Thursday, October 10, 2021

Op Ed: Is the Age of Bitcoin-Powered Discounts Finally Upon Us?

While the digital gold narrative around Bitcoin has always existed, in the early days, there was also a heavy focus on payment use cases for the world’s first major cryptocurrency. There was plenty of block space to go around at the time, which meant transactions were practically free and users didn’t have to worry about whether or not their transactions would be included in the next block.

Due to the lack of chargebacks and low fees associated with the Bitcoin network at the time, many Bitcoin enthusiasts wondered whether merchants would start to offer discounts to those who decided to pay for goods and services via bitcoin rather a credit card. There have always been people who have offered discounts to those who pay with bitcoin in an effort to promote the peer-to-peer digital cash system, but the benefits of using a system where transactions are cheap and irreversible meant that even those who didn’t care about the cypherpunk philosophy behind Bitcoin might have been interested in trying out the new technology too.

Eventually, entire businesses, such as Fold and Purse, were built on top of this premise of Bitcoin-powered discounts. These early companies effectively acted as middlemen between bitcoin holders and holders of gift cards for various retailers. That said, early Fold users were able to get 20 percent off of their Starbucks purchases, and Purse users can still save 15 to 20 percent on their usual Amazon shopping.

While direct Bitcoin merchant adoption was happening at places like Newegg and Overstock, many of the stores accepting bitcoin at the time appeared to be doing so for marketing purposes more than anything else. Overstock’s decision to offer a small discount to those who paid with bitcoin was definitely the exception, not the rule.

On-Chain Congestion and the Lightning Network

Eventually, as Bitcoin became much more popular, those aforementioned low transaction fees disappeared. The ability to get a transaction into the next block became more difficult as the network became more congested. Fees started to be calculated in dollars rather than in cents, which ate into the potential for Bitcoin to enable payment-related cost savings for merchants and their customers. Additionally, the uncertainty regarding when a transaction would be included in a block made some types of payments, such as those made in a real-world, face-to-face environment, less practical.

During this time, the focus on bitcoin’s digital gold properties came to the forefront, and some users who were unwilling to give up on cheap payments moved to bitcoin cash and other altcoins.

Now, the Lightning Network appears to be bringing back the early vision of Bitcoin-powered discounts. The Lightning Network is a much more practical solution to digital payments than on-chain transactions because every transaction does not need to be added to the blockchain. Instead, transactions are processed on a secondary network layer where fees approach zero, payments are instant, and there is even the potential for better financial privacy.

Further reading: What Is the Lightning Network?

These three benefits of the Lightning Network are massive improvements to how payments work with on-chain transactions, especially in terms of transaction speed. While unconfirmed transactions were often used and seen as “secure enough” in the early days, the Lightning Network provides a greater guarantee that a payment has been finalized and can be accepted without worry.

Bitcoin Rewards Programs

To be fair, bitcoin discounts never really disappeared for merchants offering goods in services on the black market (depending on the jurisdiction). Whether it be online piracy, darknet ecommerce, gambling or porn, these sorts of merchants continued to offer discounts to their customers. The censorship-resistant properties of Bitcoin as a payment system were still extremely valuable to them. For some of these merchants, even in the face of its higher fees and lower reliability, Bitcoin remained their only viable option. 

While Purse continued to operate normally in spite of Bitcoin’s problematic on-chain payment rails, Fold has since relaunched itself with a model built around the Lightning Network’s instant confirmations and fees of practically zero. Its users are now also able to shop with a credit card and receive bitcoin rewards.

Up-and-coming Lolli is pioneering the concept of a bitcoin-based rewards system where consumers are able to shop normally at their favorite stores with their traditional forms of payment and receive bitcoin rewards via a cashback program. For Lolli, the bitcoin rewards concept is part of a master plan to eventually get well-known retailers to accept the cryptocurrency directly. Lolli is effectively creating greater demand for bitcoin merchant adoption on the consumer side by putting the cryptocurrency into the hands of as many people as possible.

With layer two bitcoin payment solutions like the Lightning Network, it may eventually be possible for cryptocurrency enthusiasts hung up on the ability to buy their morning coffee at Starbucks with digital cash to do so directly at a discounted rate. For now, bitcoin rewards programs offered by the likes of Fold and Lolli will continue to fill the gap for those people who want to use bitcoin to make everyday purchases.

The post Op Ed: Is the Age of Bitcoin-Powered Discounts Finally Upon Us? appeared first on Bitcoin Magazine.

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A Blockchain is a growing list of records, called blocks, which are linked using cryptography. Cryptography is the practice and study of techniques for secure communication in the presence of third party adversaries. Cryptocurrency is a digital currency that uses encryption (cryptography) to regulate the generation of currency and verify the transfer of funds, independently of a central bank.

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