How IOTA creates the ultimate lock-in effect
The full article was originally published by Multi on Medium. Read the full article here.
This post was triggered by a recent announcement of PayPal to raise fees for certain transactions. In this post, I will explain why PayPal did the exact opposite of tapping new markets or expanding existing ones. It gets even more interesting when we take into account that all markets, even blockchains are prune to rising prices prohibiting serious lock-ins, except for IOTA.
Blockchain fees and corporate pricing behave very similarly. More demand means higher prices for the respective service in both cases. The case for blockchain is clear. Although fees are set by users, we can see a clear correlation between transaction load and prices. Transaction-throughput is fixed due to fixed block sizes and constant block intervals. If demand is bigger than capacity, users start overbidding each other by raising their fees to get transactions processed. Transacting turns into a bidding competition where only the highest-paid transactions are considered by validators. You can witness this simple correlation between utilization or demand of transactions and transaction prices for all blockchains where demand exceeds the supply of transactions.
On the corporate side, Paypal is the most established payment solution. It counts roughly 400 Million active users and currently up to $300 billion transaction volume per year. Chances are high that you have used PayPal before, considering PayPal’s market share as well as the high retention rate. According to a study from 2019 by ibi research, PayPal-Checkout is available in four of five German online shops. If it is available, it is used most often (49%). The case today: If a shop is not offering PayPal, it loses out on sales. Once a shop offers PayPal, it is hard for them to not offer it anymore as they will lose customers, if they do so(lock-in effect). As a near monopolist or, at least, a market leader in an oligopoly of a couple of established payment solutions, the company uses its market power and merchant lock-ins to maximize its profits.