This post was triggered by a recent announcement of PayPal to raise fees for certain transactions. In this post, I will explain why PayPal did the exact opposite of tapping new markets or expanding existing ones. It gets even more interesting when we take into account that all markets, even blockchains are prune to rising prices prohibiting serious lock-ins, except for IOTA.
Blockchain fees and corporate pricing behave very similarly. More demand means higher prices for the respective service in both cases. The case for blockchain is clear. Although fees are set by users, we can see a clear correlation between transaction load and prices. Transaction-throughput is fixed due to fixed block sizes and constant block intervals. If demand is bigger than capacity, users start overbidding each other by raising their fees to get transactions processed. Transacting turns into a bidding competition where only the highest-paid transactions are considered by validators. You can witness this simple correlation between utilization or demand of transactions and transaction prices for all blockchains where demand exceeds the supply of transactions.
On the corporate side, Paypal is the most established payment solution. It counts roughly 400 Million active users and currently up to $300 billion transaction volume per year. Chances are high that you have used PayPal before, considering PayPal’s market share as well as the high retention rate. According to a study from 2019 by ibi research, PayPal-Checkout is available in four of five German online shops. If it is available, it is used most often (49%). The case today: If a shop is not offering PayPal, it loses out on sales. Once a shop offers PayPal, it is hard for them to not offer it anymore as they will lose customers, if they do so(lock-in effect).
As a near monopolist or, at least, a market leader in an oligopoly of a couple of established payment solutions, the company uses its market power and merchant lock-ins to maximize its profits.
You could expect PayPal to lower their fees to foster their position, processing even more transactions and enabling more merchants to sell e.g. cheaper goods and thus creating more lock-ins or making use of economics of scale. Economically this is not the preferred strategy to maximize the producers surplus of a monopolist. In fact, on the 21st of June 2021, PayPal announced that it will not decrease but increase its fees for certain merchants. I spare you the exact calculations that lead to this decision. The rule is simple and holds true for every market: the higher the concentration on the producer’s side(competitive market -> oligopoly -> duopoly -> monopoly), the higher the consumer prices get. This means a dominant transactor will not cheapen its service to penetrate an even bigger market, instead, it will maximize producers surplus by increasing the price of its service aka transaction fees.
For blockchain and corporate, the consequences are significant: The tendency to raise prices with higher market dominance will give competitors always the edge to sufficiently distinguish their service and pricing offerings, so they are able to compete again or at least occupy a niche market. Although Paypal and Bitcoin or Ethereum are dominant, this doesn’t mean merchants or blockchain users are price-insensitive. Put simply: The market enforced higher prices make room for competition and counteract lock-ins.
Three corporate examples are Alphabet challenged by TheTradeDesk, PayPal versus Klarna, or eBay versus other auction houses that don’t take a 5% to 10% cut on every auction.
The intruders of Bitcoin are altcoins. Alternative coins were developed because they offer a better alternative to Bitcoin in terms of speed and costs. Bitcoin transactions became expensive and slow, which made altcoins more attractive to use. Altcoins, once being more used, also became more expensive and slow, because they rely on the same unscalable distributed ledger technology, with one exception: IOTA.
The better alternative to Blockchain (and monopolistic markets) is the IOTA Tangle. IOTA doesn’t get more expensive with more market share as market participants would normally expect. IOTA simply can’t get more expensive as transactions are feeless. This is possible due to how the IOTA transactions are processed. Instead of centralized and capacity-limited entities having to bear higher transaction load, users themselves process transactions. If users validate their own transactions, there is no payment processor left who could demand a fee. This means merchants using IOTA as a payment method will not have to face any higher costs no matter the market share or transaction throughput of IOTA . If you want, IOTA levers out market forces in a good way by mimicking a public good.
Once IOTA sees first meaningful adoption, it will stay feeless and there won’t be a reason, at least from a market perspective, to switch to costly alternatives creating the ultimate lock-in.
