Comparing Paypal with Bitcoin

[DublinBrian]

Looking at Paypals (subsidiary of Ebay) latest quarterly results is informative from a bitcoiners point of view.
http://www.bloomberg.com/news/2012-07-18/ebay-templates.html

PayPal had 113.2 million active accounts at the end of the three-month period, up 13 percent from a year earlier.

If Bitcoin were to achieve 113 million active users,
Average account balance = 21m/113m = 0.18584071 BTC
If the average user has $100 of value in their account.
Implied exchange rate = 100/0.18584071 = $538 per BTC

Secondly, take a look at Paypals revenue from transaction fees. Its massive.

Revenue at PayPal, EBay’s electronic-payment unit, surged 26 percent to $1.36 billion in the period while the total value of transactions processed climbed 20 percent to $34.5 billion.

So if bitcoin were to achieve $34.5bn in transactions per quarter, at the exchange rate of $538, we would have to increase transactions to

$34.5bn/(30 x 3 x 538) = 712,515 BTC per day

[1715360214]

1715360214

[Boussac]

+1

I think that's exactly what drives the price of bitcoin up.

[BCB]

Great analysis

But could bitcoin scale to even a fraction of that volume?  Certainly not with the current infrastructure.  bitcoind, exchanges, getting fiat in and out of the system etc.

[Vandroiy]

I don't think people will want to do all the Paypal-like transactions directly in the block chain. The confirms take time, and it would make the block chain extremely large and expensive to handle. Not the best trade-off for a quick, small payment. There are many projects on how to replace Paypal with Bitcoin backing though, and I'm quite confident it will work out without hurting any of Bitcoin's goals.

But yes, if Bitcoin or something based on it replaces PayPal, triple-digit prices would not come as a surprise. It's a very long way to get there though.

[BCB]

Vandroiy

Are you suggesting a alternate or and alternative to the existing blockchain?

[Vandroiy]

Vandroiy

Are you suggesting a alternate or and alternative to the existing blockchain?

No, not at all. The block chain is good for what it does: securing the large transactions, preventing inflation, etc. It's still not very clear how the problems with it size limits will be resolved, but I don't see a reason for major changes in Bitcoin itself.

The small, quick transactions have totally different requirements. They can be solved by various forms of trust-nets or banking, quickly and cheaply. The classic problems with compatibility between different firms, banking licenses and having to trust them with large amounts do not apply if the backing system is Bitcoin.

I'm actually working on something of the sort. The idea is to build a program that does off-the-chain micro-transactions in which a cheating party would always lose funds. One thing we're investigating is building trust based on escrow features of Bitcoin scripting, so that a bank cannot run with the money, because it would allow customers to burn an equivalent amount of the bank's funds.

Even without fancy tricks, a lot of things can be done using Bitcoin "just" as a backing currency. Simply building a normal payment processor with Bitcoin instead of USD Wire backing would already solve a lot of problems. Look at Bit-Pay and similar projects, there is a lot of potential there!

[BCB]

Very interesting.  I'm was not familiar with "micro-transactions"  You work sounds quite intriguing.  Can you point me to where I might learn more about micro-transactions, if it exists?

Thanks.  

[Vandroiy]

Very interesting.  I'm was not familiar with "micro-transactions"  You work sounds quite intriguing.  Can you point me to where I might learn more about micro-transactions, if it exists?

Thanks.  

We haven't posted anything on the project yet, and probably won't for a bit longer. The crypto guy is still figuring out some things, and I'm tied up with other work at the moment.

"Micro-transactions" just means very small, very fast payments. While the block chain has superior security, for many high-frequency applications, it is expensive and slow. A really small transaction doesn't need its full security, but the delay of the block chain alone could limit its usage scenarios. Examples would be: Payments in physical shops (no waiting for a block when you buy a hamburger), pay for routing a small amount of traffic (online p2p networks), pay a little for posting a message (anti-spam feature)... you name it, anything where speed and price are more important than perfect security.

If Paypal weren't so sluggish and misbehaving, it could be a good micro-transaction provider. But it's just sitting on its natural monopoly and claiming absurdly large fees. Bitcoin makes all payment providers based on it trivially compatible, creating a great form of productive competition. It's likely that we will see better versions of Paypal in Bitcoin, as well as new ways to approach the problem.

[CodesInChaos]

There are a few techniques for off-the-chain payments that limit the amount of damage a bank can do, such as Trustless, instant, off-the-chain Bitcoin payments. Those allow bitcoin to scale to much larger volumes and faster transactions.

Raw Bitcoin isn't optimal for small every day payments, but it's great as a backbone for higher level systems.

[Dansker]

Imagine if paypal adopted bitcoin.

I see no technical reason why it isn't possible.

Bitcoins is like cash in many ways, and essentially, paypal has a load of cash it holds for people, and then move some numbers around backed by trust and that cash.