A lot of what keeps regular Joes away from bitcoin is its complexity and the difficulty of keeping your funds secure. If PayPal were to make the most secure, easiest-to-use bitcoin wallet, they could profit greatly from it and also provide something that doesn't really exist anywhere yet.
All PayPal does right now is help you get dollars from point A to point B, and in the process they take a cut. They could do the same thing with bitcoin. I don't think it would be competition with bitcoin, it would be promoting it to mutual benefit.
I would be afraid of them providing this service without allowing you to export your data, however, which seems like the kind of thing PayPal might like to do. If your bitcoins were trapped in their system you're always in danger of having your account frozen as has been a problem up to now. Part of the purpose of bitcoin is to be able to avoid that, so I'd hate for PayPal to bring that whole problem to the bitcoin world.
But if they approach it properly, bitcoin could be a great opportunity for PayPal, instead of a threat.
You cannot collect profits from a transaction between 2 Bitcoin users like PayPal does right now with "real" money. If the world adopted Bitcoin, it would be the end of PayPal's business model. If PayPal were ready to replace their business model with something way less profitable, but more future-proof, it would still make no sense for them to adopt bitcoin. It would only make sense if they owned significant amount (50%) of the existing bitcoins and had the code base under at least indirect control. What would happen if this were true and the bitcoiners found out? ...too many ifs.
That said, Bitcoin will never become a commonly used currency in its current form. The built-in deflation is a fatal flaw, which makes it unusable for normal buyers or sellers. It is only appealing for "get-rich-quick" investors, which is a shame, 'cause we really need a good solution (0% fee & safe) for online payments.
There's no reason PayPal has to build a vanilla bitcoin wallet interface. It's true that you cannot simply deduct a certain percentage from a direct bitcoin transaction. However, they could pool your coins in their own controlled address, and when you choose to send a payment through them, it makes one transaction on your behalf for that amount, and also a second transaction for 1% to their revenue address.
Average Joes who don't want to bother having to understand bitcoin may find this tradeoff acceptable if PayPal makes it worth it by providing a very simple and secure bitcoin interface that is better than everything else out there.
Whether you think bitcoin itself is doomed to failure due to deflation and all that is a different topic entirely.
One of the advantages of bitcoin is that you do not need a middle man to do a transaction. Some people may choose one for whatever reason, but would they be OK with paying the transaction fees? Would you use a credit card if you had to pay 4% more than if you paid in cash? I do not think many people would be OK with that.
It may sound as if I am a PayPal lover and bitcoin hater, which is NOT the case. I just do not see them cooperating sensible.
Interestingly, Bitcoin does support transactions which have a third party acting as an arbitrator; these transaction require the consent of two out of three participants in order for the money to be transferred. PayPal is essentially a fraud detection business disguised as a money-transfer business, so this seems like a natural niche for them.
(Technically, every Bitcoin transaction has a script in a Forth-like, non-Turing-complete bytecode which specifies the conditions needed for the transaction to be valid. It supports m-out-of-n signature requirements, among many other fun things.)
As I take it, it's not really possible yet. In any case, we're talking about 'multi-signature transactions' [0]:
A multi-signature transaction is one where a certain number of Bitcoins are "encumbered" with more than one recipient address. The subsequent transaction that spends these coins will require each party involved (or some subset, depending on the script), to see the proposed transaction and sign it with their private key. This necessarily requires collaboration between all parties -- to propose a distribution of encumbered funds, collect signatures from all necessary participants, and then broadcast the completed transaction. [0]
If you are using Blockchain's Mywallet, you might already be able to use them, as an end-user. [1]
One way to implement them is by allowing a more generic 'script execution per transaction' (not sure of wording) mechanism, proposed in BIPs 16 and 17. [2] [3]
Also see bitcoin.stackexchange question about multisig TXes. [4]
As I understand it, if you're a developer wanting to implement arbitrated bitcoin transactions, you'll have to wait. Correct me if I'm wrong though.
You write:
"Would you use a credit card if you had to pay 4% more than if you paid in cash? "
That is exactly what happens today on the real world. If you make it convinient for me to use your "credit card", I will use it, and because of that, vendors pay the 4% fee. All paypal needs to do is to make it easy (at non bitcoin vendors for example) for me to spend my bitcoins and I will use it. Vendors will fall in line because they want my business.
