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Author Topic: Bridging to Greater Bitcoin Merchant Acceptance - an Open Source Business Plan  (Read 1031 times)
Chainsaw
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May 13, 2013, 06:17:52 PM
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Bitcoin merchant adoption is currently a chicken-and-egg problem.  The long term viability and usability of Bitcoin remains in question to the common public, chiefly because you can't spend it in enough places.  Merchants are reluctant to accept Bitcoin, for fear of selling goods in exchange for a currency that could go to zero.

This proposal sets out to break that logjam. I should also stress that if successful, this system will gradually move itself into obsolescence, as merchants realize they can make more profits by owning Bitcoins themselves. 

I don't have enough time or financial resources to pull together all the skilled players that would be required to turn this concept into a fully-fledged business.  Yet I believe an advance like this is what Bitcoin needs to get it over the hump.  So, I'm offering this idea in full to the Bitcoin community, no strings attached.  If someone wants to run with this, I'd be interested in helping out in an advisory/consultative capacity, but there are no obligations.  Final disclaimer: I'm just a regular dude that thinks Bitcoin will revolutionize the concept of money. I want to see it succeed, and am offering ideas to help us move to that ideal.  I have no delusions that this plan is 100% complete, nor viable.  My hope is that other smart mind will read this, and further adapt the concept so that we can get something in place, then improve from there.  Without further ado...

The Problem at Hand
-Bitcoin holders fervently wish to be able to spend their Bitcoins wherever they spend their money.
-Merchants don't see the value in investing in a technology that might not be there tomorrow.

How could we solve the problem? By providing merchants a way to accept Bitcoin as payment, without incurring an upfront buy-in cost, and while earning at least as much money per transaction as they currently do.

Let's take a look at how a consumer thinks of a transaction (numbers made up, but important for comparison):

How Consumers View a Transaction (in USD)

Consumer sees item they want  --> chooses payment method --> Merchant receives USD --> Merchant sends item

How Merchants View a Transaction (in USD)

Consumer sees item they want --> sends USD to payment processor (credit card, paypal, whatever) --> processor takes 3% USD, merchant receives 97% USD--> merchant sends item

In short, consumers don't have to care about "the cut" that happens from payment. Merchants are very aware of this cut.  The whole concept is black-boxed from the consumer - they send the money, and get their good.  Merchants know that a middleman payment processor offsets the management of fund collection, at a cost. They can count on receiving a fixed percentage of their sale price in exchange for this benefit.

Let's take that exact same model, and insert Bitcoin in the middle. Let's use the hypothetical company Chainsaw's Widgets.  We can then black-box that entire concept, leaving the merchant in the same position they are in now.  I'll talk more about the "Bitcoin Trust" as soon as I've laid this parallel, Bitcoin-based scenario out.

How Consumers View a Transaction (in Bitcoin)

Consumer sees item they want  --> chooses Bitcoin payment method --> Merchant receives Bitcoin --> Merchant sends item

How Merchants View a Transaction (in Bitcoin)

Consumer sees item they want --> sends Bitcoin to Chainsaw's Widgets Bitcoin Trust --> Bitcoin Trust sells bitcoins for USD, distributes 3% proportionally to Bitcoin holders, merchant receives 97% USD--> merchant sends item


What is the Bitcoin Trust? (First of all, probably a horrible name for this concept. Tons of better wordsmiths out there than me. If this thing gets legs, please, lets improve on this.)
The Bitcoin Trust is the missing piece, the one that let helps everyone (except existing payment companies).  Implementing this idea will require development of a few technical, infrastructural components. For the purposes of explanation, imagine they already exist. The work of any company that tries to run with this idea will lie in developing these components, with the chief emphasis being on maximally reducing friction both to the merchants and to the consumers.  Here's a theoretical walkthrough of it in action.

