Blockchain tech is going mainstream as the traditional finance world begins to embrace its disruptive potential.

Bitcoin and Ethereum are the market leaders when it comes to cryptocurrency investment by institutions or consumers trading in retail markets. And it’s no secret that both digital assets have helped create many millionaires. But it’s the technology that undergirds it that has the power to change the world.

Blockchain has plenty of applications but centralised blockchains could help to ease the many problems that currently plague our international money-transfer system.

Slow, Expensive Transfers Remain a Major Pain Point

A big challenge for financial institutions is cross-border and cross-country transfers. This is because there is a heavy reliance upon correspondence banks and other middlemen. One of the early attempts to ease this problem came from blockchain company Ripple.

Ripple is better known for its payment network and protocol, rather than its currency (XRP). The project uses an open-source peer-to-peer decentralized platform that acts as an agnostic form of money transfer. It does this using RippleNet, a network of institutional payment providers like banks and money services businesses that leverage Ripple’s technology.

Ripple uses a network of “gateways” to serve as the link between two parties who want to make a transaction and provide liquidity to the system. This helps the company avoid the problems faced by traditional currencies. It also keeps transaction fees as low as $0.00001. Reportedly, one-third of the world’s major banks are already using the platform.

Traditional Fintech Companies Are Jumping on Blockchain

The success of Ripple hasn’t gone unnoticed. For some time now, a number of companies have been toying with blockchain technology. The most recent, and impactful, was the fintech giant PayPal. While there have been many other fintech companies adopting crypto, like Revolut, the news that PayPal was making it possible to buy and sell Bitcoin made big waves.

The company confirmed that users in the US would be able to trade Bitcoin, Ethereum, Litecoin, and Bitcoin Cash using their PayPal accounts. The service will be rolled out to Vemo and other geographical areas over the first half of 2021 and users will be able to use their cryptocurrency to purchase goods and products via PayPal.

Bitcoin and other cryptocurrencies saw a sudden price rise as many traders and investors learned the news. It was generally seen as a sign that cryptocurrency had taken another big step towards the mainstream.

But there is a problem. PayPal users will not be able to withdraw cryptocurrency from the company’s ecosystem and there is a good reason for it.

Bitcoin Isn’t Ready for the PayPal Effect

Bitcoin still suffers from a scalability problem. During any major rise in transaction volume, the waiting times for a single Bitcoin transaction increases significantly. This “PayPal effect” could have a disastrous impact on the reputation of cryptocurrency.

There are around 350 million users and 26 million vendors in the PayPal ecosystem, compared to Bitcoin’s estimated 190 million users. To understand the impact that this sudden influx of users could have, it is useful to look at how the DeFi craze impacted Ethereum in September.

As the number of DeFi apps exploded, the transaction costs on the network skyrocketed. In September, miners made over $160 million, a 39% increase from the month before. This was due to an increased number of transactions triggered by DeFi. Now imagine if Bitcoin suddenly gained 350 million more users, few of whom really understand how blockchains operate.

This would be a massive problem. Visa is able to process around 1,736 transactions a second. Currently, Bitcoin can guarantee less than 5 transactions per second. And as more transactions hit the blockchain, their costs will skyrocket. Until Bitcoin can move away from Proof of Work consensus, the PayPal effect remains a major threat.

It’s Not All Bad News

In order to combat this effect, PayPal has decided to make it possible to access cryptocurrency through their network, and not withdraw it. Other limitations will help to keep down the volume of cryptocurrency taken into the network and mitigate the impact — at least until second layers such as the lightning network are in place to reduce scalability problems.

The good news is that PayPal has opened up an easier way for people to become acquainted with using cryptocurrency. It has the potential to normalize the practice of paying for goods and services using it, something which is currently difficult to impossible except for niche purchases such as VPNs.

This change would have two important effects:

  • It makes it easier for vendors to justify accepting Bitcoin. As more vendors adopt cryptocurrency payments, the utility for Bitcoin and other cryptocurrencies will increase significantly, and more people will see it as a viable method of payment.

  • It might shock the crypto community into accelerating to make solutions more scalable, either by shifting towards Proof of Stake as Ethereum has. Or by adding in second-layer solutions.

While many crypto enthusiasts won’t be happy with PayPal’s closed garden, this is a positive step towards the mainstream. It will take time before PayPal is able to open up withdrawal features, but they likely will if regulations and scalability allow it.

Posted by Akeela Zahair