We often talk about IOTA as the new distributed ledger that promises a financial and infrastructural solution in a world where fees for transactions act as a barrier to progress, especially in the IoT.
But how big are the present existing fees for a system like the IoT? Do we really have a problem?
I tried to find out! Very amateurish, I might add, but enough for this purpose.
A bigger issue in estimating a none-existing number such as the “global-transaction-fee-index” is to find systems that are overall able to deliver the necessary services globally.
I take the liberty and define the “global-transaction-fee-index” as an indicator that shows the impact of the “mean fees” that would be added to a value transaction in the IoT.
The lower this index is, the worse it is for the IoT (shown with an example under “conclusion”).
This number is almost certainly utter bullshit but it gives us an idea how expensive and cumbersome transaction fees could be.
For my evaluation, I made a list of relevant requirements for present services:
- the service needs to be fast (financial state of the art)
- the service needs to be available almost everywhere (high adoption)
- the service needs to be a commonly used technology right now (no proof of concept)
- the service needs to be a system that is documented well enough to be assessed
This list supposedly isn’t complete but should be enough for this assessment.
For my calculations, I furthermore held to the very conservative estimate for the IoT-devices by Gartner of approximately 30 billion devices in 2020 (Source: Gartner)
We can assume that not every single device will be used for shifting values because a big piece of the pie will just be connected to submit data in any way.
But my relatively high estimation, especially because of new emerging e-markets, is still around ~5%.
This little assessment, therefore, starts with a number of 1.5 billion devices that need to shift value just once a week in 2020
I have no idea if this is close to reality but we have to start somewhere, so this acts as a reference.
If you find any serious, scientific approach to transaction fees in the IoT, I would be happy to get it somehow!
The services I found that held up to the requirements are no surprise:
Swift /wire transfer (globally active instead of national-remittance)
Paypal (most popular payment service – highest online adoption)
Visa (also a globally used service with access to markets everywhere on the planet)
The resulting fees are:
- Swift: ~$30 for an outgoing domestic wire transfer
The IoT is a global system so Swift instead of national remittance is what we need for now.
- Paypal: “the fee for each transaction is 2.9% plus $0.30 USD of the amount you receive”
Paypal has a few competitors especially in the Asian region like Alipay but is generally spoken the biggest fish.
- Visa: “1.51% plus $0.10 is the current Visa interchange fee for a swiped consumer credit card.”
Debit Cards as a whole are in a sensitive competition, so I assume that fees of MasterCard etc. are comparable to Visa.
The naive fallacy:
Let’s pretend to know the percentages of the transaction system of the estimated 1.5 billion transactions, once per week in 2020.
- Since SWIFT is aiming for bigger transfers, I assume a small share of just 5 %
- Paypal, especially in the growing field of e-commerce would have a share of 60% (we assume a mean value of 10$ per tx)
- And Visa would have a share of the remaining 35% of all transactions. (we again assume a mean value of 10$ per tx)
- At this point, I don’t include micro-payments because existing systems simply make them impossible
That leads to:
Swift = 75 million tx/week
Paypal = 900 million tx/week
Visa = 525 million tx/week
Swift = 75 million * ~$30 = 2.25 billion Dollar per week
Paypal = 900 million * $0.59 ($0.29 + $0.30) = 531 million Dollar per week
Visa = 525 million * $0.251 ($0.151 + $0.10) = 131 million Dollar per week.
All global transaction fees combined per week: roughly 2.91 Billion Dollar per week (!)
Even Bitcoin would *only* generate fees about 1.125 billion Dollar per week if the scalability would stay at 75cents per transaction, which isn’t the case, sadly.
The scaling of Bitcoin would lead to much higher transaction fees due to the big number of 1.5 billion transactions per week. But I don’t know how much that would be and furthermore, Bitcoins adoption is not as advanced as the mentioned services. So this is irrelevant.
The global transaction-fee-index would be (the higher, the better):
1.5 billion transactions / 2.91 billion Dollar = 0.515 with existing systems
If the transaction fees would be 10 million Dollar per week due to proof of work, electrical expenses or investments in tokens for IOTA it would be:
1.5 billion transactions / 10 million Dollar = 150 (290-fold of 0.515) with IOTA
Whatever this number means, a multiplicator of ~290 in the global economy is a game changer either way. Even if it wasn’t 0.515 but 5 it would be a disaster for the IoT (!).
This estimate of 2.91 Billion Dollar per week (151.23 Billion Dollar annually) is just a number without a scientific background, but let’s be honest:
Is my calculation so unrealistic?
We can alter the numbers down to 10% of what I calculated but we cannot hide the fact that the vision of the IoT gets into trouble if these systems don’t evolve.
And that, ladies and gentlemen, is one big reason IOTA is a necessary technology!
If you have questions or if I made a mistake, leave me a comment -I would be happy to discuss this assessment!
Have a nice week,