One of the key features of IOTA is that there is no transaction fee. It is designed for micro transaction on the Internet of Things. This opens up a lot of possibilities (more on this in future posts). The problem however is, that as long as IOTA transactions are benchmarked against fiat money1 we are not able to reap the full benefits. Exchange rate risk premiums could counteract the feeless advantage of IOTA, until we have local IOTA transaction ecosystems.
It costs money to pay money
Fees are a given in our society. You might not notice it, but every monetary transaction you do has a fee, direct or indirect.
You pay your bank a fee to transfer money (within a country or currency they might not charge an extra fee, but you do have to pay to have a bank account and have access to that service. The service costs of that account accommodate for that fee.) Money transfers to other countries or even other continents are usually very expensive. Online/digital fiat transfers can be cheaper, but they still come at a cost.
When you pay online by credit card or PayPal you have to pay an extra fee. Sometimes it seems free, but if you’re not paying explicitly for it, then the costs are likely hidden in the price, because the seller sure does have to pay.
And it’s the same thing in your local store. They pay for card purchases. Paying by cash also comes with a cost: a store owner has to pay to deposit cash in the bank and pay to get small change. These are all costs that the consumer in the end has to pay for, because the store owner has to raise prices to cover the cost. So even if you don’t notice the transaction costs because the fee is paid by the other party, it impacts you.
IOTA is feeless
The cryptocurrency IOTA is the only system I know that does not have any transaction fee at all. How can that be? Your computer/phone/device pays with a little bit of calculation power. To make one transaction you first have to confirm two other transactions, and as such confirm that previous transactions were legitimate. Because everyone participating is ensuring the integrity of the network, there is no trusted third party needed who has to be rewarded for the effort2.
NOT feeless if there is an exchange rate risk premium
With IOTA the transaction fee for payments or transferring money can be zero. The middle man is cut out and the buyer and seller are better off. However I think there is a risk the lower transaction cost could be eaten up by exchange rate risk premiums, at least until a broader implementation of IOTA has happened.
Right now companies run on fiat currency, report in fiat and pay taxes in fiat. When deals are made in foreign currencies a risk premium is added to cover the risk that the exchange rate can move. The same is likely true for companies that now do transactions in IOTA (if you work for a company where paying in IOTA is possible, please let me know how you do it.)
If fees end up being bigger than a potential profit/advantage, that transaction will not happen. Potentially this means that transactions that could be beneficial for society do not happen because of transaction fees. This risk is especially high for microtransactions.
IOTA as a feeless, self-sustained ecosystem
For IOTA to be successful and for society to reap the benefits of a feeless system, it needs to be a system where intra-day fluctuations in IOTA/EUR exchange rate would not affect the prices of products.
One way to do this is to make it a self-contained system. A system where sometimes you receive money/IOTA and sometimes you pay, but in the end it balances out.
There is however another way, more viable in the short term, until broad adoption becomes reality. And that is taking the risk that the conversion to fiat will have a positive effect, not regardless of volatility, but because of it. Anyone who has followed the cryptocurrency markets has experienced this. Anything under a 50% price increase or decrease is just another day. A favorable price opportunity to buy or sell is hardly ever lost. For companies looking for a competitive edge, they might forego charging exchange rate risk premiums. This makes their prices more competitive. At the same time their ‘risk’ of the price jumping up the minute after the transaction is real, but the likelihood of a correction within days if not hours is also there. In the end it will likely even out, or even a profit might be made.
(Embracing the ‘risk’ goes against some traditional economic theory, but then again, so does much of the cryptomarket. We will be diving further into these possible paradigm shifts in future posts.)