What happens to BCH once we close the payment loop?
This is a translation of Bruce Lee's in-depth analytical piece on AnyHedge that went viral with about 3 million views on Weibo.
What will BCH look like when we close the payment loop?
In a closed payment loop, all circulating BCH in the economy does not need to be converted into fiat to be spent, and BCH is used for every transaction. It’s the utopia many BCH supporters dream of.
Author | Bruce Lee (Please credit Bruce in reposts)
【What is a closed payment loop?】
In a closed payment loop, BCH is spent for every single transaction, and selling into fiat is unnecessary. It’s the utopia many BCH supporters dream of.
Before AnyHedge, there was only one way for BCH to achieve a closed payment loop: when the market capitalization of BCH becomes so large that it is comparable to that of gold. In this scenario, BCH’s volatility will drop until it’s similar to fiat, and the economy will have closed payments in BCH. Even if BCH achieves this goal, this scenario occur so far in the future, that it is currently irrelevant to our BCH community at our current stage.
[The current problem with promoting BCH for payments]
From the day BCH was born, there have been a group of hardcore BCH evangelists promoting BCH for payments. Among these BCH evangelists, Roger Ver is the most famous. Their mantra is that BCH is "peer to peer electronic cash" and needs to be used for payments. Fast forward a few years, and while many more merchants accept BCH payments, the number of people who actually use BCH for payments has not increased much. In fact, their numbers seem to be at a standstill.
Why is this happening? The answer is simple: price volatility.
This is the Achilles heel of all current cryptocurrencies, including Bitcoin, which has the largest market value. Even if bitcoin’s mempool is not clogged, daily volatility of 10% make bitcoin unsuitable for payments.
At present, merchants can completely avoid price fluctuations by working with payment processors. The principle is that after merchants receive a user's BCH payment, BCH will automatically be converted into fiat through the payment processor, so that there is no need for the merchant to deal with price fluctuations.
If we look at ordinary crypto users, they are exposed to huge price fluctuations without any protection. Imagine a scenario like this: I have 100 dollars in crypto, I buy a cup of coffee today, and I have 98 dollars left. When I get up the next day, the coins in the wallet are only worth 50 dollars. This is completely unacceptable. The vast majority of ordinary people just want a useful payment medium, and they are not willing to deal with violent price fluctuations.
So, who uses BCH for payments? 99% of the time, it’s BCH bag-holders. However, the willingness of BCH holders to pay will change greatly with price fluctuations. Most BCH holders are unwilling to use BCH for payments in a bear market as it is like selling a portion of their holdings at the bottom. Till this very day, there are still only a few cryptocurrency holders who frequently use cryptocurrency for payments.
【AnyHedge is BCH’s perfect solution to closing the payment loop】
In a time where it is difficult to use BCH for payments, along comes AnyHedge, BCH’s secret weapon.
AnyHedge is an open-source protocol built on BCH. It has many capabilities, but the main function is locking in the fiat value of your BCH (in simple terms, hedging)
When you use AnyHedge to create an on-chain smart contract and deposit $100 worth of BCH into it, no matter how the price fluctuates, you can always end up with $100 worth of BCH.
Suppose the market price of BCH is $200, you hedge 0.5 BCH worth a 100 dollars.
The price of BCH drops to $120, you receive 0.8333 coins, which is worth $100.
If the price of BCH rises to 350 dollars, you receive 0.2857 coins, the market value is 100 dollars.
In the examples above, through BCH’s smart contract based on a UTXO model, you are a hedger, and your counterparty is a speculator. When the price of BCH falls, you receive more than 0.5 BCH and when the currency price rises, receive less than 0.5 BCH.
In the words of the AnyHedge developer, hedgers sell the risk of price fluctuations to speculators, everyone gets what they need, hedgers can always lock in the value of fiat, and speculative users get the opportunity to get rich (at the risk of speculating incorrectly and making a loss).
(After reading this article, many readers will have a lot of questions, but due to the word limit of this article, I cannot explain too much. Follow me and I will explain more as time goes on.)
AnyHedge is really cleverly designed! With it, ordinary users can use BCH for payments without worrying about price fluctuations, and help BCH achieve a closed payment loop quicker.
