Encryption Payment Channel: The Superconductor of Future Payments

By 2025, blockchain has gradually built a financial payment ecosystem parallel to the traditional financial system. The encryption payment channels carry a volume of 200 billion stablecoins and a trading volume of 5.62 trillion US dollars in stablecoins for 2024, which is already close to Mastercard's annual transaction volume. According to a report by ARK Invest, the annual trading volume of stablecoins will reach 15.6 trillion US dollars in 2024, which is approximately 119% and 200% of Visa and Mastercard, respectively.

The widespread adoption of encryption payments has become an undeniable fact, especially with the case of Stripe acquiring the stablecoin service provider Bridge. Encryption payment channels are becoming the superconductors of payments. They form the foundation of a parallel financial system, providing faster settlement times, lower fees, and the ability for seamless cross-border operations. This concept has gradually matured over ten years of development, and today, hundreds of companies are dedicated to making it a reality. In the next decade, encryption channels will become the core of financial innovation, driving global economic growth.

There are still many issues that need to be resolved, including:

• 16 trillion dollars trading market
• 89 trillion dollars in trade finance
• 4 trillion dollars in remittance pre-funding
• The average fee rate for international transfers is close to 7%.
• 3-5 working days for arrival
• 1.4 billion people without bank accounts

This article will comprehensively explore how blockchain-based encryption payment channels can bring utility to traditional payment channels from the perspective of traditional payments, and provide multiple real-world application scenarios and future predictions.

1. Existing Payment Channels

To understand the importance of encryption channels, it is first necessary to grasp the key concepts of existing payment channels and their operational mechanisms.

1.1 card organization network

Although the network structure of credit card organizations is complex, the main participants in credit card transactions have remained largely unchanged over the past 70 years. Credit card payments mainly involve four parties:

1. Merchant
2. Cardholder
3. Issuing Bank
4. Acquiring Bank

The issuing bank provides credit or debit cards to customers and authorizes transactions. The acquiring institution collects payments on behalf of the merchant and ensures that the funds reach the merchant's account.

The credit card organization network provides channels and rules for credit card payments, connecting acquiring institutions with issuing banks, offering clearing functions, establishing participation rules, and determining transaction fees. ISO 8583 is the main international standard that defines how credit card payment information is exchanged among network participants.

Credit card organization networks are divided into two types: "open loop" and "closed loop". Open loop networks like Visa and Mastercard involve multiple parties. In contrast, closed loop networks like American Express handle the entire transaction process by one company.

The economics of payment is very complex, with multiple layers of fees in the network. These mainly include exchange fees, card group fees, and settlement fees. The level of fees varies by region and transaction type.

1.2 Automatic Clearing House ( ACH )

ACH is one of the largest payment networks in the United States, owned by the banks that use it. It was originally established in the 1970s and became popular after being used by the U.S. government to send Social Security payments. Today, it is widely used for payroll processing, bill payments, and B2B transactions.

ACH transactions mainly consist of two types: remittances and withdrawals. The transaction process involves the originator, ODFI, RDFI, and ACH operators. At the end of each day, the operator calculates the net settlement total for member banks.

The ACH system has been striving to meet modern demands. In 2015, "Same Day ACH" was launched, allowing for faster payment processing. However, it still relies on batch processing rather than real-time transfers, and has some limitations.

1.3 wire transfer

Wire transfers are at the core of high-value payment processing, with the two main systems in the United States being Fedwire and CHIPS. These systems handle urgent, guaranteed payments that require immediate settlement. Once executed, wire transfers are typically irrevocable.

Modern wire transfers use real-time gross settlement systems ( RTGS ), where each transaction is settled individually as it occurs. Fedwire is an RTGS system that allows participating financial institutions to send and receive same-day funds transfers. CHIPS, on the other hand, is a private sector alternative that uses a netting settlement system.

SWIFT is a global information network for financial institutions that enables banks and securities companies around the world to exchange secure structured information.

2. Real-World Use Cases

Encryption payment channels are most effective in places where traditional dollar usage is restricted but demand is strong, such as Argentina, Venezuela, Nigeria, Turkey, and Ukraine.

The advantages of encryption payment channels are most evident in the context of globalized payments. They rely on existing internet connections to provide global coverage. Encryption payment channels can serve as a glue between different payment systems.

Encryption payments are particularly suitable for urgent payments or those that typically have a higher time preference, such as cross-border vendor payments and foreign aid payments.

