Blockchain: Blueprint for a New Economy

https://bitpay.com/directory#/) means

not having to entrust your personal

financial information to centralized

vendor databases. It might also possibly

entail a lower transaction fee (Bitcoin

transaction fees are much lower than

merchant credit card processing fees).

Merchant Acceptance of

Bitcoin

At the time of writing, the main Bitcoin

merchant processing solutions for

vendors to accept Bitcoin are BitPay and

Coinbase in the United States, and

Coinify in Europe.16 However, it is

difficult for vendors, like the local café,

to run two separate payment systems

(traditional and Bitcoin), so a more

expedient future solution would involve

integrating Bitcoin payment into existing

vendor payment networks. Mobile

payment functionality is also needed for

quick point-of-sale Bitcoin purchases

(for example, a cup of coffee) via

mobile phone. CoinBeyond and other

companies focus on mobile Bitcoin

payments specifically, and BitPay and

CoinBase have solutions for mobile

checkout. In one notable step forward,

Intuit’s QuickBooks accounting software

for small businesses makes it possible

for vendors to accept incoming Bitcoin

payments from CoinBase and BitPay

with its PayByCoin module. 17

Summary: Blockchain 1.0 in

Practical Use

Blockchain is already cash for the

Internet, a digital payment system, and it

may become the “Internet of Money,”

connecting finances in the way that the

Internet of Things (IoT) connects

machines. Currency and payments make

up the first and most obvious

application. Alternative currencies make

sense based on an economic argument

alone: reducing worldwide credit card

merchant payment fees from as much as

3 percent to below 1 percent has

obvious benefits for the economy,

especially in the $514 billion

international remittances market, where

transaction fees can run from 7 to 30

percent.18 Furthermore, users can

receive funds immediately in digital

wallets instead of waiting days for

transfers. Bitcoin and its imitators could

pave the way for currency, trade, and

commerce as we know it to be

completely redefined. More broadly,

Bitcoin is not just a better version of

Visa—it could also allow us to do things

we have not even thought of yet.

Currency and payments is just the first

application.19 The core functionality of

blockchain currencies is that any

transaction can be sourced and

completed directly between two

individuals over the Internet. With

altcoins, you can allocate and trade

resources between individuals in a

completely decentralized, distributed,

and global way. With that ability, a

cryptocurrency can be a programmable

open network for the decentralized

trading of all resources, well beyond

currency and payments. Thus,

Blockchain 1.0 for currency and

payments is already being extended into

Blockchain 2.0 to take advantage of the

more robust functionality of Bitcoin as

programmable money.

Relation to Fiat Currency

Considering Bitcoin as the paradigm and

most widely adopted case, the price of

Bitcoin is $399.40 as of November 12,

2014. The price has ranged considerably

(as you can see in Figure 1-2), from $12

at the beginning of 2013 to a high of

$1,242 per coin on November 29, 2013

(trading higher than gold—$1,240 per

ounce—that day). 20 That peak was the

culmination of a few factors: the Cyprus

banking crisis (March 2013) drove a

great deal of demand, for example. The

price was also driven up by heavy

trading in China until December 5, 2013,

when the Chinese government banned

institutions (but not individuals) from

handling Bitcoin, after which the price

fell. 21 In 2014, the price has declined

gradually from $800 to its present value

of approximately $350 in December

2014. An oft-reported though disputed

metric is that 70 percent of Bitcoin

trades are made up of Chinese Yuan.22 It

is difficult to evaluate how much of that

figure indicates meaningful economic

activity because the Chinese exchanges

do not charge trade fees, and therefore

people can trade any amount of currency

back and forth for free, creating fake

volume. Further, much of the Yuan-

denominated trade must be speculation

(as is true for overall Bitcoin trade), as

there are few physical-world vendors

accepting Bitcoin and few consumers

using the currency for the widespread

consumption of goods and services.

Figure 1-2. Bitcoin price 2009 through

November 2014 (source:

http://coinmarketcap.com/currencies/bitcoin/#charts

Some argue that volatility and price

shifts are a barrier to the widespread

adoption of cryptocurrency, and some

volatility-smoothing businesses have

launched to address this: Bitreserve,

which locks Bitcoin deposits at fixed

exchange rates;23 Realcoin’s

cryptocurrency, which is pegged to the

US dollar (USD);24 and Coinapult’s

LOCKS, which allow purchasers to peg

Bitcoin to the price of gold, silver, the

US dollar, the British pound, or the

Euro. 25 One of the first USD-pegged

Bitcoin cryptocurrencies was Ripple’s

XRP/USD BitStamp, and there is also