Encryption Payment Channel: The Superconductor of Future Payment Infrastructure

By 2025, blockchain has built a financial payment ecosystem parallel to the traditional financial system. The encryption payment channels support a scale of 200 billion in stablecoins, along with a trading volume of 5.62 trillion in stablecoins for 2024, which is close to Mastercard's annual transaction volume. According to a report by ARK Invest, the annualized trading volume of stablecoins in 2024 will reach 15.6 trillion, 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, laying the foundation for a parallel financial system that offers faster settlement times, lower fees, and the ability for seamless cross-border operations. This concept has taken a decade to mature, and now hundreds of companies are dedicated to turning it into 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 addressed, as Kevin pointed out:

• Trading Market: $16 trillion
• Trade financing: 89 trillion USD
• Remittance of 40 trillion dollars in advance funds
• The average fee rate for international transfers is close to 7%.
• Funds will be credited within 3-5 working days.
• 1.4 billion people without bank accounts

This article will comprehensively analyze how blockchain-based encryption payment channels can bring 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, it is first necessary to understand the key concepts of existing payment channels and their complex market structures and system architectures.

1.1 Card Organization Network

Although the topology of credit card organization networks is complex, the main participants in credit card transactions have remained largely unchanged over the past 70 years. Credit card payments mainly involve four participants:

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

The issuing bank provides customers with credit or debit cards and authorizes transactions. When a transaction request is made, the issuing bank decides whether to approve it by checking factors such as the cardholder's account balance and available credit limit.

If a merchant wants to accept credit card payments, they need an acquiring institution (, which can be a bank, payment processor, gateway, or independent sales organization ). This institution is an authorized member of the credit card organization's network. The acquiring institution collects payments on behalf of the merchant and ensures that the funds reach the merchant's account.

Credit card organizations provide the channels and rules for credit card payments. They connect acquiring institutions with issuing banks, offer clearing functions, set participation rules, and determine transaction fees. ISO 8583 remains the primary international standard that defines how credit card payment information ( such as authorization, settlement, and refunds ) is constructed and exchanged among network participants.

There are two types of credit card organization networks: "open-loop" and "closed-loop". Open-loop networks like Visa and Mastercard involve multiple parties: issuing banks, acquiring banks, and the credit card organization network itself. The credit card organization network facilitates communication and transaction routing, but acts more like a marketplace, relying on financial institutions to issue credit cards and manage customer accounts.

In contrast, closed-loop networks like American Express are self-sufficient, handling all aspects of the transaction process by a single company - they typically issue their own cards, act as their own bank, and provide their own merchant acquiring services. It is generally believed that closed-loop systems offer more control and better profits, but at the cost of more limited merchant acceptance. Conversely, open-loop systems provide broader adoption, but at the cost of reduced control and revenue sharing among participants.

The economics of payments is very complex, with multiple layers of fees present in the network. The interchange fee is a part of the payment fees charged by the issuing bank to provide access to its customers. Although technically the acquiring bank pays the interchange fee directly, the cost is often passed on to the merchants. Card organization networks typically set the interchange fees, which usually account for a large portion of the total payment cost. These fees vary significantly across different regions and transaction types. For example, in the United States, consumer credit card fees range from about 1.2% to about 3%, while in the European Union, the cap is 0.3%. Additionally, the card scheme fees are also determined by the card organization networks, used to compensate the network for connecting acquiring institutions and issuing banks, as well as acting as a "gateway" to ensure the accurate flow of transactions and funds. There are also settlement fees to be paid to the acquiring institutions, typically a percentage of the transaction settlement amount or volume.

Although these are the most important participants in the value chain, the reality is that today's market structure is much more complex in practice.

In the above link, there are several important participants:

The payment gateway encrypts and transmits payment information, connecting payment processors and acquiring institutions for authorization, and communicates transaction approval or rejection to the business in real time.

The payment processor acts on behalf of the acquiring bank to process payments. It forwards the transaction details from the gateway to the acquiring bank, which then communicates with the issuing bank through the card organization network to obtain authorization. The payment processor receives the authorization response and sends it back to the gateway to complete the transaction. It also handles settlement, which is the process of funds actually entering the merchant's bank account.

Payment service providers or payment service providers were first introduced by PayPal and Square around 2010, acting as small payment processors between merchants and acquiring banks. It effectively acts as an aggregator by bundling many smaller merchants into its system to achieve economies of scale, simplifying operations by managing cash flow, processing transactions, and ensuring payments. PayFacs hold direct merchant IDs from card organization networks and take on the responsibilities of onboarding, compliance, and underwriting on behalf of the merchants they partner with.

