Bitcoin is one of the most well known and popular cryptocurrencies. But before we get into the workings of the cryptocurrency, it is important to understand what it is and how it works. Bitcoin is a digital currency that allows people to send money online without the use of a third party. It has been around for nearly 10 years and has become the worldwide currency of the internet.
Bitcoin has been one of the most-talked about topics of 2017. The supposed “currency of the future” has been grabbing the attention of both the media and the general public. First its public interest was high when it came to the price and volatility of the cryptocurrency, but these days the word “Bitcoin” has become synonymous with “darknet” drugs, and “data breach” in the news. The cause is no secret: Bitcoin has become a victim of its own success.One of the most lucrative uses of bitcoin is to transfer money abroad. Remittances have remained constant in recent years and are expected to continue growing at a similar pace in the medium term. It’s more than $500 billion a year, with most of the money going to low- and middle-income countries.
With the growth of the remittance sector, the local economy should be affected by the increased purchasing power of citizens. However, this is not the case in countries like Nigeria, India, Vietnam and Bangladesh.
Remittance fees are so high in many of these countries that recipients must pay at least 6% for small remittances, and this can be as high as 22%. Countries in South Africa, such as Botswana, also suffer from these high average costs.
Money transfer services are expensive due to regulations in different countries and different exchange fees. In addition, there may be a lack of transparency in exchange rates, which imposes additional invisible costs on consumers.
If institutions and large banks manage the remittance market in this traditional way, countries dependent on remittances will suffer. In many African countries, remittances account for a third of total GDP. Thus, if they are charged high fees for cross-border transfers, this limits their purchasing power and does not contribute to an increase in demand.
So we need to start using a payment system that links cryptocurrencies like bitcoin and lowers the cost of peer-to-peer transfers. If we have a network without intermediaries, the beneficiaries of the transfers will automatically benefit from it. To understand how drastic the difference is, we’ll take it a step further and look at how bitcoin transfers on the Lightning network and the Stripe app are disrupting global money transfer markets.
Why don’t banks offer direct money transfer services?
Although there are many money transfer companies, few have direct access to the global network of correspondent banks. Before the introduction of correspondent banking, cross-border payments were associated with an increased risk of fraud and delays. Neither party had a direct relationship and there was no central authority responsible for clearing and settlement.
After the Russian Central Bank began to exercise control over cross-border payments, the number of intermediaries increased, slowing down and making the process of transferring money even more expensive. Most of these government agencies have no ties to third world banks, so the power to regulate interest rates is concentrated in the hands of a few local banks in a given state.
In recent years, 50% of the CBRs have gone bankrupt, making changing money difficult and expensive. African countries have been heavily dependent on these banks for their international trade, and now they are being asked to pay high fees to receive payments. That’s why we’re seeing a shift in money transfers to the currency. Remittance flows in the form of U.S. dollars have dropped by more than 28 percent, with most citizens now receiving money in the form of cryptocurrencies.
Nigeria has the highest acceptance rate for bitcoin, which is very convenient for money transfer arrangements. Banks cannot offer the same facilities because they spend too much money on KYC, anti-money laundering rules and other capital controls. The Bitcoin network can be used to facilitate the management of P2P payment channels.
In developing countries, the financial system is generally unstable and unreliable, so banks have no choice but to charge high fees for remittances. The solution here is the micropayment channel, which can serve as a payment solution for digital goods where costs are relatively low and transaction costs are negligible.
How can blockchain make a difference in money transfers?
The cost of remittances is at the heart of the problem. The cost of transferring money abroad can be as much as 10% of the transaction amount when banks are involved, and double that amount when informal methods are used, both by migrant workers and by their families back home. There is no doubt that blockchain technology can contribute to society by significantly reducing costs. There are three major opportunities for Blockchain in terms of streamlining remittance markets and overcoming traditional banking challenges:
- Optimisation of the referral process and disintermediation
The money transfer industry is like the post office, I mean, seriously ….. It’s a physical letter. There are many levels and points of failure, as well as high costs for the privilege of sending money. When only a few banks offer exchange services on a large scale, there are multiple points of failure. As the number of intermediaries increases to meet demand, they begin to reduce transaction costs, increasing the amount the recipient ultimately pays. With its efficient network for approving transactions, blockchain technology can simplify a process that would otherwise take days by eliminating the middlemen.
