Original article link: (The Last Big Thing - Crypto Payment Part3)
Original author: Larry Liu, Qiming Venture Partners
Compiled by: Scof, ChainCatcher
Edited by: flowie, ChainCatcher
Editor's note: Crypto payments are one of the hottest tracks recently. Besides Stripe's acquisition of stablecoin payment startup Bridge for $1.1 billion, creating the largest acquisition in crypto history, many mainstream financial institutions are accelerating their layout in crypto payments:
PayPal completed its first commercial payment using the stablecoin PYUSD.
Visa launched the tokenized asset platform VTAP to help banks issue fiat-backed tokens.
BlackRock partnered with Ethena to launch a new stablecoin supported by BlackRock BUIDL.
Coinbase and A16Z jointly invest in AI crypto payment company Skyfire.
……
Crypto payments are also experiencing a financing boom. As seen in ChainCatcher's September publication on crypto payment financing statistics, recent crypto payment financing has gathered giants from various fields, including payments, stablecoins, and traditional finance. Visa, Tether, Circle, JPMorgan, and Standard Chartered are all rushing to enter this space, while top-tier capital like Sequoia Capital, Temasek, and A16Z are also betting.
Recently, renowned investment fund Qiming Venture Partners' investor Larry Liu published a lengthy series of articles (The Last Big Thing - Crypto Payment), systematically exploring the future of crypto payments from the historical transformation of payments, the current state of crypto payments, and trends. ChainCatcher compiled this.
This is the first article in a series, exploring the panorama of traditional payment systems from their credit card payment history to modern digital transformation. The second article discusses the unique advantages of blockchain technology in payments and assesses the current status and challenges faced by crypto payments.
This is the final article, analyzing the emerging trends and innovative solutions that can overcome existing barriers to payments. The author states that from the rise of non-custodial solutions in payments to the integrated development of payments and DeFi, it may fundamentally reshape the way value is transferred in the cryptocurrency era.
4. Trends
4.1 The Rise of Non-Custodial Solutions
In the past two years, many innovative account designs have emerged, gradually overcoming previous obstacles. In the future, users will no longer need to convert cryptocurrencies into fiat in advance. Resource locks
Resource locks are tools that help users make credible commitments about account activities. They allow users to ensure that their accounts will not or will perform certain actions under specific conditions. One of the most common applications is preventing double spending, where users can credibly guarantee that the assets in their accounts will not be spent multiple times. This guarantee allows service providers to continue executing subsequent operations even when transactions have not yet fully settled or confirmed.
I borrowed this term from Frontier's research article, but its implementation had already been widely used in the industry before One Balance was launched.
Case 1 - StablesMoney
For instance, StablesMoney (an Australian card issuer) keeps user funds on-chain until a payment action occurs. Stables utilizes MPC wallets, where the private key is split into three parts, managed by the user, StablesMoney, and Fireblocks (one of the largest custodial service providers globally). When initiating a payment, StablesMoney assists in co-signing, launching the transaction, and confirming it instantly with the card organization. At the same time, they update the user's balance in their database before the transaction is finally confirmed on-chain. When users initiate subsequent transactions, Stables will first compare the user's balance with their internal records, rejecting any attempts at double spending. In this setup, for a user to double spend, they must bypass StablesMoney and collude with Fireblocks within a very short timeframe, which is extremely unlikely to occur. However, this method remains centralized, and theoretically, StablesMoney and Fireblocks could conspire to steal user funds.
Case 2 - Gnosis Pay
Gnosis Pay takes a different approach, prioritizing decentralization over efficiency. In the Gnosis Pay system, transactions are divided into card transactions and non-card transactions, the latter of which are usually initiated directly by users through wallets. Card transactions are confirmed instantly, while non-card transactions have a delay—typically a three-minute waiting period—during which any previously initiated card transactions are usually settled and notified to the relevant service providers. This design choice also effectively reduces the risk of malicious double spending.
Gnosis Pay implements this approach by adding a 'Delay Module' developed by Zodiac on top of standard SAFE accounts. This solution is clever and elegant, but also highly customized, leading to some limitations in efficiency and flexibility. For example, if a user needs to quickly reallocate funds to prevent liquidation, a three-minute wait time can have fatal consequences. Additionally, it is worth noting that this transaction processing method does not support all card transactions, such as complex reversals or delayed refunds.
