Original link: (The Last Big Thing - Crypto Payment Part 2)
Original author: Larry Liu, Qiming Venture Partners
Compiled by: Scof, ChainCatcher
Editor: flowie, ChainCatcher
Editor's note: Crypto payment is one of the most popular tracks recently. In addition to Stripe's acquisition of the stablecoin payment startup Bridge for $1.1 billion, creating the largest acquisition in the history of cryptocurrencies, many mainstream financial institutions have begun to accelerate the layout of crypto payments:
PayPal completed its first commercial payment using the stablecoin PYUSD.
Visa launches Tokenized Asset Platform VTAP to help banks issue fiat-based tokens.
BlackRock partners with Ethena to launch new stablecoin backed by BlackRock BUIDL.
Coinbase and A16Z jointly invest in AI crypto payment company Skyfire.
……
Crypto payment is also showing a hot financing trend. In the crypto payment financing statistics article released by ChainCatcher in September,
It can be seen that crypto payment financing has recently gathered giants in major fields such as payment, stablecoins, and traditional finance.
Visa, Tether, Circle, JPMorgan Chase, and Standard Chartered Bank are all rushing to join the game, and top capitals such as Sequoia Capital, Temasek, and A16Z are also placing bets.
Recently, Larry Liu, an investor of the well-known investment fund Qiming Venture Partners, published a 10,000-word series of articles (The Last Big Thing - Crypto Payments), which systematically discussed the future of crypto payments from the perspectives of historical changes in payments, the current status and trends of crypto payments, etc. ChainCatcher compiled this article.
The first in a series of articles, it explores the panorama of the traditional payment system, from its historical origins in credit card payments to its modern digital transformation.
This second article explores the unique advantages of blockchain technology in payments and assesses the current state of crypto payments. The final article will analyze emerging trends and revolutionary possibilities.
3. Enter crypto payment
3.1 Advantages and reasons
So, what are the benefits of cryptocurrency and blockchain?
3.1.1 Democratized access
① Public blockchains democratize access to digital assets and ownership through their permissionless and decentralized networks. Node operators are able to benefit from diversified revenue streams, enabling them to serve a wide audience that traditional banking and payment systems cannot reach.
Traditional digital payment systems have reduced the marginal cost of serving additional customers to almost zero. In contrast, public blockchains often have additional overhead due to communication costs and redundant work of multiple nodes. However, node operators rely heavily on token issuance and other diverse sources of revenue, not just transaction fees.
Take the income of Ethereum nodes as an example:
Current situation:
Consensus layer rewards
Token issuance - 82.5%
Executive level rewards:
Priority Gas Fee (Processing Fee) - 11.7%
Baseline MEV (Miner Extracted Value) - 5.9%
Ethereum node revenue breakdown. Source: Rated Network
In the past 30 days, token issuance accounted for 82.5% of node revenue, while priority gas fees (similar to payment processing fees in traditional systems) accounted for only 11.7%. Although the annualized return of 3.42% seems modest, it is denominated in ETH and has relatively low risk. The scale of funds involved is very large, with about 33 million ETH staked, totaling more than $100 billion - about 3.7‰ of US GDP in 2023, or the equivalent of the total amount of US Treasury bonds - all in ETH, with an annual yield of more than 3%. Looking ahead, it is expected that the sources of income will be further diversified, with non-issuance rewards accounting for a larger share.
These rich revenue streams and high-value transactions make operating a node a profitable business, especially when professionalized. While some argue that L2 may not benefit from Proof of Stake (PoS) staking, launching your own token, internalizing gas fees, and potentially earning MEV revenue can easily offset these disadvantages.
We delve further into revenue concentration at the transaction level. Data shows that the first four transaction types contribute more than 60% of the total MEV, while they occupy only about 22% of the block space (calculated in Gas fees). These transaction types — Telegram bot flows, sandwich MEV, bot swap flows, and non-atomic arbitrage MEV (essentially arbitrage between centralized exchanges and decentralized exchanges) — are primarily related to trading, not transfers or Other activities. These complex transaction operations bring significant financial returns to node operators who maintain and secure network infrastructure. Combined with the composability of the technology, this results in a decentralized network that serves a wider audience.
Order flow analysis. Source: (Who wins the Ethereum block construction auction and why?) Author: Burak Öz, Danning Sui, Thomas Thiery, Florian Matthes
3.1.2 Neutral and transparent environment
② Public blockchains excel in eliminating trust assumptions and the frictions that come with cross-party collaboration. In essence, they provide a neutral and transparent environment, secured by trustless data processing and computation.
If you have a deposit account in the United States and want to send money to family in Southeast Asia through a bank, you have a few options, but none of them are ideal.
Traditional bank transfers typically take 3-5 days and cost between 1-5%. Money transfer providers can help you transfer money faster, usually within minutes or hours, but the fees are higher, usually between 5-10%. Even most online services, while more convenient, usually only complete the transfer within 1-2 days and cost between 0.5-2%. In addition, foreign exchange conversions may add another 0.5-5% in fees, depending on the provider and many other factors.
The main reason for these long and expensive processes is that different banks and countries maintain separate "ledgers." Each bank maintains its own accounting system, and even global banks usually keep separate ledgers for different regions or countries.
Currently, SWIFT is the main messaging network used by banks to route global remittances. When you initiate a transfer, your bank deducts the funds from your account and sends a message to the receiving bank via SWIFT. The receiving bank then processes the message and credits the funds. If two banks do not have a direct relationship, they must rely on one or more intermediary banks to route the message and funds.
These intermediary banks may be located in different time zones, have different levels of digitalization, and follow their own processes and policies. Some banks prefer to process international transfers in batches rather than in real time. All of these factors lead to significant delays and high costs.
