Payments on the internet really don’t happen on the internet. They are made using a gated, expensive network of processors that settle payments weeks after they are made.
Why is that an issue?
Credit card payments, cheques, and bank wires depends on the coordination and approval of many processors in order to be settled. That approval process comes with high fixed costs, time delays and constraints, and regulations limiting the range of value that can be transferred.
No such limit exists for Bitcoin, and that will unlock enormous amounts of economic activity by letting anyone express value in any size, at any time, no matter where in the world they live.
The upper end of Bitcoin’s value transfer spectrum allows anyone to settle payments worth billions of dollars in minutes. This is a new tool for for wealthy elites, large companies, and governments to move large amounts of money.
The lower end of Bitcoin’s value transfer spectrum enables anyone to send money in an instant without fixed costs.
Without fixed fees, payments on Bitcoin’s Lightning Network can scale down to infinitesimally small amounts, creating a brand new economy of low-value payments. Early success stories include payments for podcast streaming, bitcoin gaming, social media, chat, and tasks that aren’t supported by fiat payment methods.
How About The Middle of the Spectrum?
Historically, Bitcoin advocates have focused on the two ends of the payment spectrum - making fast, global payments that are too small or too large for fiat payment methods to support.
Credit cards control the day-to-day payments market where payments range from tens to thousands of dollars, and are good enough to make it hard for Bitcoin to offer a better solution.
After all, credit cards already feel instant and free to their users. Merchants eat the fee on all payments, and payment processors take on the settlement risk. For users it’s a magical experience, they never even notice the cost or delays.
Though credit cards appear free and instant to their users, a massive opportunity still exists for a payment system with higher efficiency, lower fees, and instant settlement, so long as it doesn’t sacrifice any of the convenience of credit card payments for merchants or consumers.
Merchants typically pay 3% to process credit card payments, and with over $10T of payments made on Visa cards last year, that’s roughly $300 billion per year going to the various payment processors that make Visa payments possible.
What if Bitcoin could eliminate, or dramatically reduce, that 3% fee charged by all payment processors? To do so would be to return roughly 3% of the world’s purchasing power back to the consumers and merchants that make it happen.
This would have enormous implications for businesses everywhere, especially those operating on razor-thin profit margins.
Take grocery stores for example. Margins are incredibly slim, as low as 1% in many cases. Without payment processing fees, their 1% margin would quadruple to 4%, or they could choose to pass those gains back to their customers for a 3% reduction on their grocery bills.
Improving upon credit cards is a challenge. However, with recent Lightning advances, all the pieces of the Lightning commerce puzzle are being placed on the board. It’s only a matter of time until someone figures out how to put them together.
Historically, there have been a few problems holding back Bitcoin adoption in retail or online shopping settings. They include the following critiques:
These concerns are among the most popular explanations for why Bitcoin can’t be used for payments. Let’s go through them one by one, and see how new solutions are eliminating these concerns for merchants and consumers.
“Bitcoin block times are too long to support real-time payments”
This is true. The Lightning Network solves this specific issue with instant payments that don’t require waiting for a mined block to make a payment.
“Ok, fine. But nobody uses the Lightning Network. It isn’t ready for mainstream adoption.”
There are almost 100 million people who can send money over the Lightning Network with the apps installed on their phones today. A year ago, this number would have been closer to 1 million.
Cash App recently rolled out Lightning payments to all of their estimated 70 million users, and El Salvador’s Chivo wallet allows any of its 4 million users to make Lightning payments too. Many merchants in El Salvador already accept Lightning payments from customers.
Beyond those two, there are a quickly growing number of wallet providers in the Lightning ecosystem, including Wallet of Satoshi, BlueWallet, Muun, Bitcoin Beach Wallet, Alby, Strike, and others.
Lightning is growing fast, and is quickly becoming ready for mainstream adoption.
“Ok, but swapping between on-chain Bitcoin and Lightning is too much of a pain. I’d rather use a single fiat currency.”
It is a pain. That’s why Lightning wallets are taking steps to abstract away the difficulty of swapping Bitcoin on-chain for Bitcoin on Lightning. Cash App, Muun, and Wallet of Satoshi already let you deposit Bitcoin on-chain and immediately pay someone with it over Lightning.
I believe all exchanges and wallets will make this a standard feature moving forward.
To extend this abstraction, a wallet or exchange could even detect whether a user is trying to send a small payment amount and send it over Lightning without user input. When a large payment amount is detected, they would default to sending it on-chain.
It will take some time before all wallets and exchanges are fully interoperable in this way, but many have already abstracted away the pain of switching between Bitcoin on-chain and Bitcoin on Lightning.