The orchestration platform is a middleware technology layer that simplifies and optimizes the payment process for merchants. It connects to multiple processors, gateways, and acquirers through a single API, routing payments based on factors such as location or fees, to improve transaction success rates, reduce costs, and enhance performance.

1.2 Automatic Clearing House ( ACH )

The Automated Clearing House ( ACH ) is one of the largest payment networks in the United States, actually owned by the banks that use it. It was originally established in the 1970s, but really began to gain popularity when the U.S. government started using it to send social security payments, which encouraged banks across the country to join the network. Today, it is widely used for payroll processing, bill payments, and B2B transactions.

There are two main types of ACH transactions: credit transfers and debit transfers. When users receive their salary or use their bank account to pay bills online, they are utilizing the ACH network. The process involves multiple participants: the company or individual initiating the payment ( originator ), their bank ( ODFI ), the receiving bank ( RDFI ), and the operator acting on behalf of all these transactions. In the ACH process, the originator submits the transaction to the ODFI, then the ODFI sends the transaction to the ACH operator, and then the ACH operator switches the transaction to the RDFI. At the end of each day, the operator calculates the net settlement totals for its member banks (, with the Federal Reserve responsible for managing the actual settlement ).

One of the most important things about ACH is how it handles risk. When a company initiates an ACH payment, its bank ( ODFI ) is responsible for ensuring everything is legal. This is especially important for withdrawals - imagine if someone used your bank account information without permission. To prevent this from happening, regulations allow disputes to be raised within 60 days of receiving the statement, and companies like PayPal have developed clever verification methods, such as making small test deposits to confirm account ownership.

The ACH system has been striving to meet modern demands. In 2015, they launched "Same-Day ACH" to process payments faster. Nevertheless, it still relies on batch processing rather than real-time transfers, and it has limitations. For instance, no more than $25,000 can be sent in a single transaction, and it is not applicable for international payments.

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 time-sensitive and guaranteed payments that require immediate settlement, such as securities transactions, large commercial transactions, and real estate purchases. Once executed, wire transfers are typically irrevocable and cannot be canceled or reversed without the consent of the recipient. Unlike conventional payment networks that process transactions in batches, modern wire transfers use real-time gross settlement systems ( RTGS ), which means each transaction is settled individually as it occurs. This is an important feature, as the system processes hundreds of billions of dollars daily, and the risk of bank failures using traditional net settlement is too great.

Fedwire is a real-time gross settlement (RTGS) system that allows participating financial institutions to send and receive same-day funds transfers. When a business initiates a wire transfer, its bank verifies the request, debits the account, and sends a message to Fedwire. The Federal Reserve Bank then immediately debits the sending bank's account and credits the receiving bank's account, after which the receiving bank credits the account of the final recipient. The system operates on business days from 9 p.m. the previous evening to 7 p.m. Eastern Time, and is closed on weekends and federal holidays.

CHIPS is owned by major U.S. banks through a clearinghouse and serves as a private sector alternative, but on a smaller scale, only providing services to a few large banks. Unlike the Fedwire's RTGS method, CHIPS is a net settlement system, which means it allows multiple payments between the same parties. For example, if Alice wants to send $10 million to Bob, and Bob wants to send $2 million to Alice, CHIPS will net these payments into a single payment of $8 million from Bob to Alice. While this means CHIPS payments take longer than real-time transactions, most payments are still settled within the same day.

As a complement to these systems, SWIFT is actually not a payment system, but a global information network aimed at financial institutions. It is a cooperative organization owned by its members, whose shareholders represent over 11,000 member organizations. SWIFT enables banks and securities companies around the world to exchange secure structured information, many of which initiate payment transactions across various networks. According to Statrys, SWIFT transfers take about 18 hours to complete.

In a typical process, the sender instructs their bank to wire the funds to the recipient's bank. The value chain below illustrates a simple case where two banks belong to the same wire transfer network.

In more complex situations, especially cross-border payments, transactions need to be executed through a network of correspondent banks, usually using SWIFT to coordinate the payments.

2. Real-World Use Cases

Now that we have a basic understanding of traditional payment channels, we can focus on the advantages of encryption payment channels.

In situations where the use of traditional US dollars is restricted but the demand for dollars is strong, encrypted payment channels are the most effective. Think of those places that need dollars to preserve wealth or as a banking alternative but cannot easily obtain traditional US dollar bank accounts; these countries are often economically unstable, have high inflation, currency controls, or an underdeveloped banking system, such as Argentina, Venezuela, Nigeria, Turkey, and Ukraine. Furthermore, one could argue that, compared to most other currencies, the dollar is a superior means of value storage; consumers and businesses typically prefer dollars because they can be easily used as a medium of exchange or converted into local fiat currency at points of sale.

The advantages of encryption payment channels are most evident in the context of globalized payments, as blockchain networks are not restricted by