Blog

Archive for the ‘bitcoin purchase’ tag

Aug 7, 2019

Spending Bitcoin in person is easy (What happens in background is elegant)

Posted by in categories: bitcoin, cryptocurrencies, economics

Today, I was co-host of an online cryptocurrency symposium—taking questions from hundreds of visitors. A common question goes something like this:

Can Bitcoin be used in person—or
is it just for internet commerce?

Our panel had a moderator, and also an off-screen video director. As I cleared my throat in preparation to offer a response, a voice in my ear reminded me that it was not my turn. The director explained that another panelist would reply. It was a highly regarded analyst and educator in Australia. Realizing that that she was calling the shots, I deferred.

I was shocked as I listened to a far off colleague suggest that Bitcoin is not useful for in-person payments. I wonder how he explains this to the grocers, tailors, lawyers, theme parks and thousands of retailers who save millions of dollars each year by accepting bitcoin—all without risk of volatility and even if they demand to instantly convert sales revenue into Fiat currency.*

Of course it can be used in person, Numb-nut!” (I kept the thought to myself. I know better than to criticize another speaker).

An in-person transaction, such as paying for a meal after consumption, is an ideal use scenario. It benefits everyone: The seller captures greater value and the buyer is unlikely to need bank-brokered arbitration. He only needs a receipt. He will never demand a 90-day return warranty, claim that he was shipped an empty box, nor complain about the amount charged.†

But, this isn’t about my clueless colleague. It is about the ease of using Bitcoin in person and the interesting stuff that happens in the background. Let’s look at a simple purchase scenario — and then we’ll dig in to marvel at the settlement process. This is a true story, told in 7 bullets. It occurred in the summer of 2015—just 5 years after the very first use of bitcoin to purchase anything (Bitcoin Pizza Day was May 22, 2010).

  • It’s 2 AM on a moonlit Sunday morning. Driving from Boston to New York I rehearse the Bitcoin presentation that I will deliver at a startup clinic hosted by LaGuardia Community College and the Cryptocurrency Standards Association. I pull off the last exit in Connecticut and find the Darien Diner. My meal costs $12.
  • As I take one last bite of midnight quiche, I realize that I forgot my wallet! No cash; no driver’s license. I have a smartphone, but it is brand new. I have not yet loaded it with credit cards. But, I do have access to my account passwords.
  • I scope my surroundings. My waiter is the only one on the main floor. He is also the cashier. Seeing no other customers or staff, I figure that the owner or cook is in the kitchen; probably the only other person on premises. I approach the cash register, hoping that the waiter will accept my apology—and trust that I will pay on my return trip in a few days. Before I launch into my poor-man’s excuse, I spot the placard shown at right. Bitcoin is among the diner’s accepted payment methods!
  • I ask the cashier how I can pay with Bitcoin. His response catches me off-guard: “I have no ideaThey told me that you would know.” What?! Does this guy recognize me? Does he know that I am on my way to give a Bitcoin lecture? This seems very unlikely. Gradually, I understand what he means, and I know what to do…
  • I point my smartphone at the QR code (It’s taped to the cash register next to the words: “We accept Bitcoin”). In fact, this restaurant is fully on board. I am amazed to see that a display on the register offers a custom code that is encoded with the exact meal cost. That’s really cool! So, I shift my camera to that code.
  • Immediately, my wallet asks if I would like to add a tip. (It’s hosted by an online exchange, but an application wallet will also work). I add $3 and press SEND.
  • A thermal printer next to the till spits out a narrow receipt. At the very bottom, where it would typically say “Paid with MasterCard ending in −3862”, it says “Paid with Bitcoin”. The buzzing sound of that receipt printer tells the cashier that I am good to go. Good food in the tummy and a bill has been paid. Case closed; Return to car; Drive to New York.

What Really Happened?

In the few seconds between the authorization and the printed receipt, some fascinating things occurred around the world. Seriously Fascinating! This is almost magic — and it is transforming the way payments work, and—eventually—the way we view, understand and manage cash. ‡

  • When I clicked SEND, a limited subset of Bitcoin credentials was presented to a massively distributed, worldwide network of miners. In effect, I informed the bookkeepers that I wish to have $15 transferred to the restaurant’s public address.
  • Seconds later, the original credentials were voided (this solves the ‘double spend problem’) and a new transaction was added to public ledger that we call the blockchain. It now reflects my slightly reduced wealth.

