Thoughts?
http://www.abcoin.net/post/75914054510/assessing-cryptocurrency-use-casesThese are the most commonly discussed use cases for cryptocurrencies. How compelling are they, and how might that change?
Private Transactions
This use case remains the one where Bitcoin’s advantage is the biggest. The exchange rate may collapse; mainstream usage might never materialize; Bitcoin could be supplanted by a superior alternative — but some cryptocurrency will be in use ten years from now, if only due to the demand for it from this category of transaction.
The Silk Road was Bitcoin’s first killer app. Illegal goods are a big market, and one where Bitcoin’s privacy advantages are highly motivating
There are also totally legal kinds of transactions in this category. It could be something private that you don’t want on the credit card bill, or a donation to causes that you’re afraid would put you on a government list.
Bitcoin isn’t strictly anonymous, though. Zerocoin's much stronger anonymity guarantees make it one of the few proposed altcoins worth watching. It won't be surprising if the Silk Road's successors adopt it.
Remittances
This is the most interesting use case to watch in the short-term. A World Bank report lists fees for existing remittances services at almost 9%, with potentially more fees at the receiving end. Whenever that cost is greater than the spread from using LocalBitcoins on both ends (and there do seem to be buyers and sellers all over the world), the use of Bitcoin for remittances might make sense.
The idea has gotten a lot of recent publicity, it’s addressing an existing market, there are no major technical obstacles, and startups like Kipochi and BitPesa are giving it a try.
That said, there’s no evidence yet of anyone actually using Bitcoin for remittances, and unforeseen obstacles could make it impractical. For example, what happens when there’s intermittent Internet access on the receiving end? Startups in the space must face regulatory compliance issues. We’ll see how this plays out soon.
Store of Value
Is Bitcoin a good store of value? “No.” Right now, it’s far too volatile, risky, and low-volume. How good is Bitcoin as a store of value? “Not very” — but that difference in framing is important, because it lets us see that there might be even worse alternatives. If you live in a country with a hostile national currency — places like Argentina, Cyprus, or, Zimbabwe — Bitcoin might be a rational choice for some part of your savings.
Everyday Purchases
Overstock.com recently became the largest merchant ever to accept Bitcoin. It’s telling that the testimonials on their launch announcement are more about ideology than any practical advantage of the cryptocurrency. Their decision seems to have been made mostly due to the CEO’s political ideology, not customer demand.
Ideology might be motivation enough for some buyers. Overstock’s first-day Bitcoin sales figures were impressive. But I doubt they will be matched for a long time. In fact, I’d hazard a guess that Bitcoin sales have fallen to near zero.
Right now, for everyday purchases, Bitcoin’s advantages benefit the seller far more than they do the buyer. Merchants get the lack of chargebacks, as well as the near-elimination of transaction processing fees, which for credit cards can approach 3%. Buyers, though, have no apparent motivation to use Bitcoin instead of a credit card. If Bitcoin saves merchants money, they should incentive adoption by passing some of those savings on to the consumer. People will go a long way to save a dime.
The story for in-store purchases is even worse. The user experience of paying with Bitcoin doesn’t compete with cash or credit cards, not to mention Square Wallet. None of those payment methods involves scanning a QR code. A better UX could make Bitcoin credible here, but even then, Bitcoin would just be an implementation detail — not better than any alternative.
Perhaps the biggest problem right now is that Bitcoin only travels “one hop” on the transaction graph. Consumers have to buy Bitcoins just to spend them. Then, the merchants sell them as soon as they are received. Both parties incur losses from the attendant spread and exchange fees.
This needs to change on both ends: people who get paid in Bitcoin will be preferentially motivated to spend it, and merchants who can pay their suppliers in Bitcoin will benefit more from accepting it. When we go from one-hop to multi-hop on the transaction graph, there could be a phase transition, like when random graphs become connected.
Smart Contracts
Smart contracts are the wildest idea of the bunch. Beyond just sending currency from one person to another, a blockchain could cryptographically secure more complicated transactions: things like wagers, property transfers, or foreign exchange trades. See this talk for a good introduction.
They’ve gotten a lot of attention lately. Investors like Fred Wilson are interested in the concept. Ethereum is an ambitious new altcoin built expressly around smart contracts. Even the Financial Times mentioned them in a broad take on Bitcoin.
Despite the hype, there are several reasons why we’re a long ways away from seeing any significant adoption of smart contracts. First, major UI and UX issues must be overcome. The official Bitcoin client only supports the simplest kinds of transactions, but even that much is confusing to people. Smart contracts will be far more so. Second, many of the proposed uses for smart contracts rely on real-world data inputs, like the winner of an election or sports game. These data have to come from a trusted source, so it’s not obvious what the advantage is over trusting a centralized bookie under the simpler transaction model. Finally, to use the typical example given by smart property proponents, why would you want your car’s ownership to be stored on the blockchain? With the frequency at which Bitcoins are lost or stolen, I’d rather trust the legal system whenever possible.
The solutions to these problems will be complicated. Smart contracts will be relegated to niche uses for now. But they may be the most interesting case to watch in the long-term.