The above said.. IMHO, there is no way in hell that "the man" will allow bitcoin in its current form to prosper (at least not without a heck of a fight), as to much visibility & control would be lost.
Today, the buyer does not experience the fee. Sellers accept it, because the middle man gives them no other choice. With bitcoins, the middle man has no leverage anymore as the buyer and the seller can interact directly. That was my point.
The buyer does experience the fee in the form of increased price. They just don't notice it because it's baked in. Anyone who buys stuff at the grocery store in cash is financing other people's rewards points.
In some cases you can end up paying a charge for using a credit card. Low cost airlines are an example. EasyJet adds a 2.5% surcharge for credit cards. People still use them.
You don't need a middle man for physical cash (let's use USD as the example), but services like credit cards and debit cards are extremely convenient. Middle men can certainly be of great value to the bitcoin economy, by providing similar services to the ones that already exist on top of government currencies.
It's like oil companies investing in green tech. If that's where you think the world is headed, it's better to get on the train and be a player than to get left behind.
For PayPal and BTC - even in the best scenario for BitCion, there's going to be a very long transition period, and PayPal has a very good position to profit from being an intermediate in that period. And once all centralised currencies are gone, true, PayPal's current business model is irrelevant, but by then, they'll have world-class expertise on BitCoin and can probably keep in the game as wallet operators or makers of hardware for casual transactions or whatever.
> Yeah, I mean, gold didn't work as a currency all those hundreds of years.
Actually, it didn't. Gold was almost never the exclusive currency, usually wasn't the most common currency, was rarely a significant direct currency (rather than backing for currency) when people actually used currency for most transactions, and when it became the exclusive backing for currency, only "worked" because the actual circulating currency supply became increasingly disconnect from the gold notionally backing it.
Gold, as a currency, works tolerably well much of the time (though still can break an economy with unexpected surpluses or shortages) in the way it was actually used -- the high-value-density one of several commodities used in currencies in systems where most transactions using currency don't use gold, and most transactions don't use currency at all, but not even tolerably well outside of that domain.
Many economists believe that the gold standard contributed to several depressions during those centuries. Gold "worked" because nothing better was known, but modern fiat money works better.
If the bitcoin protocols changed to allow divisions to 9 decimal places instead of 8, would that be viewed as an increase in the money supply, or no change, in traditional economics?
Would re-introducing a half-penny coin increase the money supply? No. Basically, as long as you maintain proportionality, you can re-denominate currency (or shares for that matter) at will.
More relevantly, nothing stops you from creating a tradeable note that says "redeemable for 1 bitcoin from <trusted authority>" and then using those as currency.
This happened with gold, and also would happen if we saw a true bitcoin bank rather than bitcoin wallet -- they'd pay a bit of interest, and in return would pool their deposits and use some fraction of them to generate revenue through other channels.
The amount of effort required to find gold has more or less increased over time, and barring an unpredictable discovery of a huge amount of gold somewhere, the mechanics of increasing the gold supply aren't all that different than bitcoin. Or, to put it another way, I don't think the steady but slow increase in the gold supply is a substantial contributor to the current gold market.
No. Gold production has definitely become more energy intensive, and in this regard it is somewhat similar to bitcoin. HOWEVER, with bitcoin, marginal mining cost is a function of cumulative supply. As supply reaches 21M, marginal cost goes to infinity, and it doesn't matter what technology you bring to bear. Whereas with gold, technological advances have moved the equivalent of bitcoin's 21M to 42M, 84M, etc. The maximum possible supply increases. Yes, of course at some point the technological maximum will reach the physical maximum, but we aren't there yet.
The result of all this is that gold supply has grown with the economy over the past 500 years. It may be deflationary relative to fiat currency, but it is nothing like the deflationary profile of bitcoin, not at all.
All PayPal does right now is help you get dollars from point A to point B, and in the process they take a cut. They could do the same thing with bitcoin. I don't think it would be competition with bitcoin, it would be promoting it to mutual benefit.
I would be afraid of them providing this service without allowing you to export your data, however, which seems like the kind of thing PayPal might like to do. If your bitcoins were trapped in their system you're always in danger of having your account frozen as has been a problem up to now. Part of the purpose of bitcoin is to be able to avoid that, so I'd hate for PayPal to bring that whole problem to the bitcoin world.
But if they approach it properly, bitcoin could be a great opportunity for PayPal, instead of a threat.