Breaking down the consumer benefits of cryptocurrencies
Internet services that use this technology for better consumer autonomy and privacy are already being built
Internet services that use this technology for better consumer autonomy and privacy are already being built
In addition to their widely touted commercial use-cases, cryptocurrency and open blockchain technologies can significantly empower and improve the welfare of individual consumers. Because they do not offer the same potential for financial return, these consumer benefits are too often overlooked. Indeed, a common but untrue accusation leveled against cryptocurrencies is that they serve no function not already better served by existing systems and currencies—that their use only appeals to those with bad intentions who are drawn to their perceived anonymity. The truth is that, in many instances, open blockchain networks offer significant improvements for the U.S. consumer over the status quo. Here are a few examples.
To begin, one advantage of cryptocurrency networks is that they are push-based. Most payment systems commonly used by U.S. consumers, like credit cards or the ACH network, are pull-based. In pull-based payment systems, transactions are initiated by the person receiving the payment (the “payee”), who sends their financial institution an instruction to “pull” funds from the account of the person who is paying (the “payor”). The payor generally provides the payee with some kind of static, account-identifying information (a credit card number or a bank account and routing number, for example) and the payee uses this information to initiate a transaction. Using an in-store debit card payment as an example, the payee (the store) transmits the payor’s (the customer) account information (card number) to the payee’s financial institution, which then uses that information to debit the payor’s account.
Pull-based payment systems are often leveraged to consumers’ detriment; there are, in fact, entire industries based around the power asymmetry that pull-based payment systems create. These industries generally offer some kind of subscription—say, to a popular magazine—at an incredibly low initial rate, and make it very easy to enroll. Then, once a consumer has given their account information over and provided authorization for recurring debit transactions, customer service tends to drastically drop off. The only way to cancel that subscription, the price of which may have gone from a teaser rate of $1 for six months to $14.99 a month, might be to mail a physical letter to an address that can only be obtained by calling a hotline, navigating through a multi-layered maze of automated menus, and then waiting on hold to talk to a representative. The onus is on the consumer to figure out how to stop $15 a month from being pulled out of their account, rather than on the business to figure out how to provide a good enough product that consumers want to pay $15 a month for it.
Push-based payments, by contrast, can empower consumers. In push-based systems, the default transaction type is a credit transaction: the payee provides the payor with the payee’s account information, and the payor initiates the transaction by requesting their financial institution to “push” funds from their account to the payee’s account. This means that the payor, which for consumer payments is usually the consumer, retains control over their account information, and does not have to worry about the payee continuing to pull money out of it every month in perpetuity.
Push-based payment systems can also mitigate problems of data security. Many have become inured to the constant stream of news articles about data breaches in which personal and financial account information on hundreds of thousands or millions of consumers are compromised, but such breaches are only possible because those retailers have databases containing so much data on so many consumers. With push-based payments, the retailer has no need to collect and retain every consumer’s financial account information; instead, the consumer just needs to know the retailer’s account information, which can be used to initiate payments for goods and services. It’s no panacea, but it’s certainly superior to the status quo.
Traditionally, electronic payments have required the use of some trusted third-party intermediary, and those intermediaries come with costs. For example, credit card transactions typically cost about $0.25 plus 1 to 2 percent of the transaction value. Consumers may not necessarily see this cost directly—it is generally deducted from the funds received by the payee rather than added to the funds sent by the payor—but it is built into the cost of the goods and services they buy. That cost structure also means that it isn’t economically viable to make small electronic payments, because the transaction fees such payments would require are larger than the entire payment amount. By obviating the need to rely on such intermediaries, cryptocurrencies have the potential to make very-small-value payments, which are often referred to as “micropayments”, economically viable.
Cryptocurrency micropayments enable a whole host of business models that were previously unviable. For example, Streamium is an open-source application that uses Bitcoin payment channels “to achieve trustless, pay-as-you-go video streaming with no intermediaries.” Using it, content creators can offer access to their video stream in exchange for bitcoin payments on a per-second or per-minute basis with no counterparty risk or third-party intermediary. This provides an alternative monetization model for streamers to using a platform like Twitch or YouTube, which might demand a share of revenue or “deplatform” the streamer’s account.
