10 Nov, 2023
Unveiling Web3 Payment Pathways: An In-Depth Exploration
Traditional payment is a payment method based on an account system, where the transfer of value is recorded in the accounts of intermediaries such as banks or third-party payment companies. Due to the large number of participants, the process of fund transfer is complex and incurs significant friction costs, resulting in higher costs.In contrast, Web3 payment is a payment system based on a value-based or token-based system, where the transfer of value is stored by users themselves on a distributed ledger, known as the blockchain. Web3 payment relies on the blockchain network as the underlying infrastructure, allowing for the transfer of cryptocurrencies between the sender and the receiver. It can address issues such as high fees, inefficient cross-border transfers, and high costs commonly associated with traditional payment systems.Here in this article, we will delve into the two primary pathways of Web3 payment.1. What’s Web3 PaymentsIn simple terms, Web3 payments refer to a payment method based on blockchain and cryptocurrency technologies. However, due to the characteristics of blockchain and cryptocurrency, Web3 payments encompass more than just payment features.Cryptocurrencies like Bitcoin have multidimensional attributes; they are not only a form of payment but also an innovative technology, a store of value, a financial infrastructure in the form of a distributed ledger, and can serve as a unit of account in transactions to represent value.Traditional payments and Web3 payments are not mutually exclusive but rather demonstrate a two-way dynamic. Fiat currencies and cryptocurrencies continuously interact and gradually integrate into real use cases such as stablecoins and central bank digital currencies. Web3 payments are redefining our payment methods and financial systems.Although current payment methods are rapidly digitizing, the involvement of numerous participants makes the fund transfer process cumbersome, leading to significant friction costs. Improvements in the payment experience are constrained by various intermediaries, banks, technology companies, and more.Bitcoin was designed from the outset to achieve a decentralized, peer-to-peer electronic cash payment system. In 2008, Satoshi Nakamoto released the Bitcoin whitepaper against the backdrop of the global financial crisis, aiming to change the traditional banking-centered financial system and achieve decentralization in finance. Since the birth of Bitcoin on January 9, 2009, it has ushered in the widespread application of cryptocurrencies.Bitcoin payments enable direct transfers between users without the need for intermediaries such as banks, clearinghouses, and electronic payment platforms, avoiding high fees and complex transfer processes. Any user with a device connected to the internet can use Bitcoin without permission.As the acceptance of cryptocurrencies continues to grow, the interaction between cryptocurrencies and fiat currencies in the real world becomes inevitable. Institutions providing fiat-to-crypto and crypto-to-fiat exchange services play a role similar to banks providing forex services in cross-border payments.2. Pathways of Web3 Payments(1) On-Ramp & Off-Ramp Payments:Exchange between cryptocurrencies and fiat currencies.(2) Cryptocurrency Payments, including:On-chain native asset payments: Transactions between two addresses on the blockchain or interactions between cryptocurrencies and on-chain assets (purchasing NFTs with cryptocurrency, swapping between different cryptocurrencies).Off-chain traditional entity payments: Payments made when using cryptocurrency as an equivalent to traditional currencies to purchase goods/services.Web3 payments connect fiat currencies and cryptocurrencies through on-ramp and off-ramp payments. Cryptocurrency payments enable the circulation of crypto assets, forming a complete payment ecosystem.Given the relatively small volume of native assets in the crypto market and limited payment scenarios, most discussions within the Web3 industry currently revolve around the exchange between fiat and cryptocurrencies.2.1 On-Ramp & Off-Ramp PaymentsOn-ramp and off-ramp payments are crucial bridges connecting fiat and cryptocurrencies, forming a complete payment ecosystem. Apart from over-the-counter (OTC) and peer-to-peer (P2P) on-ramp methods, other on-ramp and off-ramp processes involve the participation of third-party payment institutions.2.1.1 On-Ramp & Off-Ramp Payment ProcessThe flow of funds behind on-ramp and off-ramp payments involves users transferring fiat currency through payment channels to liquidity providers behind third-party payment institutions (Crypto Liquidity Providers). These liquidity providers, acting like merchants in traditional third-party payment scenarios, transfer cryptocurrencies as commodities to users’ addresses on the blockchain and provide cryptocurrency liquidity to third-party payment institutions. The off-ramp process is the reverse.These liquidity providers are typically centralized exchanges (such as Coinbase Prime, Binance), stablecoin issuers (such as Tether and Circle), or crypto-friendly banks (such as Silvergate Bank and Signature Bank). Liquidity providers are crucial in on-ramp and off-ramp processes, acting as a bridge between fiat and cryptocurrencies.2.1.2 Major On-Ramp & Off-Ramp Payment MethodsA. Centralized Exchanges:Centralized exchanges, given their nature of handling currency transfers, often have functionalities aligned with payment institutions. Many centralized exchanges incorporate on-ramp and off-ramp payment business segments, where users can directly