“Ok, but consumers don’t want to spend their Bitcoin, merchants don’t want to hold it, and neither wants to figure out how much they owe in capital gains tax”
For most people today, this is true. However, Strike has already solved this issue in their remittance solution for Americans and Salvadorans. Americans can load their Strike wallets with US dollars, Strike auto-converts it into Bitcoin and sends it across the Lightning Network, then the Salvadoran recipient can automatically receive funds in USD if they wish.
Instant, nearly-free, cross-border money transfers using Bitcoin’s Lightning Network.
And during that entire process, neither the sender or recipient had to send or receive Bitcoin, meaning neither party incurred a capital gains tax in the transaction.
CoinCorner is also working on a similar solution where retail payments are made over Lightning, allowing consumers and merchants to choose whether to pay and receive funds in their preferred fiat currency. CoinCorner is simply swapping the consumer’s asset of choice into Bitcoin, sending it across the Lightning Network, and then swapping it back into the merchant’s asset of choice.
Once again, it will take time for all wallets and exchanges to support this feature, but millions of people can already use Lightning to make payments without ever holding Bitcoin today. That also means they have no capital gains tax to pay on their transactions.
An additional point worth making is that there are a number of initiatives (1, 2) underway to help bring stablecoins to the Lightning Network, which will offer yet another way consumers and merchants can use the Lightning Network for global, instant, nearly-free payments without ever forcing people to hold Bitcoin or pay capital gains tax on transactions.
"Ok, but merchants don't want to buy another PoS terminal to accept payments"
On Lightning, merchants won't need any payment-specific hardware at all. CoinCorner's Lightning Card is NFC enabled, meaning it works with all NFC enabled phones and existing NFC hardware devices that support Lightning.
If Square allows their terminals to accept Lightning payments, millions of merchant terminals around the world will immediately be onboarded to Lightning without them lifting a finger.
To take this idea a step further, it's even possible for merchants and customers to completely bypass the requirement for cards and terminals.
For example, a Cash App consumer could pay a CoinCorner merchant with an NFC Lightning payment by simply opening their Cash App on their phone, and tapping the merchant's phone to make the payment.
“Ok, but Bitcoin doesn’t have any concept of credit. I can’t buy now and pay later.”
The Bitcoin protocol doesn’t have any concept of credit, but many Bitcoin exchanges like Coinbase and BlockFi offer Bitcoin-backed loans to their customers who don’t want to sell their coins.
This kind of loan service could be combined with CoinCorner’s Lightning card below to replicate the function of a credit card. A user could collateralize Bitcoin, accrue a dollar-denominated debt as they make payments, and then pay off that debt as soon as they earn income.
“Ok, but my NFC tap payments on a credit card or phone are still easier”
Times are changing. CoinCorner is introducing a new Lightning card with NFC payment functionality that allows anyone to pay over the Lightning Network with a tap, using the funds held on their CoinCorner account or the Bitcoin on their personal node.
This is made possible using a set of open standards called LNURL.
It’s a total game-changer for commerce because it is interoperable with other merchants and consumers that support LNURL payments.
Furthermore, payments happen entirely over the Lightning Network. There are no banks, payment processors, or credit card companies involved at all.
It’s not hard to imagine Cash App and Square implementing a similar solution so that a Cash App user can tap their phone or card on any Square Point-of-Sale terminal to make payments over the Lightning Network. In fact, a Cash App user could even tap their phone to pay a CoinCorner merchant as long as both support the same open standards for sending and receiving payments over Lightning.
Credit Card Pains
Though credit cards are incredibly convenient in retail settings, they can still be a pain when making online payments. This is another avenue for Lightning to offer a meaningful improvement.
Customers must type in a handful of numbers, names, and addresses to make a credit card payment online, a problem exacerbated by the fact that merchants don’t all use the same credit card form or UX flow for their customers.
Both Alby and Lightning Addresses work using the same LNURL standard today.
Alternatively, what if you could use a Lightning browser like Impervious is building, enabling native payments on your browser so you can pay merchants in a single click?
Lightning can not only compete head-to-head on the convenience of retail payments, it can offer a much more intuitive and convenient experience for online payments too.
The best part of all the Lightning solutions mentioned above is that they can be combined together by wallets and exchanges to re-build and improve upon the entire fiat payments tech stack on the Lightning Network.
Instant settlement, negligible fees, global payments, available in any currency (Bitcoin or any fiat money), and no need to ask VISA, MasterCard, or SWIFT for permission.
Lightning commerce is coming.
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