[Alpha Labs #2] Musings on crypto-payments
A proposal that caters to both our online and offline needs
Welcome to the second edition of Alpha Labs Newsletter — where we will update you on what we are cookin’ over at the labs 🧪 Before we dive in…
It's that time of year again, when we come together with our loved ones to celebrate the joy of the holiday season. Whether you're spending the day with family, friends, or simply taking some time to relax and recharge, I hope you have a wonderful Christmas. 🎅 ❄️ 🎄
In today’s post we’ll share our thinking with you on payments in crypto. Where the challenges lie and how to design a better solution.
In 2008, Satoshi Nakamoto presented a proposal for a P2P e-cash payment solution.
But there were problems…
A common criticism against cryptocurrency is that it is not really useful for the economy. Even purchasing a coffee with crypto is an arduous task. There are many reasons why it does not work in its current form:
Merchants have to accept cryptocurrency
Merchant is exposed to volatility
Cryptocurrency takes a while to settle
Cryptocurrency transactions are final and irreversible
Great strides have been made in the last couple of years to get around this. Circle’s USDC has gained widespread adoption and legitimacy from the community. It is a stable-coin on the blockchain that is pegged to the US dollar; removing volatility. Solutions such as BitPay or Coinbase Commerce allow merchants to accept various forms of cryptocurrency. Blockchain Layer 2 solutions enable faster transactions. And smart contracts can be written in all sorts of ways to provide escrow services.
Despite all these breakthroughs, we still haven’t seen cryptocurrency being used for making real life purchases. An argument can be made that maybe cryptocurrency is not suited for being spent in real life at all. My personal belief that is this is simply not true. Blockchain’s transparency and composability allows powerful solutions to be constructed. Let’s begin with basics of what we need to get right.
Starting from first principles
The correct solution for crypto payments will start from customers. It would ensure that it caters to their needs; focusing on their requirements and crafting solutions that ultimately solves those issues. Here are the key principles that allows us to create an anchor around which a solution can be drafted:
Expect minimal behavior change from user
Minimize effort to achieve desired outcome
Minimal learning to be required from user
Create incentives to form new habits
Besides focusing on user-centric design, the correct approach will also build upon the existing infrastructure. This allows for fast execution. If in order to build the ideal solution, one needs to lay the groundwork first, then all energy is lost on preparations. By the time product hits the market, the world could be a drastically different place with vastly different needs.
Prior attempts
With a problem at hand and principles set in place, let’s turn our attention towards existing solutions. A lot of thought has gotten into the crypto-payments space and it’s important to take key learnings. Without going into too much depth, let’s take a look at avenues where these solutions shine and where they fall short.
Peer-to-peer approach
Examples: Coinbase, CashApp
Crypto e-commerce
Examples: Coinbase Commerce, Bitpay
Crypto cards
Examples: Coinbase Card, Crypto.com debit card
Steps in the right direction…
We have seen gradual improvements in bringing crypto payments come to life. The P2P model was the first to market. It still has its place today. Many people, including myself, use Coinbase to send cryptocurrency to friends and family. That being said, it is not commonly used for buying coffee etc. Crypto e-commerce made a significant improvement in accepting cryptocurrency payments. And many businesses are now able to accept Bitcoin; offering a privacy-focused payment rails. Crypto cards are a fresh new addition to the roster. And I have personally used Coinbase Card quite a few times at the store to buy groceries. It was nice to get rewarded in crypto — especially when prices were going up and I wanted to accumulate as many tokens as I could get. That being said, there are still ways to go before I entirely switch over to cryptocurrency as the form of money that I use on a daily basis.
… but still missing key ingredients
Let’s consider the innovations that happened in the last couple of years in this nascent yet fast-growing space. This will give us a glimpse into the realm of possibilities. One big disruption that happened recently was the ability to lend and borrow tokens. Simply stated, you can deposit your ETH as collateral and get USDC in return. In essence, you are shielded from the price volatility while your deposit accrues yield. Another big breakthrough was the ability to have token distribution models. Interested in a project? You can buy their tokens — which allows you to not only benefit from their success, but also grants you the ability to get more involved via voting in their decision making process. Finally, NFTs have partnered up with influencers and thought-leaders alike to create personalized brand affiliations. At the end of the day, you don’t just buy any coffee. You buy coffee from Starbucks (or whatever your favorite brand is). This is crypto-economy in action. The ideal solution would combine the best of both worlds: allow users to make everyday purchases, while also providing incentives to participate in the crypto-economy.
Setting the scene
When talking about cryptocurrency, one can not ignore what is happening in the broader financial ecosystem. Bitcoin itself was born in 2008 during the great recession. And gained its popularity when distrust in the government was high and people felt betrayed by the financial institutions as taxpayer money was used to bail out the big firms. The world is a drastically different place today. But one thing that everyone can agree on is that the US dollar is becoming the stronger by day. Countries are seeing high inflation in their local currencies and folks across the globe are interested in holding their reserves in USD-denominated assets. At the same time, stable-coins have grown quite a bit in popularity and can serve as an investment vehicle. Circle is becoming a trusted brand and they have established their credibility by frequently publishing reports and being transparent with their reserves in a very compliant manner. In the same vein, cryptocurrency, thanks to its open and decentralized nature, has been very inviting to the global masses. Remote world has created opportunities for distributed teams. And co-location is no longer a necessary requirement in order to work for a world-class company. All is to say: the stage is set for a big disruption to happen via USDC as it unlocks novel use-cases that serves need of not just those that are interested in crypto-finance, but perhaps go beyond that — permeating national boundaries and attracting institutions and individuals alike to participate in this new circuitry of financial innovation.
Closing remarks
It is our belief that by unlocking crypto-payments, we would allow users to not only make daily life purchases but also create incentive structures for them to get more involved in the crypto-economy. Consider as an example a coffee aficionado. Said person not only buys coffee from, say Starbucks, but also enjoys demonstrating their loyalty towards the brand. They can collect NFTs fondly which they can then show to other coffee fans; or even use for certain benefits such as access to a prestigious coffee club. This is fun and joyful experience that is only possible using the blockchain. And starts simply from a card swipe. Another example that I can think of is a user that uses CELO tokens to buy carbon-neutral products. CELO is a token whose mission is to support regeneration of global ecologies. CELO can, in turn, decide to reward their users for good behavior in supporting the environment. Finally, crypto-based payment solutions have huge implications for people who do not want to hold their national currencies. This gives an ability to transact using a global token. There are other examples too. You can use your imagination to think of all sorts of ways in which the blockchain can be leveraged to build unique solutions. The possibilities are endless.
— Uneeb & Evan 👨🔬👨🔬