purchase cryptocurrencies using debit/credit cards or bank transfers, such as Binance Pay and Coinbase Pay.Centralized exchanges provide a payment interface for users using the exchange’s custody wallet. Users and sellers can choose to use different accounts within the same custody wallet or use a non-custodial wallet, with the former incurring lower fees as it doesn’t involve gas fees.In some jurisdictions with stricter regulations, centralized exchanges need to integrate independent on-ramp and off-ramp payment institutions as underlying payment channels to facilitate user on-ramp and off-ramp processes. This operation is also suitable for decentralized exchanges; for example, Uniswap integrates with independent on-ramp and off-ramp payment institutions like Moonpay and Paypal to support user on-ramp and off-ramp processes.B. Independent On-Ramp & Off-Ramp Payment Institutions:Independent on-ramp and off-ramp payment institutions have cryptocurrency transfer functionalities and need to obtain relevant licenses for cryptocurrency transactions and payments in their business operation locations. MoonPay is a leading project in cryptocurrency on-ramp and off-ramp payments, positioning itself as the “PayPal for Web3” with over 5 million registered users. MoonPay supports cryptocurrency payments in over 160 countries and regions, facilitates exchanges between 80+ cryptocurrencies and 30+ fiat currencies, and holds payment business licenses in most jurisdictions.In terms of payment methods, MoonPay currently supports payments through credit cards, debit cards, mobile payments, and account-to-account payments. Users input the on-chain address and the amount in cryptocurrency, then make the payment. Coinbase provides liquidity to MoonPay, and MoonPay’s comprehensive on-ramp and off-ramp functions, coupled with its first-mover advantage, have quickly captured a significant portion of the European and American markets dominated by credit card usage, sustaining a valuation of $3.5 billion.Recently, major traditional payment giant Paypal, leveraging its robust payment channels, collaborated with stablecoin issuer Paxos to launch the PYUSD stablecoin, aiming to enter the Web3 payment market. Cryptocurrency-friendly banks, such as the now-closed Silvergate Bank and the forcibly closed Signature Bank, are crucial on-ramp and off-ramp payment channels.C. Other On-Ramp & Off-Ramp Payment Methods:Other on-ramp and off-ramp payment methods are essentially payment products built on the foundation of the two aforementioned payment methods.Aggregated payment products integrate multiple independent on-ramp and off-ramp payments, allowing users to access different rates and quotes from different independent on-ramp and off-ramp payments for transactions. MetaMask is a typical aggregated payment solution, and other well-known projects include TransitSwap and KyberSwap.Cryptocurrency retail terminal ATMs and point-of-sale (POS) systems have emerged with the development of the cryptocurrency industry. Cryptocurrency ATMs facilitate the direct purchase of cryptocurrencies with cash offline, with ATM providers purchasing liquidity from third-party suppliers and paying users. This payment method is characterized by its anonymity, as users require minimal or no personal information for cryptocurrency purchases. Bitcoin Depot is a leading project in this domain.Cryptocurrency payment POS systems provide another channel for offline cryptocurrency payments. Users make cryptocurrency payments through POS terminals, and merchants receive fiat currency directly, with POS payments achieving user off-ramp. Pallapay is one of the projects offering such solutions.Overall, there are various pathways for Web3 payments available for users to choose from. However, on-ramp and off-ramp processes involving the conversion of fiat and cryptocurrencies typically require operators to obtain operational licenses based on regions. The costs generated by payments vary slightly due to differences in payment method business models.In addition to on-ramp and off-ramp payments, some centralized exchanges and payment institutions collaborate with card organizations like Visa and Mastercard to issue debit and credit cards. These cards serve both on-ramp and off-ramp payment purposes and offer cryptocurrency payment functionalities.2.2 Cryptocurrency PaymentsAs the acceptance of cryptocurrencies continues to rise, Web3 payments are entering traditional markets such as e-commerce (for online shopping), gig economy (for contracts and freelancers), cross-border remittances, travel reservations, and online gaming (for in-game item exchanges). Web3 payments use cryptocurrencies for online consumption and remittances instead of relying on outdated infrastructure from traditional banks or third-party payment institutions.Currently, cryptocurrency payments primarily fall into two categories: payments between traditional entities off-chain and payments within native on-chain scenarios.2.2.1 Cryptocurrency Payments — Off-Chain Payments with Traditional EntitiesAccording to a report by PYNMTS and BitPay in 2022, which surveyed over 2,330 online businesses with annual sales exceeding $250 million, approximately 85% of large retailers (with revenues exceeding $1 billion) currently offer cryptocurrency as a payment method. Among all surveyed businesses, half already accept cryptocurrency payments, and among those not yet accepting cryptocurrency payments, 42% are considering it. The report also found that most businesses use non-native cryptocurrency wallets to support cryptocurrency payments, such as PayPal and Venmo.To meet the growing demand for Web3 