Why Crypto Is Not Universally Adopted and How to Change It


Let’s face it: crypto adoption has been going down for quite some time. There are fewer and fewer merchants accepting Bitcoin, let alone other cryptocurrencies. This is a bit surprising, given that many issues hampering adoption in the early days have been sorted out: user interfaces got a lot safer and friendlier, major cryptocurrencies are much less volatile than they once were, the assortment of tools for merchants as well as consumers has substantially increased, layer 2 solutions addressing bottlenecks are becoming practical, and yet…

A once-popular crypto-only travel agency, BTCtrip.com has closed shop, leaving unfulfilled orders and defaults on refunds in its wake. Restaurants that once accepted crypto payments no longer do. Fewer and fewer webshops offer crypto as payment options.

In this article Daniel Nagy, a software architect and Ethereum developer, explains why this is happening and how this trend can be reversed.

The First Generation

The vast majority of merchants that accepted cryptocurrencies in the past have done so through payment processors that would shield them from volatility and the technical challenges of dealing with these strange geeky payment systems. BitPay and others have turned cryptocurrencies into yet another way of accepting electronic payments the end result of which was fiat on the merchant’s bank account. In fact, most have never “seen” cryptocurrencies and did not really know what they were. They relied on the reputation of the payment processor to reliably turn their sales into revenue in what they considered “real money.”

But even for savvier merchants, directly accepting cryptocurrencies was not an option, primarily because of their volatility and poor liquidity. They needed to exchange most of it anyway to pay their suppliers and even if some of their suppliers would accept it as payment, the risk of the price changing unfavorably between the sale and the purchase was unacceptably high. So even the bravest and savviest of merchants only left as much of their revenue in its original cryptocurrency as they intended to take out as profit.

This model of operation is what I call first-generation adoption. It is currently the dominant form of e-commerce in cryptocurrencies and it is clearly dying.

As anyone with any connection to cryptocurrencies has surely noticed, the interfacing between the legacy financial system and cryptocurrencies has become increasingly difficult due to the continually increasing hostility of the banking system. It is becoming increasingly difficult to open bank accounts for businesses and individuals regularly receiving payments from exchanges and it is becoming increasingly common to have one’s bank account closed after only a few cryptocurrency-related transactions. In fact, many banks proactively make new clients sign a statement that they, under the penalty of closing it, are not going to use this bank account, directly or indirectly, in any “crypto-related activities,” whatever that means.

The times when the banking industry essentially ignored cryptocurrencies are over. Now they are actively ostracizing what they—correctly—perceive as a potent competitor. First-generation merchants cannot afford to be ostracized by the banks, so those that wish to stay in business rather stop accepting cryptocurrencies.

The Challenge

The steadily growing traded volume of cryptocurrencies and their generally increasing market capitalization clearly indicate that the total purchasing power represented by cryptocurrencies is already substantial and growing. Servicing this demand is a lucrative opportunity that people won’t forego just because the banking industry does not like it. What is currently happening is very similar to how BitTorrent, the unstoppable peer-to-peer file-sharing network came into existence after the publishing industry has put peer-to-peer file-sharing applications under intense evolutionary pressure, first shutting down Napster and then going after less centralized alternatives, until finally, BitTorrent emerged as the dominant file-sharing network. Its resilience in the face of legal and technical attacks is truly remarkable.

Decentralized, unstoppable alternatives to the services provided by the banking industry are quickly emerging, and ostracism only motivates their rapid development, giving it a sense of urgency. What are these services?

First and foremost: non-volatile deposits. Merchants want to be sure that the purchasing power of whatever they eventually get from sales in cryptocurrencies will not drop when they intend to spend it.

But they want more than that. They need to be able to borrow at favorable rates to finance their turnover. They need escrow services for dealing with remote suppliers in different jurisdictions. They want to be able to invest and attract investment.

All of that is becoming a reality without getting banks involved. Let us take a look at these alternatives.

The History of e-Commerce Without Banks

A time-honored way for merchants to borrow without taking out a bank’s loan is to sell purchase certificates (gift cards, etc.). They are, essentially, a loan directly from their customers. When a merchant sells a gift card, the money they receive does not enter the books as (taxable) revenue; it becomes a liability that only turns into revenue when the gift card is redeemed. Merchants can offer all sorts of benefits to those who pay with these certificates in order to motivate their sales. These benefits are, in effect, interest paid on the loan. Instead of customers depositing their savings with a bank with negligible interest and merchants borrowing that money at much higher interest rates, they can cut the middleman by selling purchase certificates with benefits that are worth more than the interest paid to depositors but cost less than the interest paid on loans.

The most obvious way of making purchase certificates more attractive is increasing the assortment of goods and services available for them. Making arrangements with other merchants by which they can accept each other’s certificates is mutually beneficial, even if they still call them “loyalty programs.”