Chainsaw's Widgets see the rabid demand of Bitcoin holders, and wants in on the action.  They go to www.bitcointrust.com, and register a Merchant Account. They create a Merchant Wallet, and allow investors to place invest Bitcoins for their company. They initially desire $10,000 of liquidity, and are offering to pay 2.9% of gross proceeds to bitcoin investors.  I, as a long-term bullish Bitcoin investor, decide to put 10 Bitcoins into Chainsaw's Widgets.  At today's market values, that gives me 10% of the liquidity they seek out.  Let's say 9 other investors just like me come along, and each does the same.  Okay, the fund is set up, here it is in action.

Sally Sue comes to Chainsaw's Widgets. She sees they offer Bitcoin payment! (A widget that bitcointrust builds, lets you pay the wallet set up with Chainsaw's Widgets.) She chooses that option. Payment gets sent to the proper wallet, spending $250 for some fancy Glow in the Dark Chainsaw Paint.  Automatically, the funds are sold to USD on the market. The bitcoin price charged is based on the value of bitcoin at that moment. The $250 sale happens. 2.9% of that sale ($7.25) gets distributed to the funders of the account.  For Chainsaw the investor, holding 10% of the assets in that account, I earn $7.25/10 = $0.725.  The remaining $242.75 is passed along to Chainsaw's Widgets. 

The consumer got to spend their bitcoins.
The merchant got to make more money on the transaction than by using other payment systems.
The merchant never had to assume the financial risk of investing in bitcoins.
The investors (regular Bitcoin holders like you and I) have a place to put our bitcoins, and profit, without having to play the market.

What Could go Wrong?

Plenty could go wrong. I'm sure this isn't a complete list. Nor do I think the answers are perfect. But again, I am hoping to illustrate that with some thought, these problems are solvable.

I spent a week playing with this idea in my mind, aspiring to be able to explain it adequately. I hope it's clear enough that it'll make sense, because I'd really like to talk through some of the potential problems, proposed solutions...and the potential next-steps that could get stacked on top of this idea.  None of it will make any sense if this foundation isn't solid.

Assuming you're still with me (and please, shoot me refinement suggestions if there are areas I can make this more clear)...I can think of three key problems.
1) Monies held in a centralized (per-company) wallet is still a greater risk and target than a 100%, purely distributed currency.
2) Bitcoin transactions are not instantaneous, which could get thorny for merchants.
3) Development tools need to be developed to allow these new transactions to occur seamlessly. With a wealth of existing, third-party payment systems, this may require a non-scalable number of interfaces to allow a Bitcoin payment system to interact nicely with them.

1) Like any sounds Bitcoin business, employing a highly skilled Security professional is essential.

2) We solve this either through backup payment system, social trust, or time (waiting). 
a) A backup payment system: A user can specify Bitcoin, but secondarily gives a credit card.  Payment is accepted immediately. If the bitcoin transaction doesn't verify, the backup payment system is verified. Either way, the merchant receives payment when the Bitcoin transaction is verified/rejected. Either way, the consumer completes the transaction without delay.
b) Social trust - Let's say Chainsaw's Widgets allows new users to pre-spend 0 Bitcoins. However, once you've spent $1000 with the company (and no reversed transactions), you can pre-spend 1 Bitcoin.  The specifics of the social trust system can vary (feedback, funds, anything).
c) Time - a step backwards, but the user can complete the entire transaction as if it were real-time accepted. An email sent 30 minutes afterwards indicates the successful transaction (or its negation if the funds ended up being illegitimate).

3) Consumers need to be able to pick a 'Pay with Bitcoin' option. That's all they need to care about. From their perspective, they are buying a good, and choosing Bitcoins. They do not care that Chainsaw's Widgets has contracted with BitcoinTrust to be a middleman to convert payments.  Merchants need to be able to count on getting paid for their goods. This means that when the consumer is checking out, a protocol needs to be established. Very crudely, bitcoins sent in, USD sent back to merchant, and finally, merchant's good sent.

Who Would Go For This?

We're still early in the Adoption Cycle.  9 out of 10 people I talk to today are still scared away from Bitcoin from the barriers to entry for funding, and the lack of tools.  The same must hold true for merchants.  But offering a package like this gives a new option. You can dip your toe in the Bitcoin waters, rather than needing to take a giant running start and dive in headfirst.  No up-front cash risked. Market-defined profits which should exceed existing payment methods. Capitalization on a currently untapped niche - Bitcoin holders.