But wait! It gets even more fascinating…

The “miners” that settled the transaction and provided new Bitcoin credentials needn’t have any awareness that they just facilitated payment for a meal at a diner in Darien Connecticut. From their perspective, these individuals and large server farms in Iceland, China, Israel, and South Africa — and in college dorms spread across the world — are engaged in a massively distributed gaming competition. They are competing for rewards based on solving a math problem.

As you review that last paragraph, imagine the elegance of the global network. Imagine the power, robust nature, and benefit that comes from it’s redundant and decentralized architecture. Imagine the ongoing incentive for bookkeepers to play a critical role in balancing a world-wide ledger. Imagine that authorities cannot shut down the network or even slow it down. Imagine the trust that individuals, businesses, NGOs, banks and governments can put in the monetary supply and the mechanisms of accounting. Imagine a world where this trust benefits everyone uniformly, fairly, and without susceptibility to graft or inflation.

Bitcoin and the blockchain, introduced together, are not minor, incremental contributions to economics, bookkeeping, trust, and commerce. They are overwhelmingly significant contributions to the future of human society and its institutions.


† You may have heard that bitcoin transactions are immutable. This is a simplification. The public ledger is immutable, but transactions are reversible, if terms are clear to both parties. Just as with Ethereum, smart contracts are built into the technology. So are hooks to centralized mediation, if that’s what the agreement calls for. Charge-backs, refunds, warranty demands and other arbitration are all possible. These features are built into Bitcoin, but rarely used in this early era.

Most Bitcoin transactions today are payments; they are not charges. Although they do not typically accommodate bank-brokered returns, rescission and charge-backs, these are all possible, and often without requiring an authority to broker the dispute.But these traditional safeties or mitigation must be agreed upon in advance. No longer does the seller have all the power, or the buyer need to run to a credit card processor to complain. Sales are either immutable or brokered by a 2-party contract.

This is not your grand-daddy’s payment mechanism. It is so much more evolved!

‡ In 2017, Bitcoin went through a period of intense growing pain. Transactions became so slow and costly, that in person transactions became impossible, especially for any amount less than $500. If you needed a transaction to complete in less than an hour, you would need to enlist in a bidding contest. A quick confirmation could cost upwards of $30 US.

The restaurant payment related above was an on-chain transaction. Today, transactions that use the Lightning Network overlay may occur within a private channel apart from the blockchain. But ultimately, every change in bitcoin ownership results in an individual or aggregated entry onto the blockchain.

Crisis in late 2017 and 2018

Sadly, in researching this article, I learned that the Darien Diner no longer accepts Bitcoin. Problems associated with transaction cost and delays in 2017~2018 discouraged acceptance by a great many retailers. No one eating a $12 meal would ever pay $30 in fees, and a cashier is not going to wait 2 hours to validate payment from a customer who has already eaten a meal and wants to hit the road.

That glitch sparked a terrible reversal of retail adoption. Even now (Q3 of 2019), retail penetration is sharply off its peak. We are barely beginning to recover the early adoption rate. Vendors lost faith, and many don’t yet realize that their POS investment can now be safely be reactivated. Lightning Network to the rescue!

he Next Crisis

Another crisis is looming, but it too will be solved.

Although the Bitcoin network is fast and inexpensive, the proof-of-work method used by miners to arrive at a distributed consensus consumes far too much power to scale. Mass adoption would consume more power than the world currently generates.

And here’s the kicker: The mining incentive ensures that any new, inexpensive energy that might be discovered in the future would be gobbled up by miners with no additional benefits to society (or even to the Bitcoin network). All the new, free (or cheap) power would be diverted away from homes, businesses, manufacturing and public works. The incentive for grabbing every cheap watt is very much like a cancerous growth.

Clearly, this is not sustainable. Bitcoin mining already uses more power than all of Argentina. But great minds are working on the problem and alternative methods of guaranteeing a fair, crowd-sourced accounting consensus are being tested, analyzed and debated. We will get through this complex problem, and hopefully—this time—without demoralizing a key factor in the tetrad: Consumers, developers, vendors & miners.


Philip Raymond co-chairs CRYPSA, hosts the Bitcoin Event and is keynote speaker at Cryptocurrency Conferences. He is a top writer at Quora.