payments, leading payment giants like Mastercard, Visa, PayPal, Stripe, and Venmo are collaborating with cryptocurrency companies to offer cryptocurrency as a means of payment to millions of users. Major retailers, including Overstock, Microsoft, Expedia, and Starbucks, have integrated cryptocurrency payments, allowing their customers to directly use cryptocurrency to purchase digital and physical goods. Other major companies include popular streaming platform Twitch, Norwegian Air, Etsy, and Burger King.Concerning off-chain payments between traditional entities, let’s consider a scenario where a user makes a cryptocurrency purchase, and the merchant receives fiat currency. In this case, funds flow through third-party payment institutions, converting the user’s cryptocurrency payment into fiat currency before paying the merchant. Presently, the most common solution is the issuance of cryptocurrency debit cards. Centralized exchanges or wallet companies often collaborate with card organizations such as Visa and Mastercard to issue cryptocurrency debit/credit cards. Users can use these cards for online and offline transactions as long as they hold cryptocurrency in their platform accounts. During the actual payment process, the issuing company converts the cryptocurrency into local fiat currency through off-ramp payment channels before paying the merchant. A notable example is Crypto.com’s collaboration with Visa to issue the Crypto.com Visa Card.2.2.2 Cryptocurrency Payments — On-Chain Native ScenariosRegarding on-chain native scenarios, users make payments in cryptocurrency, and merchants accept cryptocurrency. This approach goes beyond simple peer-to-peer transfer transactions based on blockchain technology. It also addresses trust issues encountered in real-world payment scenarios, requiring the involvement of third-party payments.Taking the example of an online shopping case, where trust issues are resolved through a chain of trust (e.g., a trust chain between friends), direct transactions through peer-to-peer transfers on the blockchain can be used for the entire process — user payment, merchant shipping, and user receipt. However, in an online platform without a trust basis, such as online shopping, who guarantees that the merchant will ship the goods after the transfer, and that the received goods match the actual product?Similarly, while it’s feasible to implement peer-to-peer transfers on the blockchain network among friends and family, dealing with transactions with strangers requires additional considerations. Therefore, a set of account systems and a settlement system on the blockchain need to be linked to facilitate offline goods circulation and online payment settlement.Consequently, third-party payment institutions providing cryptocurrency payment products are needed to address these issues. This includes cryptocurrency payment protocols, payment core systems, frontend product interactions, and corresponding support modules, as shown in the diagram. Ripple and Stellar are exploring these aspects.Visa recently introduced a settlement solution based on the stablecoin USDC, applied in the case of Crypto.com. In the scenario where a user makes a cryptocurrency purchase, and the merchant receives fiat currency, Crypto.com needs to convert the user’s cryptocurrency payment into fiat currency and then pay the merchant through traditional payment channels. Settling through traditional payment channels involves additional parties, transaction fees, costs, and complexity, restricting Crypto.com’s ability to execute settlements outside banking hours.In contrast, Visa’s USDC settlement solution eliminates currency conversion in transactions and traditional payment steps, enabling real-time, global settlement 24/7/365 through the blockchain. This flexible and conversion-free settlement method opens up new business scenarios for Crypto.com, such as cryptocurrency payment gateways for merchants and blockchain-based cross-border payments.Visa’s USDC settlement solution can also be used in cross-border remittances. The current nearly $1 trillion cross-border remittance market is troubled by high costs associated with traditional payment methods, which can charge up to 8% of the total transaction amount to the sending party. Web3 cross-border remittance products, such as Strike’s Send Globally, utilize Bitcoin’s Lightning Network, offering an economical alternative to traditional cross-border remittances. The fees for such transactions range from 0.01% to 0.1% of the transaction amount, significantly lower than the average cost of around $20 for traditional cross-border remittances. In 2022, cross-border remittances to the labor force approached $8 billion. Web3-based remittances have the potential to save the industry $40 billion to $64 billion in costs annually.3. SummaryWithout a doubt, in the near future, Web3 payments will become commonplace and may completely replace existing payment methods, both within enterprises and between individuals. At the same time, traditional finance will be interconnected through Web3 payments, highlighting the value proposition of asset expression, circulation, transactions, programming, and regulation, with an emphasis on efficiency advantages.The biggest opportunity of cryptocurrencies may not be seen as just profitable currencies but as a new set of payment methods. Some believe that the killer application of Web3 has yet to arrive, but it may already be here — payments!Digitization and tokenization will bring new value to the traditional monetary system, overcoming previously insurmountable boundaries, and potentially changing the world economy forever.