Touted, hyped and bannered as the new world money, cryptocurrencies have been blowing hot and changing how transactions are done in the real world. In a period of a few years, cryptocurrencies have grown from mere digital novelties into a trillion-dollar industry. Among its pillars is how it makes payments more effective than what it is today.
Cryptocurrencies ride on the waves of blockchain technology. If you are unfamiliar with the term, blockchain is the digital, distributed, and decentralised ledger that underlies virtual tokens, and is responsible for recording transactions without the need for a financial intermediary, such as a bank.
Blockchain is, in many ways, labelled as a huge game-changer and it’s the only reason we are raving about cryptocurrencies these days. However, a blockchain network is only as good as its ability to process, validate, and settle transactions efficiently. In reality, though many companies are growing to accept cryptocurrencies such as Bitcoin as payment methods. This, in turn, restricts how and where you can spend your money unlike using a debit/credit card.
How cryptocurrency payments work
Transactions done in traditional banks have a time frame. Transferring money can take a few minutes to get to the recipient, but sometimes could be longer. Blockchain technology is meant to make such transactions easier and faster in privatising items anywhere they are collected.
Transaction time impacts the speed of receiving cryptocurrency. Sometimes, in 2017, it took an average time of 78 minutes to confirm a Bitcoin transaction. On the Bitcoin network today, the average confirmation time for a BTC payment is about 10 minutes. Nonetheless, transaction times can vary so much due to factors, such as the total network activity, hash rate, block time and size, and transaction fees.
If the Bitcoin network is congested, there will be a backlog of transactions in the mempool, which is a record of all Bitcoin transactions that have not yet been validated by a miner and added to the next block on the blockchain
In order for transactions to go through faster, users have to pay more transaction fees. This happened April 2021, where average Bitcoin transaction fees reached $59, according to CoinMarket. Credit card transactions, on the other hand, only take a few seconds to complete.
Furthermore, on Ethereum, users pay a base fee to have their transactions verified by other users, known as miners. The average transaction fee on the Ethereum network rose to as high as $63 in November. That was its second-highest level ever, behind May’s record high of $70. There’s not much mercy for the small fries on that ETH network.
Another look at the ineffectiveness of cryptocurrency payment is the fact that payments made by mistake cannot be reversed like traditional banking payment systems. Bitcoin transactions are anonymous and unregulated, which breeds the disadvantage of lack of security.
Likewise, all transactions completed through Bitcoin are irreversible and final, so pretty much zilch can be done if the wrong amount is sent or if it’s sent to the wrong recipient. In traditional banking systems, payment can be reversed if the wrong sum is sent or sent to the wrong recipient. This amount of accountability makes payment less fraudulent and traceable.
That said, Ethereum 2.0 is an upgrade to the Ethereum blockchain which aims to enhance the speed, efficiency, and scalability of the Ethereum network so that it can process more transactions and reduce transaction fees.
Ultimately, people believe that Bitcoin has value as wealth storage, similar to digital gold and that second-layer solutions — an additional framework that sits on top of the present blockchain — might improve its speed and make it more practical for use as an effective payment option.
In the same vein, many still hold the notion that cryptocurrencies will be the new financial system. While that might be possible, there is still a lot that needs to be put in place to mitigate cost on the part of the sender and the receiver.
In the meantime, one may hope that, at some point, in the blockchain technology upgrade, there might be a zero withdrawal fee which would ensure everyone has equal opportunity to be part of this financial ecosystem and fully enjoy purchases in the real world.
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