Katerina Stroponiati

@katerinastro

Pay for coffee with bitcoin: Flexa case

From the perspective of a founder/engineer turned investor*

Art by Jonathan Vermersch

*Many of our friends ask us about how we identify solid projects. We decided to share a brief due diligence about some of the ones that we check out (or invest). We hope that this will help create a healthier investment ecosystem.

One of the main challenges that bitcoin and the other cryptocurrencies are facing is user adoption.

Most merchants don’t believe in crypto (yet), or are slow to adopt because of friction. To accept cryptocurrency, merchants need to change their POS, create wallets, etc.

At the same time, as the team explained us, the overall cost to a merchant on CCs is a sum of fees, fraud and overhead to manage which accounts up to 15%.

The team at Flexa created a protocol and payment app that enables us to use crypto currencies for our daily transactions in an easy way.

Flexa is not a blockchain project. It’s an infustracture play that merges existing payment networks with blockchains (cryptocurrencies).

Paying for my coffee with bitcoin earlier this morning

How it works

First of all, there is no need for the merchant to install any new hardware or software. The merchant only needs to allow a new payment provider (Flexa) onto their payment channels. This technology works directly with their existing POS.

Now, let’s say that you want to buy a coffee from Starbucks and want to pay with BTC. Open the payment Flexa app and select your merchant, let’s say Starbucks.

Step 1. A unique QR payment code is generated through the Flexa Protocol (FNP), which authorizes a certain amount of your total payment asset (let’s assume you hold BTC in this wallet).

Step 2a. When you scan the QR code to the POS, the FNP asks the App to lock FNP collateral equal to the payment amount, in the form of FlexaCoin. This happens in milliseconds and ensures zero risk for the FNP. There is no risk because the developer has to stake the amount in the form of FlexaCoin.

Step 2b. In parallel, the app subtracts the same amount of BTC from the user’s wallet. Remember, BTC can take up to 10 minutes to arrive. However, the payment needs to be done in milliseconds.

Step 3. When the collateral is locked, the FPN authorizes a direct payment from FPN’s bank account to the merchant’s bank account. The merchant gets paid instantly (with zero credit risks and zero fees).

Step 4. Once the crypto is cleared from the wallet into the FNP’s wallet, the collateral is returned to the developer’s account.

Both the consumer and the merchant don’t see any of the above steps; they don’t even interact with FlexaCoin. We’ve seen on other projects that tokens are designed in a way that adds complexity to the users.

In this case, the users pay with their cryptocurrency, and the merchants get dollars (or any other fiat currency). The above design gives zero credit risk for both merchant and FNP. The way it achieves this, is by using the FlexaCoin as collateral for every merchant payment and direct banking payment. The result: no friction for merchants equals better user adoption.

Also, the above design gives 0 credit risk for both merchant and FNP and the way it achieves it is by using the FlexaCoin as collateral for every payment and direct banking payments.

Challenges

One of the challenges that the Flexa Network is probably going to face is that the price of the FlexaCoin (that is used as collateral) and bitcoin need to have very low volatility at the time that the transaction takes place.

Another challenge is that the ERC-20 choice as an underlying protocol will cause slow transaction speed on high volume transaction rates.

Also, the fast growing market of crypto owners prefers to stake or speculate their crypto, mainly due to price volatility. Why give away something that will appreciate in value, in just a few days?

Please note all opinions in this post are my own. Nothing in this post is intended to serve as investment advice.

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