Bitcoin payment processors, such as BitPay and Coinbase, have become an extremely important part of the overall ecosystem over the past few years. These companies have worked closely with large merchants, such as Overstock and Microsoft, to enable Bitcoin payments in a user-friendly manner; however, these centralized solutions for processing payments also have their downfalls.

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The Key Service Offered by Bitcoin Payment Processors

The key service offered by Bitpay, Coinbase, Bitnet, Snapcard, and others is that they allow merchants to instantly convert any Bitcoin payment into their local currency (usually via a bank deposit). While merchants understand the benefits of accepting Bitcoin payments, such as the lack of chargebacks, most of them are not ready to deal with the price volatility associated with the bitcoin commodity. For this reason, the services offered by these companies are vital to Bitcoin’s growth as a payment network.

The Problem with Bitcoin Payment Processors

Of course, the main issue with these payment processors is that they can decide to terminate a merchant’s account for any reason they wish. More importantly, they can also be coerced into not working with certain types of merchants on the Internet and in the real world by various government agencies. For example, there is a reason that Bitpay’s e-commerce solution is not integrated into any darknet marketplace. This creates a serious issue for Bitcoin merchants who like using the decentralized payment system but are not ready to deal with the volatility of the bitcoin token.

Smart Hedging Contracts as the Solution

The good news is that there may be a solution in the works that could solve this pain point for the less-savory Bitcoin merchants in the world. There are multiple platforms in the works, such as Reggie Middleton’s Veritaseum, which allow users to hedge their bitcoin to any other real-world asset via a smart contract. This means that merchants will be able to accept and hold bitcoin (within a smart contract) without having to worry about price volatility. They could hold that bitcoin with the value attached to US dollars, euros, gold, or any other widely-traded asset.

The Road Ahead for Smart Hedging Contracts

While this all sounds good in theory, the reality is that there is not currently a liquid market for this kind of trading to occur. There is not much activity on Veritaseum, although Reggie Middleton has plans for creating that liquidity via large financial institutions. On the other hand, decentralized prediction markets, such as Augur and Truthcoin, could also play a role here.

As a side note, smart hedging contracts are also what make Abra possible as an app for cash transmissions between any two parties in the world; it’s essentially supposed to be Uber for worldwide money transfers. The platform will eventually take advantage of smart contracts built on top of the Bitcoin blockchain to lock user funds to the US dollar for a period of three days. It’s clear that these sorts of hedging platforms can create powerful new use cases for Bitcoin, and this will definitely be one of the key areas of the Bitcoin industry to watch over the next few years.

Featured image via Franklin Heijnen.

Kyle Torpey is a freelance journalist who has been following Bitcoin since 2011. His work has been featured on VICE Motherboard, Business Insider, RT’s Keiser Report, and many other media outlets. You can follow @kyletorpey on Twitter.