Resource locks can also be programmed to run under specific conditions. For example, in the cross-chain NFT purchase scenario mentioned by Frontier, locked funds can be claimed by any solver providing valid proof of performance, or returned to the user after a set expiration time. Nowadays, the experience of cross-chain transactions has significantly improved between L2 and high-speed chains, but with resource locks, waiting times can be minimized even in cases where bridging from the mainnet is involved. This example showcases the various applications of resource locks, which extend beyond just payments or cross-chain transactions.
Source: Frontier Tech
Another implementation method worth exploring is the use of TEE (Trusted Execution Environment). In a TEE, resource locks will be fully programmable and efficient. By combining decentralized networks with proof mechanisms, many concerns related to centralization and collusion can be alleviated. If implemented correctly, this approach can also achieve high security.
Resource locks may introduce additional trust assumptions, but if implemented correctly, they have the potential to unlock many currently unfeasible use cases, significantly enhancing user experience. The greatest advantage of this concept lies in its ability to allow subsequent operations to proceed as if the previous operation has already been completed, thereby eliminating the friction that typically hinders user experience. As Frontier states, 'It decouples performance from settlement.'
For example, issuers can confirm that a transaction has settled, and solvers can provide users with funds on the target chain in advance as if the assets had already been locked on the source chain.
Imagine a future where not just users, but solvers, market makers, and other service providers adopt a unified and interoperable resource lock standard. In such a scenario, the entire process—from initiating transactions to routing, performance, and confirmation—could be completed instantaneously. This would ultimately lead to an instant, low-cost, and rich cryptocurrency usage experience, comparable to Web2.
Rapid confirmation
Another method to resolve finality and delay is to achieve rapid confirmation. One feasible approach is to develop a high-performance, stable chain that can settle a large number of transactions in real-time. When transactions are completed in milliseconds, service providers and merchants receive definitive results immediately, making it difficult for even advanced attackers to double spend or exploit system vulnerabilities. Teams like MegaETH are actively working in this area.
Additionally, on mainnet or rollup-based chains, if implemented well, pre-confirmation can also achieve similar effects. Pre-confirmation allows L1 proposers to choose to enter a new supply branch, allocate part of the block space, and commit in advance to include certain transactions, before constructing and broadcasting the complete block. Projects like Commit Boost, Luban, and Chainbound are actively working on design and engineering to make this goal a reality.
Smart Contract Accounts
For the signature experience of payments, using crypto-native applications for payments is usually quite natural, as these applications typically have embedded wallets. When users select 'Pay Now' or 'Transfer', they will sign the transaction. However, for designers of non-custodial crypto debit cards, this poses a challenge as they must require users to explicitly approve the transaction after swiping the card. Tangem is developing a product that combines a hardware wallet with a payment card, but this approach requires customization of the card, thereby increasing costs.
Moreover, since the signature curve Secp256k1 used by most mainstream blockchains is not integrated or supported by most mobile manufacturers, the private keys of EOAs are typically managed at the software level rather than using secure enclaves for key management on modern mobile devices. This presents additional risks for users of mobile payment applications.
As the demand for fine-grained payment access control grows, businesses may wish to only grant employees access during business trips and set specific spending limits; parents may wish to allow children to use cards for specific purposes under certain limits.
In response to these demands, smart contract accounts are being actively developed by several startups. These accounts allow users to delegate balance deductions on behalf of others and are able to specify details like spending limits and time constraints.
Gas fee payment
Abstracting gas fees from the user experience is crucial for making blockchain technology more accessible and user-friendly.
The content above can be summarized in the following chart:
Barriers to non-custodial crypto payments and the original components for assistance
4.2 Integration with DeFi protocols
Users are increasingly inclined to seek payment products that seamlessly integrate with DeFi protocols, capable of providing yield opportunities and complex asset management while being trustless.
Despite being complex, traditional payment systems essentially revolve around two basic instructions: debit and credit. As Holyheld describes in its white paper:
“...... There are numerous intermediaries between consumers and products, each executing, relaying, or forwarding instructions. But in fact, each step only involves the reconciliation of debit and credit instructions. These instructions cannot be programmed or enriched......”
To gain access to more asset management tools and opportunities, users are forced to rely on other institutions and third parties. Relying on these mutually isolated and independently maintained ledgers incurs significant costs and friction.
