ACH transactions get a lot of criticism for batching transactions into a few bundles a day, slowing down the time it takes for transactions to be settled, and making it more difficult to enable instant or near-instant payments.
That’s one of the reasons real-time payments — and in the U.S., the RTP network — are gaining so much momentum.
It’s also a reason to ask whether blockchain payments will ever achieve the same scale. Although some of the newer blockchains focused on decentralized finance (DeFi) can process transactions in tiny fractions of a second, the earliest and most dominant payments-focused cryptocurrencies have long block times, meaning the time it takes for the next block of transactions to be added to the blockchain.
This is a pretty fair analog for processing time. On blockchains, transactions are recorded and then sent to what amounts to a staging area, where they are verified, compiled into a block of transactions, and then added to the blockchain — this is the “mining” process. The time that takes is referred to as “block time” and varies widely.
See also: What’s a Blockchain and How Does It Work?
Bitcoin and its Bitcoin Cash (BCH) fork have a block time of 10 minutes, while Litecoin takes 2.5 minutes and Ethereum 12 seconds to 14 seconds. Not coincidentally, those are the four cryptocurrencies supported by PayPal, which allows users to make payments to its 32-million-strong merchant network. Block’s CashApp only supports bitcoin.
While this is far slower than Visa’s 65,000 transactions per second (TPS) top speed, it’s worth noting that Solana, one of the leading blockchains focused on DeFi also claims a top speed of 65,000 TPS. When Ethereum completes its long transformation — bare minimum a year and probably more — into Ethereum 2.0, its developers say it will be able to handle 100,000 TPS. And Thursday (Feb. 3), the Boston Federal Reserve Bank announced the results of a very preliminary digital dollar central bank digital currency (CBDC) test that hit 1.7 million TPS.
So, block time is effectively batch processing of crypto payments. This is one of the reasons that, when you hear blockchain developers talk about scalability — and you hear it a lot in the crypto payments world — what they’re really talking about is making what are essentially batch payments move faster.
The Block Size Barrier
There’s another factor here, and that is block size — the number of transactions that can be bundled onto a single block. For bitcoin, it’s 1 megabyte, and the Bitcoin Cash schism (hard fork) was over an argument about increasing block size to 2MB. And keep in mind, all crypto transactions are not alike — a payment is pretty small, but it can involve images — say, minting a nonfungible token (NFT) — which suck up a lot of block space. It’s also why minting an NFT on badly clogged Ethereum can cost $50 or more.
That “clogged” part reveals another shortcoming crypto has as a payments method. When miners collect the pending transactions to write them onto a block, they can order them as they please. However, in addition to the block reward, they collect a transaction fee. Naturally, the highest fees go first. However, both bitcoin and Ethereum are currently processing more transactions than they can handle.
So, what? Well, for simplicity’s sake, let’s say a bitcoin block can fit 100 transactions, but in the 10 minutes between blocks, 125 transactions pile up. The miner building the block will leave the 25 blocks offering the lowest transaction fee — which can be customized for every transaction, another potentially time-consuming step — behind for the next block. But let’s say another 125 transactions pile up before then. Those 25 low-fee transactions, and another 25 to boot, will be left behind again. This can leave orphaned transactions pending for hours during peak demand, until a slow spell lets them onto a block.
This is how bitcoin transactions have come to have a transaction fee of several dollars, and Ethereum even tens of dollars.
Those are mighty big fees for a $4 cup of coffee.
The Buck Has to Stop Eventually
Then there’s finality. While people say a bitcoin transaction is immutable — which means it can’t be changed — when added to the blockchain, there’s a big asterisk after that statement. While technically true, in the event of a 51% attack — when bad actors take control of a blockchain by controlling most of its mining power — they can rewrite and double spend transactions added onto new blocks.
Read more: The 51% Attack: Crypto’s Double-Spending Achilles Heel
They can also rewrite a few of the previous blocks, as well. This has to do with how the blocks are organized into a chain in the order in which they were processed, with each link cryptographically linked to the others. We’ve gone into more detail about the process elsewhere, but the upshot is that any single block needs anywhere from a half-dozen to two-dozen more blocks of transactions added to the blockchain to be truly tamperproof.
How many depends on the blockchain, but also who’s counting — there’s no hard and fast number, but the more money involved, the higher the number will be. Bitcoin is generally said to have a finality time of one hour — six blocks each 10 minutes apart.
The well-regarded Kraken exchange requires only four bitcoin blocks — 40 minutes — to reach finality, but it requires 15 bitcoin cash blocks, so that takes 150 minutes, or 2.5 hours.
That’s a mighty long time to wait for your cup of coffee if the merchant wants a transaction finalized before handing over the goods.
