Translated by: Will Awang @will_7th
"Money is not powerful when it accumulates, money is powerful when it flows." This is a story about payment freedom that Payal tells us after launching its stablecoin - people want fast and cheap global payments.
The traditional payment channels built more than 50 years ago are obviously unable to meet people's desire for freedom of payment and free flow of money today. Galaxy Ventures partner Mike Giampapa has well explained the huge potential of blockchain as a payment track through the article The Future of Payments.
We can see that the grand payment vision in the original Bitcoin white paper can now be met in today's blockchain technology facilities. The instant settlement of blockchain payments, global access functions, and large-scale real-world use cases of stablecoins all show that the biggest opportunity for cryptocurrency may not be to view it as a cryptocurrency, but to view it as a new set of payment methods.
While we are talking about how to popularize and apply cryptocurrencies and blockchain technology on a large scale all day long, the killer application of Web3 has actually arrived, and that is payment.
Therefore, I compiled this article in the hope that we can all realize that beautiful vision of payment freedom.
1. The huge potential of blockchain payment
Although the Bitcoin white paper proposed the grand vision of building a decentralized, peer-to-peer electronic cash payment system as early as 2008, it was not until the past few years that blockchain-based payments have become increasingly feasible and popular. Billions of dollars have been invested in the development of the underlying blockchain infrastructure over the past decade, and now we finally have a blockchain system that can support "payment-level scale".
The cost and performance curve of blockchain is in line with "Moore's Law". In the past few years, the cost of storing data on the blockchain has dropped by several orders of magnitude. After Ethereum's "Cancun" upgrade (EIP-4844), the average cost of each transaction of Layer2 such as Arbitrum & Optimism is about $0.01, and the cost of other Layer1s that currently provide alternatives is close to a few cents.
In addition to better performing and more cost-effective infrastructure, the explosive rise of stablecoins is clearly a long-term trend. Visa recently launched its public-facing on-chain stablecoin data platform (Visa Onchain Analytics), which provides a glimpse into the growth trend of stablecoins and shows how stablecoins and the underlying blockchain infrastructure can be used to facilitate global payments.
Stablecoin transaction volume across the market has grown by about 3.5 times year-over-year. When focusing the analysis on transactions initiated directly by consumers and businesses (excluding automated transactions or smart contract operations), Visa estimates that stablecoin transaction volume in the past 30 days was approximately $265 billion (on an annualized basis, total transaction volume would be $3.2 trillion). To put this into perspective, this is roughly twice PayPal's payment volume in 2023 (according to its 2024 annual report) and is equivalent to the GDP of India or the United Kingdom.
We have spent a lot of time deeply researching the underlying drivers of this growth and firmly believe that blockchain has great potential to become the future of payments.
2. Payment Industry Background
2.1 Old payment infrastructure
In order to understand the fundamental drivers of the crypto payments market growth, we must first understand some historical context. The payment infrastructure we use today in the United States and internationally (e.g., ACH, SWIFT) was established more than 50 years ago in the 1970s. The ability to send money around the world was a groundbreaking achievement and a milestone in the financial world.
However, the global payments infrastructure built more than 50 years ago looks largely outdated and fragmented today. It is an expensive and inefficient system that operates within limited banking hours and relies on many intermediaries. A significant problem with current payment infrastructure is the lack of global standards, and fragmented payment systems across countries hinder seamless international transactions and create complexity in establishing consistent payment protocols.
2.2 Progress and Challenges
The advent of real-time settlement systems is a major advance in recent years. The success of real-time payment schemes internationally, such as India's UPI and Brazil's PIX, is well documented. In the United States, government and consortium-led efforts have introduced real-time settlement systems such as Same Day ACH, the Clearing House's RTP, and the Federal Reserve's FedNow. But the adoption of these new payment methods has been inhibited, and the fragmentation between numerous competing interests has created significant challenges.
Fintech companies attempt to provide user experience improvements on top of this legacy infrastructure. For example, companies such as Wise, Nium, and Thunes enable clients to pool liquidity from accounts around the world so they can make transactions feel instant. However, they do not correct for the limitations of the underlying payment rails, nor are they capital-efficient solutions.
3. The complexity of today’s payments
Given the fragmentation of the existing financial system, payment transactions are becoming increasingly complex. This complexity can be best illustrated by the structure of a cross-border payment transaction (such as the following example of a remittance from the United States in US dollars to Europe in euros), which contains many pain points:
Multiple intermediaries: Cross-border payments often involve multiple intermediaries, such as local and correspondent banks, clearing houses, foreign exchange brokers, and payment networks. Each intermediary adds complexity to the transaction process, leading to delays and increased costs.
