Feeless transactions can play a role in enabling DeFi, allowing the sector to further develop and grow in importance.
Face-to-face transactions are starting to seem quaintly archaic as many countries continue or even expand lockdowns due to the ongoing COVID-19 pandemic. Since the start of the crisis in early 2020, digital transactions have surged, particularly in e-commerce and digital banking. In contrast with face-to-face transactions, such as a direct payment of cash in exchange for a product or service, digital financial transactions typically require an intermediary, such as a credit card agency, payments processor or bank. This intermediary slows the process and, naturally, adds a cost to the transaction.
Distributed ledger technology is taking on a greater role in the handling of digital transactions. Decentralized finance applications that make use of DLT stand to disrupt and replace traditional financial intermediaries. Of course, transactions that occur on most DLT networks — and on blockchains, in particular — also require a fee for every transaction. While people may be accustomed to fees for digital payments, those fees are the elephant in the room when it comes to the full range of potential use cases on DLT networks.
A recent report from Forrester noted that 2020 was an important year for growth in the DLT space. However, despite the promise of greater speed and increased security, DLT is not taking off the way it should. Basically, no one is adopting blockchains for industrial use cases. Why? The Holy Grail of mass adoption has so far been elusive due to some sizable barriers to entry, chief among them being fees.
Barriers to entry at the individual level
For individuals, the initial barrier to adoption for using DLT is the fact that digital assets — and cryptocurrencies, specifically — are a completely new paradigm. Transactions on a blockchain require engaging with digital tokens, and people are not familiar with how to acquire, store and use them. There is a significant cognitive load involved.
People can readily understand that they pay X amount per month for access to the internet. The cost goes on their credit card or gets deducted from their bank account, and they can then surf the net. But with cryptocurrencies, they need to know many more things, like where to buy digital tokens, the difference between various tokens, and what a crypto wallet is and how to use it properly. It’s a different way of thinking. Additionally, many individuals are reading horror stories of cryptocurrency owners getting locked out of access to their funds, and that sends up a big red flag: If seasoned crypto users are having problems like this, what chance does a novice have?
Barriers to entry at the business level
Businesses have many similar concerns to individuals, particularly with regard to the fact that digital assets and transactions using DLT are completely new to most. Company executives are asking themselves if they have the infrastructure within their organization to buy and hold cryptocurrencies.
Instead of being required to use a completely new currency for data transactions, companies would rather use digital infrastructure that integrates easily into the traditional business technical stacks they’re familiar with. They’re also asking themselves whether it really makes sense for a business to create a new infrastructure, jumping through so many hoops, in order to use a completely new currency just for data transactions.
Another major issue is that companies aren’t yet prepared to think about how to integrate digital assets into accounting processes. There isn’t really any existing, standardized guidance on how businesses should acquire, store and use tokens. Additionally, before being able to truly embrace cryptocurrencies, companies will need to learn how to keep tokens secure and to develop a variety of protocols around the digital assets.
Levels of complexity also present barriers to businesses using DLT. Even the smallest amount of cryptocurrency transfer results in extra steps that must be taken for transaction fees, which means extra time and energy spent, extra server space required, and extra overhead. Of course, any change of this magnitude requires the training of entire departments, especially with the level of security necessitated.
Barriers to entry at the large-scale ecosystem level
Where there are large-scale uses, there are also large-scale barriers. Imagine the number of transactions occurring each minute as the world moves toward smart cities and smart homes. Now imagine that there is a mining fee for every single one of those transactions on a blockchain. This becomes prohibitively expensive. On top of that, those transaction fees fluctuate and are unpredictable. It’s hard to build a massive, sustainable ecosystem if you can’t reliably estimate transaction costs for the underlying network. It’s not sustainable.
Then there’s the issue of whether it makes sense to be paying third parties — the crypto miners — that have nothing to do with the applications themselves. Further barriers to adoption arise with each additional question. In the case of smart cities and smart homes, who incurs the cost of each transaction? The homeowner? The apartment resident? The city? The building? The government?
DeFi applications that leverage blockchain networks are on the rise thanks, in part, to the transparency and security of the financial transactions on the networks.
Feeless is the answer
The quickest way to eliminate these barriers is by offering a feeless alternative to blockchain. Individual users and businesses would not have to worry about learning how to buy, store and use digital currencies for traditional “data-based” applications. Corporations would not have to send their accounting department back to school to learn how to handle a completely new currency system. And ultimately, feeless DLTs could speed the shift to smart cities, smart roads, smart homes and dozens of other promising ecosystems that require the swift, secure transfer of data and payments.
The less infrastructure is attached to digital payment options — and, ultimately, non-payment-related data transactions — the freer companies and people will be to truly lean into innovating while using decentralized technologies. Additionally, use cases such as DeFi will only be able to take off with the introduction of feeless transactions.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.