As the excitement and willingness to use the blockchain builds, so do scalability issues associated with use cases. This revolutionary technology is still in its infancy but there are already open source platforms being built and used to tap into the blockchain. Startups and organizations are still ironing out the details on how these platforms will emerge into mainstream, but the technology has unleashed limitless ideas on how to fully utilize its potential. One of these interesting ideas is payment channels independent from the blockchain.
Sounds counterintuitive?
It isn’t. Here is how it works.
What is a payment channel?
A payment channel is a gateway into a large network in which payments (funds) can me moved back and forth instantly and at low fees. Some examples of payment channels are the Raiden Network and Lightening Network. Raiden is being developed to answer the scalability issues users are currently facing with Ethereum and the Lightning Network is doing the same for Bitcoin. Since I’m more of an Ethereum girl, I’ll focus on Radian to explain further.
What are the current issues and how will a payment channel help?
The common issues related to the use of blockchain for payment and transfers include transfer speeds, transfer fees and privacy.
Transfer speeds, The speed of transactions on the Ethereum blockchain depends on two things: 1. the speed in which each block can be mined, and 2. the number of transactions that can be processed at once. Currently, the average mining speed for a block on Ethereum is approximately 15–20 seconds, not bad. The quantity of transactions that are happening in a single second on the other hand are limited (due to the Ethereum gas block limit), which can further delay the transaction to approximately a minute on average. In the future, when the amount of transactions increases, processing times will be longer and backlog will increase further.
Transfer fees, Currently an Ethereum transaction fee is a set rate and not defined by the amount of funds being sent. In the case of smaller transfers (or micro-payments) you could spend more in fees than the amount you are trying to send.
Privacy, When using the Ethereum blockchain, all transactions are public and displayed as a digital ledger. Essentially this would have all your spending records on public display, almost like posting your visa statement on social media. Further more, every ETH (Ether, Ethereum’s currency) can be traced back to every user that has ever held it.
A payment channel, such as Raiden, will change all of that. Once you open a channel (or are invited to join a channel) in the Raiden network you are connected to a digital spider web of contacts and different enterprises all over the world. As network adoption grows, so will the span of the network through channels independent of the blockchain or as the Raiden teams calls it “off-chain” payment channels. This network will allow instant payments/transfers and low fees — miners must keep fees low in order to mine in the Raiden network. As for privacy, the only records that will be made public are the funds used to open the channel, and the settlement upon closing the channel and moving funds back “on-chain” (back to the blockchain).
How can this be used in real situations?
The possibilities for payment channels are endless, ranging from employers paying employees to ordering and paying for products, food and entertainment through a connected network. A current project that would benefit from payment channels is the newly implemented network of 100+ electric car changing stations in Germany that are allowing users to recharge their vehicles using digital funds (ETH). At this point the company is processing payments directly to the Ethereum blockchain, as mentioned above there are scalability limitations to this which will cause delays at the point of sale once widely adopted. Since the initiative of this energy company is in the early stages its important to keep a close eye on the usability in order to keep repeat business from those early customers. This is a great example of where a payment channel would create a bridge allowing lower fees, faster processing speeds and keeping user charging usage off record.
What will this mean for you?
This shift in technology will change the way we interact with our favourite brands and organizations. The environment in which companies work is always evolving as technology evolves. At this point companies and startups are prepared for a bit of change here and there. One thing that will be truly difficult to wrap their minds around is the shift from centralization to decentralization. Centralization of organizations is deeply embedded into our societies DNA and that can lead large corporations to feel invincible and irreplaceable. They shouldn’t feel too comfortable, according to Fobes financial services, real estate, voting, music streaming and supply-chain management will all be disrupted by blockchain technologies as early as 2020. Companies have already taken the 1st steps towards a decentralized sharing economy and the Enterprise Ethereum Alliance is getting ready for the wide adoption of the technology. Payment channels is one of the many ideas that will form the foundation for growth. In it’s essence, the blockchain will change all the rules. Legacy companies, we have all come to know, will need to put their ‘digital transformation’ strategies into over-drive and seriously consider the adoption of blockchain technologies.
Welcome to the future.