Similar situations happen every day in almost every industry. Whether individuals, companies, organizations, regions, or entire countries, each party acts in its own self-interest—cooperating when it is advantageous to do so, but also competing against one another. Economic theory often suggests that this situation promotes optimal efficiency and maintains social vitality. However, this undoubtedly also brings with it numerous prisoner's dilemmas, tragedies of the commons, and walled gardens. This introduces significant friction into cross-stakeholder collaboration, often making such interactions complex, expensive, and in some cases unaffordable.
Blockchain provides a revolutionary approach. It treats all participants equally and ensures that each node maintains exactly the same ledger, the authoritative chain. Through a strict consensus mechanism and a cryptographically protected account system, blockchain ensures that all applications and accounts operate strictly in accordance with open source code rules. This framework allows users to manage the same account from any location and transfer funds to anyone, anywhere in seconds.
A bank “on-chain” can communicate directly with other banks because they all operate on the same public ledger. Not only is this ledger universally accessible, but it can be verified by any participant, eliminating the need for trust and reducing wait times. With blockchain, a farmer in rural China can conduct secure, trustless transactions with a financial services provider in a skyscraper on Wall Street. This is the power of blockchain: removing barriers, increasing transparency, and democratizing access to financial and other services on a global scale.
3.2 Current Status Check
Despite their huge potential, crypto payments are still in their early stages of development and face significant challenges. These challenges include the rigidity of existing widely adopted payment systems, resistance from established user habits, and the entrenched interests of financial giants. While Satoshi Nakamoto envisioned Bitcoin as widely used digital cash, most goods and services in our daily lives are still priced in fiat currencies, so the main focus here is on stablecoin payments.
3.2.1 Just adding extra steps to traditional payment methods
Paradoxically, many current crypto payment solutions add extra hoops to traditional payment methods. Take cryptocurrency bank cards, for example, which are the most common product in this space.
The typical workflow of current “crypto payment”.
Although it is often argued that crypto payments may first be adopted in less developed regions that lack traditional banks and cards, I think it is more practical and symbolic to start with cards at the current stage of the industry. The key strategy here is to leverage the existing Visa and MasterCard networks, which cover more than 150 million merchants in more than 200 countries and regions. Without this approach, we will have to convince merchants one by one to adopt new payment methods or convince existing payment platforms to integrate with crypto systems - neither of which seems realistic at the current stage.
The first to enter this space are usually the card issuers, or downstream of the card issuers, working with the card issuers to leverage their issuance capabilities. When the card issuers promote the ability to use their cards for crypto payments, it usually involves converting the cryptocurrency into fiat currency beforehand. This is usually done through an OTC provider or managed by the card issuer on behalf of the user. Once this process is completed, you can use the card to pay, but the transaction is actually in fiat currency and has little to do with cryptocurrency.
In this case, the card is backed by sufficient assets and is called a "secured credit card." This blurs the line between credit and debit cards, making the distinction between the two almost insignificant. While credit, debit, prepaid cards, and other forms of payment differ in spending limits, usage scenarios, and fee structures—and these differences can vary by country and region—this article focuses on typical card payments and does not discuss the specific nuances between the various types.
This approach takes care of native crypto users to some extent, especially those who have a large amount of assets allocated in cryptocurrencies but still need to use fiat currency for daily expenses. However, this approach is not ideal and has several significant drawbacks:
Custody and centralization risks: During the period of funding the card and making payments, the user's assets are effectively held in custody, either with the issuer or a professional custody provider. This introduces potential centralization risks and complicates account management. Users must actively manage their fiat account balances and are at risk of problems with custody. In addition, this also brings opportunity costs because users miss out on potential returns that could be obtained through staking or other decentralized financial protocols. Although some issuers have begun to offer returns to users, this usually involves lending funds to asset managers, introducing additional risks and costs.
Increased complexity and costs: Contrary to the original intention of simplifying transactions and reducing intermediaries, this approach actually adds more steps and intermediaries to the payment process. Currently, service providers usually charge only 1%-3% for recharging cards, and this cost is borne directly by the cardholder.
3.2.2 Factors preventing non-custodial payments
With these issues in mind, the question arises: Why can’t users sign payment transactions in real time? Why must they be converted into fiat currency beforehand?
Provider:
Latency: When using traditional payment channels, card issuers need to confirm payments within about 5 seconds to ensure a smooth user experience and reduce potential security risks. On L1 such as Ethereum, this time window is not even enough to package transactions, let alone achieve final confirmation.
Double spending: While real-time authorization is technically feasible on L2 or high-performance L1, there are still some risks. For example, transactions may be withdrawn due to chain reorganization or network failure. Transactions pre-confirmed by the rollup sequencer may be accidentally or intentionally ignored. In addition, sophisticated attackers may overwrite their original transactions by paying a higher gas fee, allowing them to transfer assets to another address before the original transaction is finally confirmed.
In general, in a non-custodial payment system, the biggest risk faced by a payment provider or card issuer is failure to receive tokens as expected, in which case the provider will need to compensate for the loss with its own funds.
Attackers trouble service providers with double spending
user:
Gas Fees: One of the major challenges users face in crypto payment systems is gas fees. On L1, gas fees can be prohibitively high, and even on L2 or cheaper L1, gas fees may still be unacceptable for high-frequency, low-value transactions such as daily payments.
Signing and management: Until now, card swipes have not supported signing crypto transactions. Instead, users must manually sign each transaction using their phone or hardware wallet, which is not ideal. In addition, the process of signing and key management on mobile devices is neither smooth nor secure. Enterprise customers also generally expect more granular access control.
Is it possible to provide a solution to all these problems? With the introduction of several new primitives, the answer is yes.
The final article in this series will explore emerging trends that may overcome these challenges and revolutionize the crypto payments landscape.
