Encryption Payment Channel: The Superconductor of Future Payments

As 2025 approaches, blockchain technology has gradually built a financial payment ecosystem parallel to the traditional financial system. The encryption payment channels have carried a trading volume of $200 billion in stablecoins, as well as a trading amount of $56.2 trillion in stablecoins in 2024, which is almost equivalent to Mastercard's annual transaction amount. According to statistics, the annualized trading volume of stablecoins in 2024 reaches $15.6 trillion, which is approximately 119% and 200% of the transaction amounts of Visa and Mastercard, respectively.

The popularity and widespread adoption of encryption payments have become an undeniable fact. As a certain CEO stated, encryption payment channels are the superconductors of payments. They form the foundation of a parallel financial system, offering faster settlement times, lower fees, and the ability to operate seamlessly across borders. This concept has developed over a decade, and today, hundreds of companies are dedicated to making it a reality. In the next decade, we will witness encryption channels become the core of financial innovation, driving global economic growth.

There are still many challenges in the financial sector that need to be addressed:

• Market size of transactions: $16 trillion
• Trade finance scale: 89 trillion USD
• Remittance prepaid funds: 4 trillion USD
• The average fee rate for international transfers is nearly 7%.
• The funds will arrive within 3-5 business days.
• 1.4 billion people globally without bank accounts

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

1. Existing Payment Channels

To understand the importance of encryption channels, we first need to understand the key concepts of existing payment channels and how they operate.

1.1 Card Organization Network

The structure of the credit card organization network is complex, but the main participants in credit card transactions have remained largely unchanged over the past 70 years. Credit card payments involve four main roles:

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

The issuing bank provides the customer with a credit or debit card and authorizes the transaction. The acquirer collects payments on behalf of the merchant and ensures that the funds reach the merchant's account.

Credit card organization networks provide channels and rules for credit card payments. They connect acquirers with issuing banks, provide clearing functions, establish participation rules, and determine transaction fees. ISO 8583 is the primary international standard that defines how credit card payment information is constructed and 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, while closed loop networks like American Express handle all transaction processes by a single company.

The economics of payment is very complex, with multiple layers of fees present in the network. These mainly include exchange fees, card group fees, and settlement fees. These fees vary greatly across different regions and transaction types.

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, primarily for payroll, bill payments, and B2B transactions.

There are two main types of ACH transactions: remittances and withdrawals. The process involves multiple participants, including the company or individual initiating the payment, their bank, the receiving bank, and the ACH operator.

The ACH system has been working to adapt to modern demands. The "Same Day ACH" launched in 2015 can process payments faster, but it still relies on batch processing rather than real-time transfers, and there are some limitations.

1.3 wire transfer

Wire transfers are 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 need to be settled immediately, such as securities transactions, major commercial deals, and real estate purchases.

Wire transfers typically use a Real-Time Gross Settlement (RTGS) system, where each transaction is settled individually as it occurs. Fedwire is an RTGS system, while CHIPS is a netting settlement system.

Although SWIFT is not a payment system, it is a global information network aimed at financial institutions, providing support for cross-border payment transactions.

2. Real Use Cases

Encryption payment channels are most effective in places where the use of traditional US dollars is restricted but demand is high, such as Argentina, Venezuela, Nigeria, Turkey, and Ukraine. These countries typically face economic instability, high inflation, currency controls, or underdeveloped banking systems.

The advantages of encryption payment channels are most evident in the context of global payment, as blockchain networks are not constrained by national borders. They can serve as a connection between payment systems of different countries and can also extend payment systems to countries that have not yet established the necessary infrastructure.

Encryption payments are also particularly suitable for time-sensitive transactions, such as cross-border vendor payments and foreign aid payments. This is especially helpful in scenarios where the efficiency of correspondent banking networks is low.

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 provides merchants with faster settlement times and funding access channels.

2.2 Debit Card

The ability to link debit cards directly to non-custodial smart contract wallets establishes a strong bridge between the blockchain and the real world. These cards are becoming a primary consumption tool in emerging markets and are increasingly popular even in developed countries.

2.3 remittance

Remittance refers to the act of overseas workers sending funds back to their home country from the country of work. In 2023, the total global remittance amount is approximately $656 billion. 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. They can significantly improve payment efficiency, shorten settlement times, and reduce costs. Main use cases include:

• XB Supplier Payment
• XB Accounts Receivable
• Financial Operations
• Foreign Aid Payment

2.5 pay slip

Encryption payments provide freelancers and contractors with a more efficient compensation method, especially in emerging markets. This not only reduces intermediary fees but also offers recipients the option to hold digital dollars.

2.6 Currency acceptance for deposits and withdrawals

The acceptance of deposits and withdrawals is a key link connecting encryption currency and fiat currency. Although market competition is fierce, some sustainably operating companies have emerged in recent years, providing global local payment channels.

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 approach has its advantages and challenges.

4. Challenges

The popularization of encryption payment faces multiple challenges, including:

• The chicken or the egg problem that users face.
• The high failure rate of currency conversion for deposits and withdrawals, user experience barriers, and high costs.
• Privacy issues
• The difficulty of establishing banking relationships
• Insufficient compliance

V. Future Outlook

In the next 5 years, the encryption payment industry may present the following trends:

1. Annual payment volume reaches 200 billion to 500 billion US dollars.
2. More than 30 new banks globally have launched natively on the encryption payment channel.
3. The mergers and acquisitions between fintech companies and encryption-native companies are increasing.
4. A new type of encryption network designed specifically for payment has emerged.
5. 80% of online merchants accept encryption currency payments.
6. Expand the coverage of the card organization network
7. Most major remittance channels are completed through encryption payments.
8. On-chain privacy technology has been widely adopted.
9. 10% of foreign aid expenditure is sent through encryption payment channels.
10. The currency acceptance market structure for deposits and withdrawals tends to stabilize.

6. Conclusion

Encryption payment channels are becoming the superconductor in the payment field, bringing faster settlements, lower fees, and seamless cross-border operations to the global financial system. With hundreds of companies dedicated to turning this idea into reality, we can expect to witness encryption channels becoming the core of financial innovation, driving global economic growth in the next decade.