Micropayment business models may improve the provision of other kinds of media content, as well. SatoshiPay is a browser-based, unhosted cryptocurrency wallet that allows consumers to pay amounts as small as fractions of a cent in exchange for access to otherwise paywalled media content. The Register, a UK-based technology news site, publishes a travel guide called “The Geek’s Guide to Britain,” which is available in paperback for about $25; through a partnership with SatoshiPay, The Register now also offers their travel guide in digital format for significantly less—about $3—to customers who pay using cryptocurrency. Taken alone, this isn’t anything revolutionary. A $3 payment would be infeasible on the ACH network, but is economically viable on the credit card networks (although transaction fees will be around 10% of the total payment). However, SatoshiPay users can also individually purchase any one of the travel guide’s 26 chapters—each of which covers a different region of Britain—for about $0.12, an amount that cannot be economically processed over the credit card networks because the transaction fees would be greater than the value of the entire transaction.
Micropayments also enable decentralized social media networks as an alternative to current centralized models like Facebook and Twitter. In those centralized models, a single company is responsible for preventing spammers from flooding the network and, as a result, that company also controls what information is and is not allowed on the network. Common criticisms of social media companies include accusations that their primary purpose is to obtain and monetize the maximum possible amount of their users’ personal information, and that they wield unaccountable and deleterious power over our social discourse as a result of their ability to unilaterally censor or promote different views on their platform. Using cryptocurrency micro-payments, network spam can be prevented without reliance on a centralized intermediary by requiring users to make a very small payment each time they post. This allows for the creation of decentralized social media networks which are not administered by any single organization and, as such, do not have the drawbacks highlighted in the criticisms noted above.
For example, Peepeth is a decentralized social media network built on the Ethereum blockchain that functions similarly to Twitter. There are no ads on Peepeth, and there is no company behind it with the ability to access users’ private information or exert undue influence over what content users post and view. That isn’t to say that there are no rules on Peepeth. The network has a code of conduct that is roughly based on the Buddhist monk Thich Nhat Hanh’s writings on the way of living harmoniously in a community; posts that violate that code of conduct are not visible on peepeth.com, the primary front-end through which users interact with the protocol, although they still exist on the Ethereum blockchain and different front-ends implementing different content moderation policies are available.
The benefits of cryptocurrency and open blockchain networks extend beyond their usefulness for payments use-cases. In many situations, they can be used to empower individuals or increase the resiliency of critical infrastructure by removing the need to rely on existing, centralized intermediaries.
One example of an instance in which open blockchain networks can be used to improve existing digital infrastructure is the Domain Name System (DNS). In October of 2016, a distributed denial-of-service (DDoS) attack took a number of high-profile websites offline, including Amazon, GitHub, Twitter, PayPal, and the New York Times. The DDoS attack was not directed at those companies directly, but rather at Dyn, the company that provided DNS services to those companies. The DNS provides the authoritative mapping from easily-readable, human-friendly URLs (like “coincenter.org”) to numerical IP addresses (like “220.127.116.11”) that computers use to identify one another on the Internet. Dyn is one of several companies to which the administration of the DNS has been delegated, and as such is a centralized chokepoint in the infrastructure of the web. Such chokepoints present a vulnerability in the otherwise decentralized (and, consequently, robust) digital infrastructure of our country. By targeting Dyn, bad actors managed to cripple a significant portion of the entire Internet.
The ability to bring down such an important component of our economy by targeting a single weak-point is a consequence of the DNS using what is commonly called “perimeter security.” A perimeter security model essentially attempts to protect critical data and systems by collecting all of them in one centralized location or database, and then attempting to prevent any and all bad actors from gaining access to that central repository. The drawback of such a security model is that, even if it is 99.999% effective, inevitably an attacker will get in. For things of critical, national importance—like our digital infrastructure—this is a worrying state of affairs.