Lack of standardization: Lack of standardized processes and formats leads to inefficiencies. Different countries and financial institutions may have different regulatory requirements, payment systems, and messaging standards, making it challenging to streamline payment processes.
Manual processing: Traditional systems lack automation, real-time processing capabilities, and interoperability with other systems, resulting in delays and manual intervention.
Lack of transparency: The opaque nature of cross-border payment processes can lead to inefficiencies. Limited visibility into transaction status, processing times and associated fees can make it difficult for businesses to track and reconcile payments, leading to delays and administrative overhead.
High costs: Cross-border payments often incur high transaction fees, exchange rate markups, and intermediary fees.
Cross-border payments typically take up to 5 business days to settle, with an average fee of 6.25%. Despite these challenges, the market size for B2B cross-border payments remains huge and continues to grow. According to FXCIntelligence, the total market size for B2B cross-border payments is $39 trillion in 2023 and is expected to grow 43% to $53 trillion by 2030.
Clearly, real-time settlement is urgently needed, but a globally unified payment standard has not yet emerged. There is a solution available to everyone that can help people transfer value around the world instantly and cheaply - blockchain.
4. Crypto Payment Adoption
Stablecoin payments offer an ideal solution to current challenges in areas such as cross-border payments, and are experiencing long-term growth around the world. As of May 2024, the total stablecoin supply is approximately $161 billion. USDT and USDC represent the third and sixth largest crypto assets by market capitalization, respectively. While they collectively account for approximately 6% of the total cryptocurrency market capitalization, they account for approximately 60% of on-chain transaction value.
Returning to our cross-border payments example, the simplified flow of funds provided by blockchain rails offers an elegant solution to the complexity of the status quo:
Near-Instant Settlement: Blockchain rails can settle transactions nearly instantly across the globe, compared to most traditional financial payment methods that take days to settle.
Lower costs: Crypto payments can offer lower costs compared to existing products due to the elimination of various intermediaries and superior technological infrastructure.
Greater visibility: Blockchain provides a higher level of visibility in tracking the movement of funds and alleviating the administrative overhead of reconciliation.
Global Standards: Blockchain provides a “high-speed rail” that is easily accessible to anyone with an internet connection.
By using stablecoin rails, the payment process can be greatly simplified and the number of intermediaries can be reduced. Compared with traditional payment methods, the flow of funds can be seen in real time, the settlement time is faster, and the cost is lower.
5. Overview of Crypto Payment Stack
When we look at the crypto payments market, we see that there are four main layers of the technology stack:
5.1 Settlement Layer
The underlying blockchain infrastructure for transaction settlement. Layer 1 blockchains such as Bitcoin, Ethereum, and Solana, as well as general-purpose Layer 2 environments such as Optimism and Arbitrum, are all selling block space to the market. They compete on multiple dimensions, including speed, cost, scalability, security, distribution channels, etc. We expect that over time, the payment use case will become a significant consumer of block space.
5.2 Asset Issuer
The asset issuer is the entity responsible for creating, maintaining, and redeeming stablecoins. A stablecoin is a crypto asset that is designed to maintain a stable value relative to an underlying reference asset or basket of assets (most typically the U.S. dollar). Stablecoin issuers typically adopt a balance sheet-driven business model similar to that of banks, where they take customer deposits and invest them in higher-yielding assets such as U.S. Treasuries, then issue stablecoins as liabilities and profit from the interest rate differential or net interest margin.
5.3 Deposits and Withdrawals
Deposit and withdrawal providers play a key role in increasing the availability and adoption of stablecoins as a primary tool for financial transactions. Fundamentally, they also act as a technical layer that connects stablecoins on the blockchain with fiat currencies in traditional bank accounts. Their business model is often traffic-driven and they earn a small commission from the amount of dollars flowing through their platform.
5.4 Interface / Application
A front-end application is ultimately the customer-facing software in the crypto payment stack that provides a user interface for supporting crypto payments and leverages the rest of the stack to enable such transactions. Their business models vary, but tend to be some combination of a platform fee plus traffic-driven fees generated through front-end transaction volume.
6. Emerging Trends in Crypto Payments
We are seeing a number of exciting trends at the intersection of cryptocurrencies and payments:
6.1 Cross-border payment is the first battlefield
As mentioned above, cross-border transactions are often the most complex, inefficient, and expensive due to the numerous intermediaries that charge rents in the process. It is therefore not surprising that we see the highest natural acceptance of blockchain-based alternative payment solutions in the market. Providers supporting B2B payments (payments to suppliers and employees, corporate financial management, etc.) and remittance use cases have gained strong traction in the market.