- Mobile wallets with blockchain technology
The biggest challenge in developing countries like Africa is the proliferation of mobile phones. According to Statista, the 50% mark is expected to be reached by 2025. As mobile phone penetration increases, people will have easier access to applications such as mobile wallets. With dozens of companies operating in this field, we will see blockchain-based wallets become an integral part of money transfers. Coins.ph is an example of a startup rolling out mobile cryptocurrency wallets in emerging markets. With over 10 million Filipino users, they have opened the door to cryptocurrencies for a new generation.
- Integration of blockchain solutions into existing traditional players
Blockchain is a disruptive technology, but it is not intended to make competitors obsolete. Blockchain works with banks and money transfer companies to give them a more efficient way to send money around the world. By strategically integrating blockchain into their platforms, money transfer service providers can capitalize on the growing popularity of cryptocurrencies.
We have seen many new companies and start-ups trying to fill this void in the remittance market, but few have succeeded. Strike is currently one of the few payment options that simplifies money transfers and reduces the cost of sending cross-border payments to zero. With the Bitcoin Lightning Network, we see this fintech application making great strides in the industry. Let’s see how this affects remittances.
Bitcoin Lightning network
The Lightning network was created to solve bitcoin’s scalability problem. At its current speed, the Bitcoin network can only handle two to three transactions per second, which is not a reliable measure of mass usage. With the Lightning network, we are seeing payment channels emerge between the two parties. It does not matter how many transactions are made through this payment channel. Ultimately, only one is registered on the Bitcoin blockchain, saving time and money.
Bitcoin’s Lightning network still needs to improve its speed and rates. The biggest challenge for Blitz networks is to create new channels and include more parties in the same channel. If they can add new participants to the channel, the network will be relieved when we merge the existing payment channels. It will also increase the speed of off-chain transactions.
Lighting system – mechanical of table
For payments over the Lightning network, users must pay a small fee. The network divides this map into two types: Base committee and liquidity-based committee.
The flat rate applies to all transactions that pass through your node. You may be charged 300 satoshi or 1 cent for transferring payments. As the volume increases, you may decide to reduce the base fee. The network node managers set the base rate based on their capital.
Remuneration for providing liquidity
If you are an LP, you can set your fees based on an individual’s use of cash, and they will be charged per satoshi. Lightning Satoshi may charge you for each Satoshi sent through your Lightning channel.
To make this even easier, we’ll take a $10 payment, which is made through the Lightning network. For a Satoshi, a transaction is performed that lasts only one second. And the best part about using the Blitz network is that you don’t have to pay extra when you increase the volume. So if you transfer more money to your country of origin, you will still have to pay a fixed rate, relatively speaking.
What is the effect of lightning on networks?
As a mobile app that uses bitcoin to transfer money, Strike helps users maximize the potential of the Lightning network. The best way to describe the platform is a futuristic crypto-currency platform that solves the problem of fiat money transfers and allows users to send money instantly to anyone in the world at negligible cost.
The example of El Salvador will demonstrate how efficient the Blitz network is and how Strike streamlines the entire process. Remittance services in El Salvador have always been dependent on the US dollar, but with the Lightning network, users can benefit from the same inflows that contribute to GDP, and at a much lower cost for transaction fees.
The strike began today in El Salvador.
But the real reward is introducing Strike to an emerging market and providing financial instruments to people who have had to do without for centuries.
This is only possible because of #Bitcoin. The power of the open money network is clear.
– Jack Mullers (@jackmallers) March 31, 2021
Although Strike has no revenue stream, Jack Mullers is confident that it will find a successful business model once the merger with the Lightning network proves sustainable. It is likely that Strike and other startups entering this market will disrupt the remittance industry because of the unique customer experience they are trying to offer. When customers use new payment options, they benefit from competitive and fast delivery processes and high quality customer service.
International money transfers are a multi-billion dollar industry, and the cost of transactions limits the amount of money people can send. Bitcoin offers a faster way to transfer money to remote areas that need help due to the high transaction costs of traditional money transfer services. As flash networks disrupt traditional methods, we can expect bitcoin to be fully exploited as an asset. Remittances are the engine of the economy in many countries. So it will be interesting to see how Stripe will use the Lightning network and attract enough users to make it more sustainable.
Kartikeya Gutta, born and raised in India, is a cryptocurrency journalist and freelance writer for the website itsBlockchain. It covers various aspects of the industry through in-depth analysis and research. His passion for blockchain and the crypto-ecosystem is largely because he believes it can truly change the world and help millions of people.
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