they could choose to be pirates and sabotaging the network. However, if double-spending were to happen frequently, people would find out soon and lead to the collapse of the entire network. They could lose more than they could gain. Alternatively, they could choose to protectors of the realm, ensuring the integrity of the network, collecting rewards and transaction fees while maintaining or increasing values of their holdings and investments. What sane people or homo economicus might do?



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