Cryptocurrency networks provide an alternative approach to the perimeter-based security model currently employed by the DNS and other critical infrastructure. Open blockchain networks like Bitcoin protect sensitive data not by centralizing and trying to protect it, but by decentralizing it and using cryptography to ensure any attempt to corrupt or modify it is detectable by anyone with an internet-connect device. Like Dyn, which was responsible for maintaining a registry of URLs and their associated IP addresses, the Bitcoin network is responsible for maintaining a registry of public key addresses and their associated bitcoin balances. Unlike Dyn, the Bitcoin network has never been hacked.
The Blockstack Naming Service (BNS) uses the Bitcoin blockchain to create a “network system that binds names to off-chain state without relying on any central points of control.” Similarly, the Ethereum Name Service (ENS) uses the Ethereum blockchain to offer a “secure and decentralised way to address resources both on and off the blockchain using simple, human-readable names.” Less abstractly, BNS and ENS provide essentially the same service as the DNS—an authoritative mapping from human-readable names (URLs like “coincenter.org”) to associated values (numerical IP addresses like “18.104.22.168”)—without relying on centralized intermediaries like Dyn that present a single target for malicious actors. In this way, cryptocurrency networks can be used to harden critical infrastructure and national security.
Open blockchain networks and ENS-like technologies built atop them can be used for more than just digital infrastructure hardening; They also offer a pro-consumer alternative to the centralized credit bureau model for consumer credit reporting and rating. Today, the “big three” credit bureaus—Equifax, Experian and TransUnion—each maintain their own centralized repository of sensitive personal and financial data on hundreds of millions of U.S. consumers. Like the DNS, those centralized repositories have proven vulnerable to hacks and data breaches. In September 2017, Equifax announced that an attack on their systems had compromised the names, social security numbers, birth dates, addresses, and drivers license numbers of over 145 million U.S. consumers. A data breach that compromised the personally identifiable information of a majority of adult Americans could only happen because such enormous amounts of sensitive data had been stored within a single, perimeter-security based system. As with the DNS, open blockchain networks present a superior alternative to the current credit bureau model.
For example, Bloom is attempting to develop a protocol that uses the Ethereum blockchain to enable financial institutions to, when authorized by a consumer, access and verify that consumer’s financial data without relying on a potentially inaccurate or outdated report from a credit bureau’s centralized repository. The consumer benefits of such a protocol extend beyond merely disintermediating the credit bureaus and removing the need for centralized databases of sensitive information on hundreds of millions of people; two examples of those benefits are easier dispute resolution and greater consumer control over their financial data.
The primary customers of credit bureaus are the financial institutions that report consumer data to them and request consumer data from them. Under the current system, consumers do not have any ability to choose a preferred credit bureau or to opt out of using a bureau they dislike—they are bound by the decisions of their financial institutions. Consumers are not the customers of credit bureaus; they are the product.
It may come as no surprise, then, that credit bureaus do not have a great track record of customer service when it comes to the consumers whose information is their stock-in-trade. In each of the past four years, Equifax, Experian, and TransUnion have unwaveringly been the top three companies about which the Consumer Financial Protection Bureau has received the most consumer complaints, garnering 9%, 8%, and 7% of all complaints submitted to the agency respectively. In 2018, the CFPB received more than three times as many complaints about the least-complained-about credit bureau, TransUnion, than it did about the closest runner-up, JPMorgan Chase. Here, too, open blockchain networks present a superior alternative to the current model. Replacing centralized intermediaries—the credit bureaus—with an open blockchain on which consumers and their financial institutions more directly interact would allow consumers some level of dominion over when and with whom their data is shared. And, when consumers have a degree of control over which businesses can access, share, and monetize their data, then those businesses will have a much greater incentive to compete with one another on the quality of service they provide consumers with regard to customer service, error resolution, and data accuracy.
These are just a few of the ways that cryptocurrency and open blockchain networks can empower consumers. In addition to the pro-consumer benefits of push-based payments, applications built on open blockchain networks may replace existing intermediaries, thereby removing central points of failure, and eliminating their ability to extract economic rents from unwilling customers Many of the concerns expressed by policymakers over credit reporting, the world wide web, and social networks stem from the inefficiencies and negative externalities caused by centralized intermediaries. Instead of focusing on how to mitigate the harms caused by such intermediaries, policymakers should consider that decentralized technologies are an alternative that avoid centralized intermediaries altogether.