Previous attempts to implement cryptocurrency payment gateways have been hampered by several factors. The first is volatility, which imposes risk on any party required to hold and settle cryptocurrency into fiat. Another is the unwillingness of users to pay in a currency that is appreciating in value. A third problem is scalability and transaction throughput. Finally, fees and settlement times have hindered adoption for retail payments. If we can solve these issues, cryptocurrency will be recognised as a far better payment method than traditional payment rails. The reason for this is that cryptocurrency returns the sovereignty of money to individuals and merchants, removing the need for multiple parties to mediate transactions and charge fees. The question we need to answer if we are to propose a viable decentralised payment gateway using cryptocurrencies is how we will resolve the problems described above: volatility, price appreciation, scalability and fees.
Scalability is being actively worked on across all blockchain projects, supporting transaction volumes at the level of traditional payment rails is still a long way off. However, significant progress is being made, so there is reason to be hopeful that scalability will improve over the next few years. In this article we will focus on the other problems identified above.
The most difficult of these problems is volatility. Solving it directly is not possible with bitcoin due to its fixed monetary policy, but there are ways to reduce its impact. Typically, in order to accept cryptocurrencies, a merchant has had to rely on a third party to settle transactions for them into fiat at regular intervals, as well as to hedge against price changes. The reason for this is that if a merchant holds bitcoin or other cryptocurrencies they are exposed to significant price fluctuations which may exceed their profit margins. Using a third party is a viable way to limit exposure to volatility, but it undermines the purpose of using cryptocurrency, since merchants must relinquish control of their own money, becoming completely reliant on this third party to process their transactions. In addition to sacrificing trustlessness, this necessarily introduces further costs and delays into the payment process.
There will soon be a viable option for merchants to process their own cryptocurrency transactions: stablecoins. Stablecoins are a form of cryptocurrency designed to reduce or even eliminate price volatility. This post describes how stablecoins will allow merchants to accept cryptocurrency as payment without exposure to market risks or reliance on any third parties.
Stablecoins are a critical component in enabling, among other things, fully-decentralised payment gateways. Once we have a solution to stability, we can enable merchants to process transactions using any cryptocurrency. In this example we will use bitcoin, the payment flow works like this:
- The merchant installs an open-source plugin that provides an interface to a bitcoin wallet
- The customer chooses to pay in bitcoin
- The conversion rate between bitcoin and fiat is retrieved from an oracle
- The price of the goods is displayed in bitcoin and fiat
- The customer transfers bitcoin to the merchant wallet
- The payment gateway integration scans the blockchain to confirm the transaction.
- Once the transaction is confirmed the bitcoin is sent to an exchange where it is liquidated into a stablecoin.
This process allows merchants to accept bitcoin as payment, but since the bitcoin is immediately sold for stablecoins, they are not exposed to volatility for long. This process only involves interactions between the merchant, customer, and the open market, so there is no need to rely on a third party to process the transaction. The merchant can decide at what interval to convert the stablecoins into fiat and can do so through a service that deposits fiat directly into their bank account. This means the merchant has at all times had control of their funds until they are settled into fiat. This is a significant improvement for the merchant who has now reduced fraud to effectively zero and is paying transaction fees that are far lower than for processing credit cards.
Encouraging users to spend cryptocurrency is much harder, as it is a direct consequence of the fixed token supply of most cryptocurrencies. If a token’s value is likely to increase most users will be unwilling to spend it, this drives further speculative appreciation. This increases the costs of doing business for both merchants and consumers. Fiat-denominated stablecoins represent one solution to this, as users will be able to hold funds in stablecoins to make purchases denominated in fiat. If users expect stablecoins to maintain their value, they will have no incentive to hold them as an investment. This property of stablecoins encourages higher liquidity of the token: they are most useful for their stated purpose, which is as a currency rather than as an asset for storing value.
The final issue is transaction fees; currently it is relatively expensive to convert crypto to fiat in most markets around the world. These costs can become non-viable when conversion must happen at regular intervals. Once stablecoins enable customers, merchants, and suppliers to transact in cryptocurrencies, they can avoid the conversion altogether. This will further reduce the cost of accepting cryptocurrencies, especially given that integration and fraud monitoring costs drop to essentially zero. This is illustrative of the point that the introduction of stablecoins into the ecosystem does not just enable a set of novel applications, but also enhances the utility of all cryptocurrencies. With the potential to behave as a universal settlement layer for cryptoassets, a stablecoin reduces the friction of operating between them.
Enabling a decentralised cryptocurrency payment gateway for online merchants is an example of one of the many improvements to the ecosystem enabled by stablecoins like Havven. For more information on Havven please check out our website, https://havven.io. We are currently working with a number of payment processors in Australia to enable this solution for their merchants. More details will be announced soon.