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The Bitcoin payment protocol has been configured illogically, and inconveniently for merchants. Here’s how the invoice-based standard will fix it.
All transactions come with an overhead to process, regardless of which payment network they are settled on. Many times, this cost is absorbed by the merchant or factored into the amount settled in a transaction.
For smaller payments however, like when using EFTPOS at your corner store for some bread and milk, you may be met with a bit of paper sticky-taped on the console saying: ‘EFTPOS transactions under $10 will incur a 30-cent surcharge.’
Can you imagine being notified of this surcharge yet still sending only $10 to the merchant and expecting them to happily accept the transaction and allow you to leave with your goods?
And yet, the payment protocol in Bitcoin has been configured similarly illogically to date.
A merchant would provide a customer with a Bitcoin address, and the customer would generate a transaction which spends some of their Bitcoin into that address, including an appropriate amount to miners as a fee and broadcasiting the transaction to the miners.
If the maximum number of transactions which can be included in a block were small, miners would select only the highest paying transactions to be included in this scarce real estate.
This means that users could outbid one another for priority processing on the network. The transactions which offer a lower fee would be forced to wait until a period of lower activity to be included in a block and be confirmed.
If you were a merchant under this conventional paradigm and a customer pays you with a lower fee, on occasion you may have been waiting for days before you were able to confirm that you had successfully received the funds.
If a customer wanted to leave with the goods earlier than this, there would be times they would have to include a fee in excess of $20 to outbid other transactions.
The scenario sketched above isn’t really an issue when using a protocol version with unbounded block sizes, like with the Bitcoin SV (BSV) network.
However there are other shortcomings of this payment approach which have led to the development of an invoicing-based payment approach by key players in the Bitcoin SV economy.
Bitcoin SV’s invoice-based payments (Direct Payment Protocol) resemble fiat transactions much more closely in that a merchant will generate a total for your goods, poll miners for a fee quote, add the fee and any necessary VAT or GST to an invoice template and pass this on to the customer for them to add their signed funds and return it to the merchant.
The merchant then performs a simple Merkle authentication proof to check the transaction is using valid unspent outputs, broadcasts the transaction to the mining network where it then polls another random miner or two just a few milliseconds after, and if the transaction resides in all their mempools, the transaction can be safely considered final.
This approach comes with several advantages:
In effect, by putting the responsibility of broadcasting the transaction on to the merchant (just as the responsibility to cash a received cheque would be on them) the invoice-based paradigm offers significant advantages to the merchant and allows for the creation of entirely new transaction templates which weren’t previously possible under the legacy method.
Due to the fact this new payment paradigm can allow for a proliferation of entirely new transaction dynamics, this will in turn induce a completely novel transaction economy which scales efficiently for all parties.
It is for this reason that the Bitcoin SV Technical Standards Committee (TSC) as a collaboration between Bitcoin Association and enterprises from industry, have deemed it necessary to develop a technical standard to ensure that this approach is both flexible and robust for interoperability and extensibility between diverse wallet providers.
In the future you may well be able to pay for your bread and milk with a combination of a few satoshis, a milligram of vaulted gold, a US quarter and a freshly minted NFT that’s the hot commodity of the day.