Blockchain Basics, Cryptocurrency Ecosystem
While the popularity of cryptocurrency has not shot up as fast as expected in some early predictions, it has experienced steady growth, and that trend is unlikely to slow down.
A PYMNTS survey among US crypto owners found that 30% had used crypto for online purchases in the past month, while 21% used crypto for purchases at physical outlets during the same time period.
It is still unlikely that cryptocurrencies in physical stores will be made with direct cryptocurrency transactions, instead they often use Mastercard and Visa-branded cryptocurrencies or third-party processors such as Cash App and PayPal. Seventy-four percent of the crypto purchases in the store were made using digital wallets, compared to 66% made with debit or prepaid cards. Even for online purchases, the specific rails on which crypto payments are made vary. Among the 30% of crypto owners surveyed who said they used it for online purchases, 70% used digital wallets while 54% used debit or prepaid cards.
In any case, interest in direct crypto payments is increasing for a number of reasons. Among the consumers surveyed, just over 42% said they would be interested in using cryptocurrency to make financial services transactions more secure, while more than 40% said the same for real estate transactions.
Meanwhile, more than 39% said they would be interested in using crypto to make the purchase of clothing and accessories more efficient, and 37% stated the same reason for using crypto in travel and leisure purchases. Other consumers see crypto as a way to eliminate third parties from their transactions, and 40% said they would like to use crypto for real estate purchases to cut out “intermediaries” – the highest percentage citing that reason.
As consumers’ demand for cryptocurrencies evolves from a preference to an expectation, an understanding of cryptocurrencies and blockchain technology is fast becoming a necessity for businesses involved in payments at all levels. This month, PYMNTS looks at the basics of the blockchain and the ecosystem of cryptocurrency payments, and examines the challenges and opportunities they offer for payment speed, security and reliability.
Break down the blockchain
While first-generation blockchain and distributed ledger technologies (DLTs) demonstrated the feasibility of cryptocurrency trading, clearing and settlement, early approaches to the technology were energy intensive, impractical to scale and slow, and each transaction took 10 minutes or longer to complete. Early iterations also lacked standards across platforms and were limited to simple value transfers, with no contingent transactions or unforeseen expenses. Many of the limitations of blockchain and DLTs have been linked to the proof-of-work consensus mechanism, which relies on involved and resource-intensive calculations to ensure the legitimacy of transactions. This is the source of the high energy costs that are often associated with cryptocurrency transactions, as well as the significant time each transaction can take to complete.
As with all technology as it matures, various stakeholders, from academic institutions to entrepreneurs, are aggressively addressing the limitations of blockchain and DLT platforms. This has led to significant, ongoing innovation, which has resulted in greater ease of use and speed as well as more efficient cryptographic verification processes that use fewer resources while creating a high level of security that keeps data private. In addition to the environmental benefits and faster transaction times that come with it, improved verification processes have also enabled lower transaction fees.
By using more efficient approaches such as proof-of-stake protocols, it is possible to reduce the environmental impact of cryptocurrencies while improving speed without sacrificing security. Accelerating transactions and making them more efficient actually reduces the amount of resources required, and as efficiency increases, transaction fees decrease. In addition, newer generation protocols allow greater scalability, which increases the usability of the technology for both companies and individuals.
Builds consensus on the blockchain
Among the owners of cryptocurrencies surveyed, 68% said that crypto transactions are faster than other payment methods, and 58% said that they believe that blockchain payments are also more secure. Still, while 91% of U.S. consumers surveyed said they have some awareness of cryptocurrency, those who have never owned crypto owners do not share the benefits. Only 40% of all consumers surveyed consider crypto as a viable currency for purchase, and about half of all respondents expressed concern that crypto may be too risky. One third even said that cryptocurrencies are too complicated to become mainstream, but all respondents’ concerns seem to correlate with the lack of owning crypto.
On the part of companies, concerns related to regulation and demand affect the willingness to offer crypto payment alternatives. As regulations related to crypto transactions begin to solidify and demand continues to increase, incentives will grow for companies to offer crypto payments.
The proliferation of cryptocurrencies through various marketplaces is also likely to stimulate growth in third-party solutions that make integration more possible for a wider range of businesses. As a result, blockchain and other DLTs are expected to generate more business opportunities and uses, with 80% of survey participants saying they expect their industry to see new revenue streams related to blockchain, digital assets or cryptocurrency solutions.