Thinking Big

The theoretical company www.bitcointrust.com - it's a middleman.  Their aim is to appeal to all Bitcoin holders, and all merchants.  Just like Chainsaw's Widgets signed up, the next day, maybe Bob's Buckets signs up. They ask for $100,000 in liquidity at 2% return rates, because they're finding they can't keep up with Bitcoin payments unless they increase their size.

Now Joe Investor comes over to bitcointrust. He's thinking "Man, Bitcoin is going up. I don't wanna sell. I wonder where I can invest my funds."  Ultimately, he decides to put 75% of his money into Bob's Buckets. Even though their rate of return is lower, they sell so much more, that proportionally, he calculates he'll get a greater return on his investment. So as not to tie his profits too much to a single company, he puts the remaining 25% into Chainsaw's Widgets.

Is this limited only to small businesses? Of course not.  Amazon could do this. (I commend them for trying to go to war with Bitcoin by defining their own virtual currency. But c'mon. What is going to win - a currency you can use anywhere, or a currency you can only use for a single company?  ("First they ignore you, then they laugh at you, then they fight you, then you win.")

So that's the big payoff.  PayPal could do this.  Imagine.  They get to use their complete, existing market base. Keep their brandname.  From their perspective, they're just adding a sub-option. I'm paying with Paypal, using Bitcoin.  From the consumer side, the costs are the same.  From their end, they set up a trust, allocate a percentage to the userbase, keep the remaining profits.

What's the Endgame?

Imagine this idea works, and now you've got the dream scenario we all think about. Widespread bitcoin usage and adoption.  At some point, Chainsaw's Widgets is going to say "You know what? This is great, I'm making more money than ever...but I could make more. I'm going to put some of my own profits into my trust. In short, I will start funding 50% of my own Bitcoin transactions. Now, of those 3% profits, half are coming back to me.  From there, 75%. Eventually - "That's it. I'm going to cut out BitcoinTrust entirely, and start accepting Bitcoins directly to my own wallet."

The laws of business dictate that, once successful, this (removable) middleman can, and will, be removed.  Then we've got the scenario we all hope for.  The interim phase might be many years.

I welcome all feedback. My only requests:
-Please take the time to thoughtfully construct any feedback, with the aim of keeping discussion focused on refining the idea, pointing out errors, suggesting improvements.
-If anyone is interested in trying to get an actual business group put together around this idea, please set up a separate thread and link to it.

Thanks for taking the time to read.

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Chainsaw
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May 14, 2013, 02:02:44 AM
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If this is the wrong forum, could someone kindly let me know/ask a moderator to move it?

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May 14, 2013, 02:10:49 AM
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A friend asked a question. The question is one of trust.

What is to keep the merchant from getting ripped off?
What is to keep the investor from getting ripped off?

The merchant has no initial outlay. So their only risk is of not being reimbursed for the sales that they make.  Reimbursement would occur nearly real-time, so they would get reassurance pretty quickly. The blockchain would provide a reliable audit. From their end, trust won't really be a factor.

The investor has everything to lose, if they cannot trust the bitcointrust company.  Since they would control the wallets, accepting payment, then sending payment along to the company, while distributing the small percentage amongst the investors.  The investors are putting their bitcoins in the hands of the company.

This is a very real limitation, though one that I think would help throttle the growth of the company (and concept) in a healthy way.  Presumably, investors in the first few companies would only be willing to stake smaller amounts. As the company's reputation grew, so too would the trust. After all, the opportunity cost of future profits would be a strong motivator to continue to operate in an honest, customer-friendly way.

I'm sure there are other holes in this idea. I'm really hoping a few people will see some merit in this idea. Then kick it's proverbial tires, and see what problems shake out.  Or maybe someone has a different perspective. I think this is the single missing piece that lets us begin rapid merchant adoption.

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May 14, 2013, 04:47:08 PM
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Isn't what you propose essentially what https://bitpay.com/ offer ?
And the other way around also exist with https://bitspend.net/

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