The emergence of DeFi aims to address these issues. Although DeFi is still in its early stages, it has already generated various on-chain yield opportunities, including:
Staking and Restaking: Earning yields by helping operate blockchains or protocols.
LP fees: Earning income by providing liquidity, especially in scenarios with high depth or immediacy requirements.
RWA: Bringing on-chain funds into off-chain assets to gain yields.
CeDefi: Directing on-chain funds to off-chain strategies to earn yields.
Moreover, we have also seen the development of many automated tools, compositions, derivatives, and strategies based on these protocols. The next logical step is to integrate payment applications with DeFi protocols to complete the final mile. This will enable users to seamlessly and trustlessly store, manage, and spend their assets within a single account.
Case 1 - Etherfi
Etherfi recently collaborated with Scroll to launch a 'real' crypto credit card, perfectly aligning with this vision. Currently, Etherfi is best known for its liquidity re-staking protocol built on EigenLayer. However, with the launch of Cash, users will be able to use a Visa credit card issued by the platform to borrow against their staking positions and spend stablecoins. Debts can be automatically repaid with interest generated from their staking. Etherfi also launched Liquid, which provides vaults with automated DeFi strategies. Users only need to deposit their tokens, and the vault will allocate funds to DeFi positions in the background.
Case 2 - RoboSaver
In contrast, Onchainification Labs advocates for a non-custodial approach. They released the alpha version of RoboSaver, a smart contract module that can be integrated into each Gnosis Pay card's underlying Safe smart account. This module allows users to deposit idle balances into DeFi protocols such as Balancer or Aura, where it can earn yield and charge fees. When the card balance falls below a certain threshold, RoboSaver automatically withdraws assets from the pool to top up the card balance. They have already deployed the contract and conducted experiments, successfully triggering withdrawals when buying coffee.
Here are two products or features that I believe have great potential:
Allow users to borrow and spend stablecoins using their staked/re-staked assets as collateral (as Etherfi Cash does):
Staking is the cornerstone of the crypto world, often seen as the risk-free interest rate in the crypto space. It offers simplicity and predictable returns, attracting a large number of participants and substantial assets. Many stakers, especially large investors (whales), may need credit cards that can be used for everyday spending.
It sounds like a credit card, but it can be achieved by adding a liquidity pool between the user and the issuer. This way, the issuer does not need to use its own funds, and instant settlement of funds can be achieved.
Additionally, we can leverage existing lending protocols, such as AAVE or Compound. The Holyheld team has already conducted internal testing on credit loans using wstETH (Lido) and AAVE's V3 delegation module. While the system operates normally, there is a significant limitation: AAVE's credit delegation only supports '0 or all' modes. This means that partial positions or specific amounts cannot be delegated. Compound faces the same issue.
Allow users to hold and pay with (risk-free) yield assets:
Ironically, most crypto users—from small investors to the majority of professional institutions—continue to lend funds to Tether and Circle without receiving any returns. In a highly digitalized world, users should gain more transparency and fairness, rather than continue to be exploited by centralized entities. RWA, especially interest-bearing stablecoins, are poised for iteration on existing foundations. The importance of risk-free, interest-bearing stablecoins cannot be underestimated, as bonds and treasury bills have long been preferred investment tools in many parts of the world. These tools are highly standardized, easy to understand, and backed by sovereign nations. Many people see USDT or USDC as digital substitutes for the dollar, primarily because they offer better inflation protection than their home country's fiat currency. Naturally, these users also wish to earn risk-free interest on their held assets. However, the current adoption rate of interest-bearing stablecoins remains low, which can be attributed to two main factors:
On-chain challenges: Current interest-bearing token standards are difficult to integrate with existing systems, causing friction.
For a token to be considered a stablecoin, its value must remain stable, but the underlying interest-bearing assets, such as treasury bills and bonds, will appreciate over time. To pass this appreciation on to users while maintaining the stability of the stablecoin price, many interest-bearing stablecoins (like Mountain's USDM and Matrixport's STBT) use a rebase token model. This model adjusts all holders' balances proportionally using the rebaseFactor to reflect accumulated appreciation. Although this is a clever design, it has not received widespread support from DeFi protocols, wallets, and exchanges, which still primarily adhere to the simple ERC-20 standard. Additionally, these protocols typically trigger the rebase process once a day, which may create arbitrage opportunities for traders and lead to price volatility, which many users do not wish to see. A possible solution is to liquidity the rewards per block, which helps smooth price fluctuations. However, this approach incurs significant gas fees, and the potential for arbitrage still exists.