[What will the BCH ecosystem look like after achieving a closed payment loop]
Wallets: Many wallets will begin to integrate AnyHedge to attract users
Exchanges: Many exchanges will integrate Anyhedge to carry out market-making activities. They will also integrate AnyHedge so that their users can speculate and seek profits
Users: Users will never have to worry, or wake up one day to find that the value of BCH in their wallet has plummeted tremendously.
Merchants: There is no longer a need to use centralized payment processors like Bitpay to avoid volatility. They enjoy a much greater degree of freedom.
People living in countries their fiat currency has collapsed: They will use BCH as their everyday currency.
The following situation below will happen very quickly once AnyHedge becomes popular.
Let’s look at a country where the local fiat has collapsed, vendor A is selling potatoes, and passerby B comes over and wants to buy some potatoes. A asks for $1, and B is ready to pay. In the past, A would have needed to register and open an account with a centralized payment processor, but now he only needs to open any wallet integrated with AnyHedge, pull up the payment interface and display the QR code. Then, B takes out his mobile phone and opens his wallet integrated with AnyHedge (of course, B could use a wallet without Anyhedge, but he will assume FX volatility risk). B has $10 worth of BCH hedged by an AnyHedge contract in his wallet, so B scans the code to pay. Then, $1 worth of BCH is transferred from B's contract to A's wallet, B's AnyHedge contract is automatically updated, and the locked value of the contract changes from $10 to $9. After receiving 1 U.S. dollar, A’s wallet will automatically carry out hedging operations to lock in the legal currency value of 1 U.S. dollar.
With AnyHedge, BCH users don’t need to worry about price fluctuations. More importantly, BCH is permission-less money and thus there is no chance of BCH being frozen by a by trusted, third party. BCH users retain 100% autonomy over their own money.
[Why not just use stablecoins? ]
After reading this, there will definitely be readers that ask: Why not just use stablecoins?
Because stablecoins have various problems, let's list them one by one:
1. USDT is now used by many, but everyone knows that it is neither a legal, nor stable currency and may collapse at any moment. There have been instances where rumors about USDT cause its price to violently fall by more than 20%.
2. Users of regulated stablecoins like USDC do not have to worry about violent price drops, but accounts holding USDC may be frozen at any moment.
3. Decentralized stablecoins like DAI have two flaws. First, there is the risk of complete liquidation. In the previous bear market, ETH fell about a $100, which almost triggered the complete liquidation of all ETH that was used as collateral for DAI. If a complete liquidation ever happens, the entire DAI system will stop working until the collateral is auctioned off and the proceeds are paid out to all DAI holders. Secondly, the price of DAI often deviates greatly from $1. Due to changes in supply and demand, and DAI deviated many times by close to 10%
4. Algorithmic stablecoins. These stablecoins are the worst, and their prices often fluctuate greatly.
The hedging function of AnyHedge completely solves all the problems above. It is not susceptible to price crashes, funds being frozen, or a complete liquidation of collateral. The value of the locked fiat is always close to $1.
All stablecoins need to have support from exchanges and other businesses in the cyrpto ecosystem to run smoothly. For example, USDT runs on many different blockchains, and now ETH and TRX versions are the most used. The USDT issued on EOS and BCH is essentially useless because so few exchanges support it. While AnyHedge does not issue tokens, almost all exchanges and payment processors support BCH, which allows AnyHedge to seamlessly integrate into the existing ecosystem. For example, you can use a wallet integrated with AnyHedge to transfer or top up a wallet/merchant/exchange that does not have AnyHedge integrated in it.
AnyHedge has changed BCH fundamentals forever, and the sky is the limit!
General Protocols Blog
This article forms part of the General Protocols Blog, a collection of cross-platform links showcasing our team's community activity, Bitcoin Cash projects, UTXO development, and general crypto musings.
I love Anyhedge and think it will be great for crypto, but I do not believe price volatility is what is keeping BCH from going viral and taking over the world as p2p cash. I think many learned the lesson that no Bitcoin can really scale for full-on massive worldwide adoption yet. Until one can, we should not try to go viral like BTC tried to in late 2017. The terrible user experience from reaching the scaling limit would be bad for confidence in any coin that tries and fails.
Once we can go viral, I think we will and the Bitcoin dream will happen much faster than most people think is possible. But until we can handle the load, we will stay pretty small and BTC's dishonest social engineering and massive market-price manipulation will be very difficult to over come. Going viral would put the naked emperor in it's place as we take the market cap and mining hash from the small historical footnote that used to appear to be so well dressed.