Strawpay Tackles Bitcoin Transaction Woes

“We want to enable micro-transactions for Bitcoin, something we have been thinking about for years. We also want to create an ecosystem to avoid a centralized solution.”
— – Olle Kullberg, Strawpay CFO

Strawpay was founded in early 2014, by a trio of Swedish developers. The open source protocol in development, Stroem, attempts to tackle potential issues with Bitcoin. CEO Martin Zachrison outlines one of the issues, “we believe that Bitcoin will become big with a lot of transactions per second. This implies that the fees will go up. We aggregate many micro payments using payment channels. The effect is that all micro payments share one single transaction fee.”

Confirmation times present another challenge, specifically for Point Of Sale (POS) transactions. The target time for a single confirmation is 10 minutes, as dictated by the Bitcoin protocol. A transaction can take much longer if multiple confirmations are required. This timeframe is uncompetitive for POS transactions, credit card payments can be completed in far less time.

Zachrison explains, “it takes one hour before a transaction can said to be safely completed. One hour can be a long time, and the general view is that, for a growing part of transactions on the internet to use Bitcoin, different service layers built on the Bitcoin protocol will need to handle most everyday transactions. This is the focus of Strawpay’s contribution to the future technology stack needed by merchants and consumers,”

While confirmations are not mandatory, merchants would assume the risk of failed POS transactions with zero confirmations. Stroem implements a traditional payment structure, but is designed to enable an entirely new payment mechanism for small purchases using Bitcoin.

“Stroem should not be used for large payment where waiting a few seconds it not an issue.”
— – Kullberg

At the centre of the new protocol is the idea that a ‘hub’ will facilitate payments, “The participants are typically a) consumer b) merchant c) hub, where the aim is for the consumer to pay for something by sending a payment over a payment channel to the hub.” explains CFO Olle Kullberg

Hubs can be wallet providers, exchanges, or stand alone enterprises. The first Stroem enabled wallet is MultiBitHD. By offering an open source protocol the team envisions an entirely new marketplace where hubs will become prolific and varied, charging for services. “It is up to each Stroem hub to charge a fee. Since the market will set the price, hopefully it will be low. You are free to set up a hub with 0% fee if you like.” explains Kullberg, “We want to compete with our own Hub and/or sell extra (closed source) software that can be used in this environment”

Stroem uses two key parameters of the Bitcoin protocol to facilitate transactions. The consumer enters into a 2 of 2 multi-signature transaction with the hub of their choice. The funds are then secure, and the Hub can issue Promissory Notes backed by those Bitcoins. The multi signature transaction also utilizes the NLockTime parameter, which returns unspent Bitcoins to the consumer after a predetermined amount of time.

“This alleviates potential Bitcoin fees.” Explains Zachrison, “Promissory notes can be exchanged in several different ways, between multiple parties […] it enables the merchant and hubs to batch the redeems. This will of course increase the risk but it enables a more efficient handling of small payments.”- Zachrison

“promissory notes […] are off-chain. These represent in-flight consumer payments and can be fast, cheap, and micro,”
— – CTO Jarl Fransson

The decision to use a Hub and Promissory Notes presented more than one issue for the developers. Kullberg explains;

“Security: it is a complex thing to keep a payment channel server running. It has to be secure. Most merchants do not have the knowledge, and could get their wallet hacked. The Promissory Note, the way we designed it, cannot be used by anyone else than the merchant, so it is pointless to steal it.

Performance: we worry that in a network of hubs the progression of micropayments from hub to hub would not be fast enough. Better to tell the merchant that the consumer has paid ASAP, and let the merchant hold the Promissory Note instead.”

The Stroem Protocol was also designed with decentralisation in mind. Fransson describes the differences found in a centralized micropayment solution, like ChangeTip, “In an account based system, a depository institution manages accounts […] you deposit some funds, and you can request the funds on demand. The depository institution can change the records to shift funds around between accounts.”

The more decentralized Stroem presents a different risk profile. Fransson continues, “In a system with circulating promissory notes, like ours, there is no single actor that holds the account balance for another party. Each party is responsible for knowing and managing its outstanding balance and risk. This allows for a decentralized system where hubs are free to operate and compete. More importantly, the risk management of each party, being consumer, merchant or a hub, has different properties from the account system.”