2.1 Merchant Acquiring

Merchant acquiring can be divided into two use cases: front-end integration and back-end integration. The front-end method allows merchants to directly accept encryption as a payment method from customers. The back-end method can provide merchants with faster settlement times and funding channels.

2.2 Debit Card

Linking debit cards directly to non-custodial smart contract wallets creates a powerful bridge between blockchain space and the real world. In emerging markets, these cards are becoming a primary consumer tool. Even in countries with stable currencies, consumers are using these cards to accumulate dollar savings.

2.3 remittance

Remittance refers to the transfer of funds by individuals who have moved abroad for work back to their home country. The total global remittance in 2023 is approximately $656 billion. Traditional remittance systems are costly, while encryption payments can offer a faster and cheaper way for overseas remittances.

2.4 B2B payment

Cross-border B2B payments are one of the most promising applications of encryption payments. Payments through the correspondent banking system may take weeks to settle, while encryption payments can greatly speed up the process and reduce costs.

The main use cases of B2B payments include:

• XB Supplier Payment
• XB Accounts Receivable
• Financial Operations
• Foreign aid payment

2.5 payslip

Freelancers and contractors are among the early adopters, especially in emerging markets. Encryption payments can allow more funds to enter their pockets instead of flowing to intermediaries. This is also very useful for companies that have already held most of their funds in the form of encryption.

2.6 Currency Acceptance for Deposit and Withdrawal

Currency acceptance for deposits and withdrawals is a highly competitive market. They can be used as standalone products or as a key part of the payment process. Building currency acceptance for deposits and withdrawals typically involves obtaining licenses, ensuring local banking partnerships, and connecting with market makers or OTC desks.

P2P channels rely on a "broker" network, which is particularly common in Africa. This system is especially powerful because it can support various local payment methods without the need for formal permissions or integrations.

3. Compliance Regulatory License

Obtaining regulatory approval is a necessary step to expand the application of encryption payments. Startups can choose to collaborate with licensed entities or obtain licenses independently. Each region has its own unique currency transfer regulations, making global licensing coverage highly challenging.

4. Challenges

The widespread adoption of payment methods is usually difficult because it is a chicken or egg problem. We have not yet seen use cases where paying with stablecoins is particularly beneficial or completely necessary, although debit cards and remittance applications are bringing us closer to that moment.

There are still some issues with currency acceptance for deposits and withdrawals, such as a high failure rate, user experience barriers, high costs, and inconsistent quality. Privacy is also a potential issue.

Establishing banking relationships is often the most difficult part, as it is another chicken or egg problem. Compliance has not yet reached the level of traditional payment companies, and this is an ongoing challenge.

V. Future Outlook

In terms of consumers, we are at a stage where certain demographics are beginning to accept stablecoins. In terms of business, we are at the initial stage of mainstream adoption.

20 Predictions for the Next 5 Years:

1. The annual payment volume through encryption channels is between $200 billion and $500 billion.

2. More than 30 new banks globally have been natively launched on encryption payment channels.

3. Dozens of encryption-native companies have been acquired.

4. Some cryptocurrency companies will acquire fintech companies and banks.

5. About 3 encryption networks specifically designed for payments have emerged.

6. 80% of online merchants will accept encryption currency payments.

7. The card organization network will expand to approximately 240 countries and regions.

8. The 15 major remittance channels globally will mainly be completed through encryption payment channels.

9. On-chain privacy primitives will be adopted by enterprises and nations.

10. 10% of foreign aid expenditure will be sent through encryption payment channels.

11. The currency acceptance market structure for deposits and withdrawals will tend to stabilize.

12. The number of P2P currency acceptance liquidity providers will significantly increase.

13. Over 10 million remote workers will be compensated through encryption payment channels.

14. 99% of AI agency business will be conducted on-chain.

15. More than 25 well-known partner banks in the United States will support the encryption payment channel company.

16. Financial institutions will attempt to issue their own stablecoins.

17. Large messaging platforms will integrate encryption payment channels.

18. Loan and credit companies will begin to receive and make payments through encryption payment channels.

19. Several non-US dollar stablecoins will begin large-scale tokenization.

20. CBDC is still in the experimental stage and has not yet reached commercial scale.

6. Conclusion

Encryption channels are becoming the superconductors of payments, forming the basis of a parallel financial system. They provide faster settlement times, lower fees, and the ability for seamless cross-border operations. In the next decade, encryption channels will become the core of financial innovation, driving global economic growth.