Prepaid accounts are, from a financial point of view, identical to gift cards. In countries where a substantial part of the population is unbanked, such prepaid accounts are the dominant payment method of e-commerce, and they are also popular in some highly developed countries. The western pattern of entering one’s credit card details after the purchase is far from universal. In the former Soviet Union, cash-accepting terminals where one could top up dozens of prepaid accounts have been ubiquitous since the first internet boom of the late nineties. Now they can be seen in Central America and elsewhere. It is a matter of software to turn them into so-called “Bitcoin ATMs,” dispensing cryptocurrencies for cash. It is also a matter of software to make them accept cryptocurrencies for topping up prepaid accounts, though the volatility of cryptocurrencies presents the above-outlined challenge. On the other hand, cryptocurrencies allow such services to become an entirely online operation, freeing them from the very substantial costs and risks of dealing with physical cash.

First Generation Stablecoins

Businesses such as egifter.com or gyft.com are doing essentially this, while services such as purse.io provide a marketplace for individuals and small businesses to engage in crypto-for-gift-card transactions on either side of the trade. Of course, these businesses need to hedge against volatility and they have traditionally done that via exchanges, where they do not really need to withdraw fiat, they merely need to maintain a position that balances their exposure to cryptocurrency volatility. However, traditional centralized exchanges carry substantial counterparty risks and are exposed to hostile actions by the banking industry.

Some exchanges have created certain instruments, namely, cryptocurrencies—at least theoretically—backed by fiat balances at these exchanges which are hard-pegged to fiat. The most successful of these is Tether (USDT) pegged to USD, closely linked to Bitfinex. These stablecoins still carry substantial counterparty risk and are vulnerable to legal and technical attacks against exchanges. These are the first generation of so-called stablecoins: accounting units “living” on decentralized blockchains pegged to a stable fiat currency. Yet, they provide the familiar interface of a low-volatility currency and can be traded in a permissionless fashion. A huge step in the direction of freeing e-commerce from banks.

From Making Bets to Second Generation Stablecoins

But in order to hedge against the volatility of cryptocurrencies, these entirely online merchants do not really need to hold fiat or even deposit tickets for fiat (which first-generation stablecoins essentially are); they merely need to make—preferably leveraged —bets against the cryptocurrency which they have in abundance and it is perfectly okay for the payouts of these bets to be in cryptocurrency as far as they are concerned.

Since there are plenty of people out there who wish to bet on cryptocurrencies—we know this for a fact, since this is the one and the only thing that endows them with value—it should not be difficult to find parties who wish to take up the other side of the merchant’s bet.

It is, however, unreasonable to assume that many merchants will have the skills or the time to carefully balance their risks on a betting platform. The good news is that they don’t need to. Decentralized betting platforms (a.k.a. leveraged trading platforms) can provide synthetic instruments that behave like stablecoins, without the associated counterparty risk of backing fiat reserves. On fully programmable smart contract platforms, such as Ethereum, it is possible to make these entirely decentralized and, hence, unstoppable.

One such marvel of financial engineering is the Maker DAO. While not yet entirely decentralized, it is already very far down that road. Their ERC-20 token known as DAI (or its predecessor, SAI) behaves, from a user’s point of view, like any other stablecoin. However, unlike first-generation stablecoins, it is not backed by fiat, but is a byproduct of leveraged trading (a.k.a. making bets) on and against Ether (ETH), Ethereum’s native currency, on Ethereum’s blockchain, denominated in ETH. Its only connection to USD, the fiat currency to which it is pegged, an on-chain price feed (also decentralized) telling betting parties what the exchange rate between USD and ETH is, on which the outcomes of these bets are—automatically—decided.

The Maker DAO went though a very impressive baptism by fire: between January 2018 and December 2018, its collateral asset—Ether—lost approximately 90% of its value against the U.S. dollar. Nonetheless, its synthetic asset, the DAI, held the peg remarkably well.

Today, a merchant can accept Ether and exchange most or all of it automatically into DAI without counterparty risk, in a permissionless fashion. Or they can directly accept DAI. In either case, they can be assured that their turnover capital is not subject to cryptocurrency volatility.

In addition to the trading platform, Maker DAO also provides a similarly decentralized lending platform, where holders of DAI can lend it out to those who need to borrow it, at reasonable interest rates. Again, in a permissionless fashion, immune to ostracism by the banking industry.


As the pieces of the puzzle are coming together, decentralized finance (or DeFi for short) is quickly becoming a viable alternative to banks. Blockchains are uniquely suitable for issuing purchase certificates, so the entire accounting of e-commerce can move onto the blockchain.

There a few challenges on the way, mostly of technical nature, such as transaction throughput and privacy, but there are also being addressed. For example, a new technology called ZK-rollup, promises to allow hundreds or even thousands of transactions per second with security properties similar to those of the blockchain to which it is anchored and, simultaneously, provide very decent privacy protections. Why does privacy matter? For multiple reasons, the most important of which is that customers do not want to disclose their identity or wealth to avoid price discrimination (i.e. having to pay higher prices, if they are richer). Similarly, merchants might want to hide their identity or turnover from their suppliers for the same reason.

Thus, within a very short period of time, we can expect to see what I call second-generation cryptocurrency adoption, with a deep and liquid market for purchase certificates, borrowing and lending platforms, largely shielded from cryptocurrency volatility, yet rarely touching fiat currency and not using any of the services of the banking industry. The harder they squeeze the first-generation adoption, the quicker are they are going to face some very stiff competition from second-generation adoption, where businesses and individuals can transact entirely without them.

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