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digital daily: Merchant Tradeoffs

Merchant Tradeoffs: The Diners Club credit card was the first of its kind in the 1950s. A hefty 7% merchant fee on each credit card transaction was required, yet it was embraced by merchants. Why? It offered cardholders convenience and resulted in increased spending by consumers. It was an even smaller price to pay when adding the extra benefit of delegating bad debt collection responsibilities to Diners Club. Optimization mattered more to the merchants. Payment rails have evolved into a modular walled garden where “layer two” networks like VISA, ACH, and Paypal that facilitate USD payments operate depending on Fedwire, the final settlement layer. This structure can be likened to the Bitcoin protocol. Like Fedwire, the Bitcoin base layer does not scale. But its secondary payment layer, the Lightning Network, does. Credibility and security of the base layer is the common foundation. However, the differentiating factor is the Lightning Network’s ability to offer significantly higher throughput at lower fees and almost-instant settlement. To truly reach its potential adoption, there are hurdles to overcome. Liquidity is the biggest. Aside from limiting business cash flow with locked supply requirements when running a node, merchants cannot receive funds over the Lightning Network without first sourcing liquidity from a Lightning node. It’s a deterrent. The average customer doesn’t (yet) run a Lightning node. So far, it has been an opportunity for centralized liquidity providers and solutions like LNBIG, Coincharge, and Voltage. But centralized services sacrifice the ideal of having merchants operate independent of intermediaries. The value added using the Lightning Network is still compelling, and merchants might accept centralization as the price to pay in the transition to independence. It is early days for the young Lightning Network. Today’s tradeoffs are tomorrow’s opportunities.