Off-chain challenges: Issuing these types of assets may expose projects to significant legal risks, particularly from the SEC, as they may be considered 'unregistered securities.'
This is why many of these projects explicitly exclude U.S. residents or citizens from using their services. These protocols often invest significant time and resources into creating legal frameworks to ensure that even if the protocol itself fails, users can still retrieve their assets (bankruptcy isolation). However, until new legislation is passed or any precedent-setting cases are ruled upon, the legal outlook for these projects remains uncertain.
Another key factor is establishing a widely adopted stablecoin system, which requires the establishment of a globally distributed bank-supported network. While inflows are crucial, ensuring a smooth outflow process for merchants or institutions is even more critical. Tether achieves this through its distributor network, while Circle accomplishes this through compliance and strong relationships with major banks. New market participants will need to decide on their strategies. For RWA, gaining deep liquidity, such as that provided by companies like BlackRock, may be crucial.
In the near future, payment systems will seamlessly integrate with the entire DeFi ecosystem. Individuals will be able to access a variety of investment tools, management tools, and strategies within a unified account.
Additionally, digital currency payments will increasingly integrate with traditional financial systems. Currently, issuers are the first to adopt cryptocurrencies as they manage the initial phases of fund flow and are downstream of information flow. Once these issuers handle conversions between cryptocurrencies and fiat currencies, other participants, such as card organizations and acquiring banks, can operate without needing to know about the cryptocurrencies involved.
However, in the long run, we can expect cryptocurrencies to further integrate into downstream fund flows (which are also upstream information flows) due to their efficient and low-cost advantages, reducing the required conversions. We have already seen Visa and MasterCard actively exploring the integration of cryptocurrencies into their networks and traditional payment systems, marking a significant shift in the industry. Similarly, Stripe's recent allowance of stablecoin payments further emphasizes this trend.
As cryptocurrency adoption increases, more funds will remain on-chain for secure and convenient management, utilizing better yield opportunities, only converting to fiat when necessary.
5. Conclusion
5.1 What should crypto payments look like?
While the specific state of the future remains uncertain, we can envision an ideal scenario based on current knowledge and trends.
In the future, the process of crypto payments should be as seamless and fast as today's digital payments. Users should only need to engage in brief interactions with merchants, such as using QR codes, NFC, or biometric authentication as we currently do. This simple interaction will allow merchants to identify users' abstract or smart accounts, supported by the foundational components discussed in section 3.2.1.
As one of the few intermediaries in this streamlined system, payment processors handle a range of security checks for merchants and users. These checks may include identity verification, balance confirmation, anti-money laundering compliance, fraud detection, and access control, among others. Once these checks are successfully completed, payment requests will be routed to the user's smart account.
This smart account can typically be used to store various assets, such as those related to staking, liquidity provision, RWA, CeDefi products, or other yield opportunities and their combinations. These assets will remain non-custodial, fully controlled by the user. Pre-authorization and access control will be defined and authorized through smart contracts, with gas fees typically borne by the application or service provider.
Ideal Crypto Payment Flowchart
To ensure speed and security, the system can utilize resource locks, rapid confirmation, or high-performance chains. This will enable payment processors or other service providers to confirm transactions instantly, thereby minimizing the risk of malicious activities. Merchants will receive immediate notification of the transaction completion status, while the actual settlement of funds can be instantaneous or occur later. Ultimately, the corresponding assets will be transferred to the merchant's account, completing the transaction.
5.2 Unification, Democratization, and Disintermediation
The Payment Era
Summary of the entire article:
Card payments mark the beginning of the digitization of financial transactions, utilizing computers and the internet for bookkeeping and information transmission. As the payment industry grows and technology advances, the number of specialized intermediaries involved in the process gradually increases. Digital payments further drive this digitization process by leveraging emerging technologies, and as consumer internet usage becomes widespread, the payment process becomes more efficient while removing direct contact between customers and banks.
Blockchain and crypto payments further promote disintermediation, providing a system where users can control their own assets and access a range of composable yield opportunities and asset management tools. This technology offers a decentralized and permissionless network, enabling almost anyone globally to access digital assets and ownership. It provides all participants with a transparent and neutral environment where all parties can cooperate without needing to establish trust beforehand.