We think of cross-border payments as being similar to logistics, where the “last mile” (the exchange channel between fiat and crypto) is particularly difficult to navigate. This is where companies like Layer2 Financial provide real value, as they take on the heavy lifting of integrating with the various crypto and fiat partners on the back end (blockchains, custodians, exchanges/liquidity providers, banks, traditional payment rails, etc.) and provide customers with a seamless and compliant experience. Layer2 Financial also helps facilitate the highest speed/lowest cost route for transactions and is able to complete the entire lifecycle of a cross-border payment in as fast as ~90 minutes using crypto rails.
Given the cost and efficiency gains, we are seeing adoption of the technology across all regions and end customers (crypto-native and traditional businesses). Demand is particularly high in regions where fiat currencies are less stable and the dollar is less convenient to use. As a result, Africa and Latin America have been hotbeds of entrepreneurial activity. For example, Mural has seen great success helping clients facilitate payments to suppliers and developer contractors between the U.S. and Latin America.
6.2 Supporting the Early Stages of Payment-Level Infrastructure
Most of the market infrastructure around the crypto ecosystem (e.g., custody platforms, key management systems, liquidity venues) was built primarily for retail trading. Over the years, this ecosystem has matured to include more enterprise/institutional-grade software and services, but overall, this infrastructure is not built to support the real-time and scale of payments.
We see opportunities for new entrants and existing payment providers to launch/expand their products to capture this emerging use case. For example, new custody/key management systems like Turnkey improve transaction signing by about 2 orders of magnitude, reducing signature latency to 50-100 milliseconds for millions of wallets. They also enable companies to design policies around asset operations to increase automation and process scalability.
Liquidity partners are also re-aligning their products to provide more frequent (ideally real-time) settlement capabilities to deposit and withdrawal providers. More automation is being implemented across the board, which will provide a more superior experience for end users.
6.3 On-chain revenue will change the rules of the game
Issuing fiat digital currency on the blockchain is the first practical use case of the tokenization trend. However, the significant growth we are seeing in stablecoin adoption further highlights the problem that their holders are unable to earn a return on their holdings (versus 4-5% on U.S. Treasuries).
Currently, Tether and USDC dominate the stablecoin market, accounting for more than 90% of the ~$160 billion stablecoin market. Recently, we have seen a series of new entrants, offering on-chain yields in different forms. Stablecoin issuers such as Agora, Mountain, and Midas are offering yield-earning assets pegged to the US dollar, providing yield/rewards to holders. We have also seen companies such as BlackRock, Franklin Templeton, Hashnote, and Superstate launch a series of tokenized US Treasury products to provide on-chain yields. Finally, we have seen creative tokenized structured products like Ethena offer a synthetic asset pegged to the US dollar, which uses the underlying transaction of ETH to provide on-chain yields.
We expect these new assets to be a huge catalyst for the broad expansion of on-chain finance. A market for yield-generating assets is being born, and we see a future where users can leverage specific instruments based on their use case, risk/return preferences, and the region they are located in. This could have a transformative impact on financial services around the world.
6.4 Early Signs of Stablecoin Utility
While stablecoins have clear, broad product-market fit across a variety of use cases, the daily lives of non-crypto natives (consumers and businesses) continue to be conducted in the world of fiat currencies. For example, businesses may be happy to leverage stablecoins and blockchain rails for cross-border payments, but most companies today prefer to hold and accept fiat currencies.
One impediment is the ability for businesses to accept stablecoin payments. Stripe’s recent announcement of support for its merchant clients to accept stablecoins is not only an important validation, but also a huge shift from the status quo. It can provide consumers with more payment options and make it easier for businesses to accept, hold, and trade digital assets.
Another inhibitor is the ability to use stablecoins. Visa has expanded stablecoin settlement capabilities to support tighter interoperability between blockchain and card association networks. For example, we have seen impressive organic demand in the market for stablecoin-backed card products that allow cardholders to use their stablecoins anywhere Visa cards are accepted.
As stablecoins become more widely accepted and used in traditional payment methods, we increasingly expect these digital assets to become ubiquitous alongside non-digital assets.
VII. Conclusion
Blockchain-based payments are one of the most important and exciting trends we see at the intersection of cryptocurrencies and financial services. We believe that more and more financial transactions will be settled using blockchains in the future, and that payments will be one of the important use cases for blockchains and a major consumer of blockchain space in the future.
