Is bitcoin a medium of exchange or a store of value? For much of the technology’s short history, the answer has been both.
“All sides want the same thing – for bitcoin to be used by everyone,” Jameson Lopp, a software developer at bitcoin wallet provider BitGo, told CoinDesk.
However, it’s the path to that future, where both functions are fulfilled, that is proving a challenge. The debate over which of those applications should define bitcoin today is now arguably at the heart of the network’s scaling debate, though it has gained an added nuance. Namely, whether this should all be accomplished by the base layer blockchain (as opposed to other top-layer networks).
While that may seem like a small consideration – it’s anything but.
It seems to all be summed up by two opposing questions:
- For businesses and miners, if you’re not transacting on the bitcoin blockchain, are you using bitcoin?
- And for developers, if you’re not storing a full history of that blockchain, are you using bitcoin?
But while such questions might verge on the academic, in November, they’ll come more directly to a head. That’s when Segwit2x, a proposal to change the blockchain proposed by business and miners, will move forward with a hard fork aimed to boost the capacity of the bitcoin blockchain.
The move, one that could split the network (again), has strained ties among the technology’s enthusiasts, separating those formerly united toward exits for common startup endeavors.
“The only difference is that one side thinks it’s urgent for bitcoin to grow ASAP, while the other side is patient and willing to put more effort into engineering efficient solutions,” Lopp, a visible and vocal proponent of Segwit2x, said.
Others, including his colleague, BitGo co-founder and CEO Mike Belshe, believe the proposal is the only way forward, given that the network’s startups are strained by the current restricted capacity.
Until recently, however, there has arguably been little in the way of data points to back this business perspective. After all, most are already passing fees off to users, while others don’t interact with the blockchain in real time, instead batch-settling transactions in bulk at a later date.
But that may be changing now that merchant processor BitPay has released new details about its payments dollar volume, which it claims has grown 328 percent over 2016. According to the company, it’s on pace to process more than $1 billion in payments this year on the bitcoin blockchain.
“People always wonder what people are spending bitcoin on all over the world, and this shows that people are actually using bitcoin around the world for real purchases,” said Sonny Singh, chief commercial officer at BitPay.
“And it doesn’t matter the price of bitcoin … our volumes don’t go up and down with the bitcoin price. Our growth rates are gradual.”
But BitPay’s claims will surely add fuel to the political fire, primarily because many remain skeptical of press releases showing large gains in transaction volume. That’s because it’s not always clear how bitcoin businesses are calculating their growth.
For example, multiplying sales by the price of bitcoin would be one approach, though it would be problematic given that the price has increased drastically since last year.
But BitPay says it’s not playing those games.
According to Singh, BitPay’s growth numbers have nothing to do with the price of bitcoin. When a consumer goes to Microsoft’s website and buys an Xbox gaming console through BitPay, the company uses the dollar amount to keep track of growth.
But, while U.S. dollar (and other fiat money) volume has increased, that’s not because of more transactions per se, that’s just that larger value payments are being made.
Singh told CoinDesk:
“We’ve seen a smaller than normal increase in the number of transactions from last year. We’ve also seen a large increase in [business-to-business] transactions, which are around $200,000 per transaction.”
That’s why BitPay’s sales team is laser focused on securing more business-to-business commerce, according to Singh, and less fixated on the smaller retail and e-commerce merchants that in 2015 brought BitPay into being.
Talking to Singh, though, it seems the company would love to be able to help both, but, with transaction fees currently rising, it’s just not practical to make transactions under $20, he said.
Chris Pacia, lead backend developer at bitcoin marketplace OpenBazaar, agreed.
“I think the fees hamper the use case as a medium of exchange,” said Pacia, who has set up a DNS seed for Segwit2x. “This is why it seems to me like at least some people have just given up on payments and are now stating that bitcoin should just be a peer-to-peer speculative trading asset (aka digital gold).”
But was bitcoin really ever suited for retail and small e-commerce transactions?
It makes sense for a large U.S. corporation buying from Chinese suppliers (or vice versa) to lower the time and transaction cost of a $200,000 transaction. With bitcoin, rather than bank wires, companies can drop the time it takes to settle a payment by several days and the amount paid to have that payment jump through a handful of middlemen.
BitPay points to shampoo manufacturer Bellatorra as a good example. The company pays one of its suppliers in China $500,000 every month, according to Singh, and by using bitcoin, fees have gone from 5 percent to 1 percent and the time has been cut from five days to one.
But for a small merchant, whose average ticket is around $20, they’re not really saving enough time and money over credit cards and other traditional payment methods (which are far more popular with consumers) to make it worth setting up to accept bitcoin.
This is especially true since BitPay began charging all merchants miner’s fees in March.
“All the big companies in the space decided we couldn’t absorb the fees anymore,” said Singh. “This is a bigger deal for the smaller merchants.”
BitPay currently charges a flat 1 percent transaction fee plus the network’s transaction fees – which have increased from 55 satoshis per transaction in October 2015 to around 120 satoshis per transaction today (although they have been much higher).
While BitPay has always had a roller coaster relationship with fees, it does seem that part of the company’s inability to offer a fee plan that works for small to mid-sized merchants has been predicated on the increasing miner’s fees.
According to Singh: “We work with many non-profits like Greenpeace and the American Red Cross, and people could donate $1 if they wanted, where now that’s not practical.”
Unfortunately, Singh was unable to give a concrete idea of the amounts such non-profits might have potentially lost over the past year due to the issue of transaction costs.
Risk of centralization
So, while bitcoin was at one time touted as a quicker, cheaper payment method for all, that currently isn’t the case. And both sides of the debate have developed strong opinions about the growing issue.
While BitPay may want an increasing number of transactions to determine bitcoin’s success, bitcoin developers largely believe there is an inherent “security trade-off” in scaling via methods such as Segwit2x. For example, as blocks get bigger, the extra information must be stored by all those who hold a copy of the network’s ledger.
Should the blockchain become so large that only major miners and businesses can hold the full blockchain, the argument goes, how then does bitcoin differ from banks? And should businesses be trusted to determine the future of the technology given their economic interest in their own success?
BitPay, for its part, would like to focus on its impact on real businesses, as well as helping the underserved in areas where traditional currencies and institutions often fail large sections of society. For example, while Latin America only accounts for 2 percent of BitPay’s business, that is a significant increase over last year – and even its own employees in the region are moving to the digital currency.
“Everyone in the company has the option to take their salary in bitcoin. We have a development team in Argentina, and that team takes 100 percent of their salaries in bitcoin,” Singh said.
Still, as for how the question of scaling now or scaling later will play out, the verdict may only come with the passage – or rejection – of Segwit2x by network users.
As bitcoin developer Jimmy Song has heard it put, the bottom line is:
“Bitcoin owes no man their business model.”
Pete Rizzo contributed reporting.
Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which helped organize the Segwit2x proposal, and has ownership stakes in BitGo, BitPay, OB1 (developer of OpenBazaar) and Paxos.
Cracked compass image via Shutterstock