To understand better how crypto works, the BNB Chain Research team draws a map of the web3 payment ecosystem
Leaving aside both the philosophical questions and the independence of the monetary policies of the central banks or any type of intermediary, Bitcoin was born as a network of payments between individuals. Payments have been a cornerstone for cryptocurrencies since their inception – including pre-Bitcoin experiments like DigiCash and BitGold – but its use, although increasingly widespread, is still not massive. Aside from the evident reluctance of some individuals to cryptocurrencies, there are certain technical barriers that hinder their adoption as a leading means of payment.
Today, the current crypto landscape is quite different from the end of the first decade of 2000 and has evolved by leaps and bounds, but some of the limitations inherent in a permissionless P2P network are still in place, which limits the possibility of paying with cryptocurrencies on a day-to-day basis.
General overview of payments in web3
Before getting into the limitations or trying to fix anything, it is necessary to review some concepts that make it easier to draw a map of the web3 payment ecosystem (powered by blockchain technology).
Payment can be simply defined as the exchange of an asset between two individuals generated by an agreed transaction. What is the reference asset in a web3 payment? Where and how are those assets stored? A web3 payment transaction will likely include a cryptocurrency, which is a digital unit of account issued on a permissionless and decentralised blockchain, such as BNB Chain.
Cryptocurrencies have high volatility, which makes them an asset that may not be best suited for payments, especially on a large scale. To avoid this volatility, stablecoins were created. Stables are cryptocurrencies whose value derives from a fiat currency in such a way that a 1:1 parity is maintained with the underlying asset (which is deposited in the form of cash or cash equivalent in the issuer’s account of the stablecoin). In simple words, 1 BUSD is equivalent to 1 USD, making its use as a unit of account much more ideal. Cryptocurrencies are stored in a digital wallet, which is the starting and ending point of any payment transaction.
In recent years, several centralised entities have realised the advantages that blockchain technology offers in terms of speed, traceability, settlement, and especially the endless possibilities that programmable money offers. Therefore, several financial institutions have already launched their permissioned blockchains with their own monetary policies.
Governments and especially their economic arm, the central banks, are also exploring the implementation of a digital currency issued by a central bank using blockchain technology which is not considered cryptocurrencies but CBDCs (Central Bank Digital Currency). It should be noted that some CBDC experiments do not even use DLT.
Both CBDCs and cryptocurrencies issued by centralised entities do not share the differentiating characteristics of the general concept of cryptocurrency: its permissionless, decentralised issuance or its trustlessness. However, there are potential bottlenecks in the performance of a blockchain.
Blockchain Trilemma for Payments:
Blockchains are often forced to make trade-offs that prevent them from achieving all three aspects:
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Decentralised: creating a trustless blockchain system that has no centre point for failure;
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Scalable: the ability of a system to handle transactions/second;
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Secure: the ability of the system to defend itself from attacks, bugs, and other malicious attacks.
Blockchain infrastructure and performance
The latency and finality of transactions are immensely important for payment systems along with a user experience that is sleek and convenient. However, current systems allow for limited throughput of a maximum of 5k tps (best case) whereas Visa can handle 24k tps.
This has led to the creation of Layer 2s and other scaling techniques that decouples computation and scalability capabilities where transactions are batched and have a final settlement on Layer 1.
The Lightning Network on Bitcoin is specifically designed to cater to the requirements as a payment infrastructure where users can use it to pay for their day-to-day activities like buying a coffee or paying at grocery stores. However, the mainstream adoption of crypto for payments has been a pressing challenge.
BNB Chain is EVM compatible, allowing a block gas cap of 120M, i.e. how much gas you can burn in a block for EVM chains, Ethereum and Polygon are 30M. BNB Chain is the most optimised EVM chain that serves as a foundation for payments. The gas costs are relatively higher compared to other chains, however, to provide a better user experience, BNB Chain is deploying zk-rollup, zkBNB, and sidechain infra for application specific blockchains. This would significantly bring down the cost of gas and increase overall performance.
BNB Chain payments ecosystem
One of the most repeated criticisms against cryptocurrencies is the impossibility of using them as a means of payment beyond that closed world that the blockchain is. BNB has several players who refute that statement.
Okse allows their wallet users to pay with cryptocurrencies in hundreds of countries and businesses with their digital debit cards issued by Visa. Everything is done permissionless and through a smart contract; the user just needs to send the funds from the wallet to the debit card contract, authorise it, and just do his groceries and pay. Projects like PIP also focus on native web3 users. It also allows social platforms payments to, for example, reward your favourite content creator or payments to web3 identities, being able to send a payment directly to a friend only using their BNB username. Streaming projects, like Zebec, streamline the payment of services or payroll of crypto-native companies, making possible the existence of companies fully powered by digital assets.
Payments are still a nascent category in crypto and it is still not clearly defined how it will look in a few years or what kind of projects will facilitate mass adoption. BNB Chain believes that payments will play a crucial role in crypto adoption and is therefore supporting all relevant projects building in this direction.
This editorial was initially published in our Crypto Payments and Web 3.0 For Banks, Merchants, and PSPs Report. The first edition of our report aims to provide a go-to payment resource of crypto terms and concepts for those interested to understand the basics of crypto payments and their long-term impact. Furthermore, it shares practical examples of cryptocurrency-enabled ecommerce and banking services and presents the latest developments in the regulatory landscape. Also, it reveals what are the most innovative companies in this space, that are building the crypto rails.
BNB Chain Research
The BNB Chain Research is an industry-leading research lab actively engaged in thought leadership on key industry developments.
