Bitcoin is a digital good that was designed as a form of money that makes sense on the Internet. It is possible to transfer from person to person easily, without intermediaries and with less commission. That is why it is increasingly popular as a way to pay on the Internet. But there are many other markets where Bitcoin, with its properties, may be the key to revolutionize some services as we know them. Sending money internationally, commonly known as remittances, could be one of these markets.
One of the main problems when money is sent internationally and is subject to a currency exchange, is to know the actual amount that reaches the destination. There are very few services that offer a fixed price. The reason for this is that when an amount of money is sent in the currency of origin, it is not converted to the currency of destination in the moment, but a few hours later or in some cases it might even take days. Because of this, the exchange rate between the currencies of origin and destination fluctuates and it is very difficult to offer a fixed price.
In many cases, the remittance processes require the identification of the recipient before receiving the payment, and it is at this time, and not before, the currency exchange is performed.
Uncertainty regarding a non-deterministic price system is not very serious if we are talking about a private person, but in the case of companies these gaps are unacceptable. Companies prefer to reduce their benefits paying for services that allow them to add certainty, and that is the purpose of many financial products.
Coinffeine’s deterministic matching system
Digital goods like Bitcoin are often praised as examples of solving problems with international money transfers for reasons that seem obvious, but that are not always certain..Cost reduction or reduction of friction to avoid identifying the parties, are two examples of this. After designing the Coinffeine’s matching system we have developed a different view: the really interesting new thing about Bitcoin remittances could be the determinism, or the ability to know precisely the money sent and received even though the system can be more expensive. A few months ago Coinffeine studied this common problem in the markets while designing the price discovery system of our platform.
Imagine a market for digital goods, such as Bitcoin or financial products, with the same user experience as a traditional market, but in which users buy and sell these digital goods between them without intermediaries, using a similar application to BitTorrent that allows them exchanging digital goods automatically and where the payments are made using payment processors such as PayPal. Welcome to Coinffeine!
If a user opens an order for one Bitcoin in a market, it is possible that even though there is sufficient liquidity there is not another user ready to to sell that amount. We can immediately think of a solution in which the user is matched with as many counterparts as necessary in order to satisfy the amount of bitcoins you want to buy or sell, but this operation is not so simple. In each operation small commissions are paid in bitcoins to the Bitcoin network for issuing transactions and in euros to the payment processor for the payment made. Although in most cases these quantities do not exceed a cent of a Euro, both depend on the number of partners required to fulfil the order.
We could be satisfied with this solution, but the truth is that this model has an unacceptable property in any market and also in the remittance market: it is not deterministic.
Since it is impossible to know the number of partners required to satisfy an order in advance, and that each match carries certain small cost, it is impossible to know what will be the exact amount of euros or bitcoins that will be received.
As in the remittance market, we are in a situation where the client needs to get a budget. But it is not possible to provide determinism because the conditions depend on the state of the market.
Coinffeine has created an algorithm to guarantee determinism
Coinffeine has solved this problem by designing an algorithm that adjusts the offer price dynamically to guarantee the user a closed budget and ensure compliance. In other words, we have succeeded in making Coinffeine a deterministic market. But how can we manage the same in a completely different market such as remittances?
Since there are several markets, or companies that allow buying and selling bitcoins in different countries, you can buy bitcoins using one of these companies in one country, send them to the country of destination and change them into local currency using a company with similar service. This makes a money transfer with currency conversion possible.
The advantage of an automatic system to perform these operations on both ends is that it is deterministic and can offer a fixed price.
Far from being a real, usable deterministic solution for remittance, the experimental use of Bitcoin today allows us to reason about using this technology in a comprehensive service based on Bitcoin. It could solve some main problems in international remittances, and help to keep the focus on the real problem: the determinism.
The same way as telephony initially, especially with mobile telephony, lacked a deterministic cost system in its services due to the price difference in calls between operators or midrange calls, remittances are now suffering the same problem. And like the mobile telephony market evolved into a deterministic costs system which created concepts such as tariffs and services with meaning and real value for the customer, it is possible that Bitcoin is the key that allows the same type of revolution in the remittance market.