Encryption Payment Channel: The Superconductor of Traditional Payments

In 2025, the blockchain has built a financial payment ecosystem that runs parallel to the traditional financial system. The encryption payment channel carries a volume of 200 billion in stablecoins, as well as a trading volume of 5.62 trillion in stablecoins by May 2024, approaching Mastercard's annual transaction volume. According to a report by ARK Invest, the annualized trading volume of stablecoins in 2024 reaches 15.6 trillion, approximately 119% and 200% of Visa and Mastercard respectively.

The widespread adoption of encryption payments has become an undeniable fact, with Stripe's acquisition of the stablecoin service provider Bridge being a typical case. Encryption payment channels are becoming the superconductor of payments, laying the foundation for a parallel financial system that offers faster settlement, lower fees, and seamless cross-border operational capabilities. This concept has gradually matured over a decade of development, and currently, hundreds of companies are dedicated to making it a reality. In the next decade, encryption channels are expected to become the core of financial innovation, driving global economic growth.

There are still many challenges that need to be addressed, including:

• 16 trillion USD trading market
• 89 trillion dollars of trade financing
• 400 billion dollars in remittance pre-funding
• The average fee rate for international transfers is close to 7%.
• Deposit time of 3-5 working days
• 1.4 billion people without a bank account

This article will comprehensively analyze how blockchain-based encryption payment channels bring utility to traditional payments 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, we first need to grasp the key concepts of existing payment channels and their complex market structure and system architecture.

1.1 Card Organization Network

Although the structure of credit card organization networks is complex, the main participants in credit card transactions have not changed 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 credit or debit cards to customers and authorizes transactions. The acquiring institution collects payments on behalf of merchants and ensures that 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 constructed and exchanged among network participants.

Credit card networks are divided into "open loop" and "closed loop" types. Open loop networks, such as Visa and Mastercard, involve multiple parties. Closed loop networks, like American Express, are self-sufficient and handle all aspects of the transaction process by a single company.

The economics of payment is very complex, with multiple layers of fees existing in the network. These mainly include exchange fees, card group fees, and settlement fees.

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. ACH transactions mainly consist of two types: remittances and withdrawals. The ACH process involves multiple participants, including the originator, ODFI, RDFI, and ACH operators.

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

1.3 Wire Transfer

Wire transfers are the core of high-value payment processing, with the two major systems in the United States being Fedwire and CHIPS. These systems handle urgent, secured payments that require immediate settlement. Wire transfers typically use the real-time gross settlement system (RTGS).

Fedwire is a real-time gross settlement (RTGS) system that allows participating financial institutions to send and receive same-day fund transfers. CHIPS is a private sector alternative that uses a netting settlement system.

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

2. Real-world Use Cases

Encryption payment channels are most effective in situations where the use of traditional US dollars is restricted but demand is strong, such as in countries with economic instability, high inflation, currency controls, or underdeveloped banking systems. The advantages of encryption payment channels are also most evident in scenarios of globalized 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 accept encryption currencies directly as a payment method from customers. The back-end method can provide merchants with faster settlement times and channels for obtaining funds.

2.2 Debit Card

Linking debit cards directly to non-custodial smart contract wallets has established a powerful bridge between blockchain space and the real world. These cards are becoming a primary consumer tool in emerging markets, increasingly replacing traditional banking.

2.3 remittance

Encryption payments can provide a faster and cheaper way for overseas remittances. An important factor driving this trend is the non-custodial embedded wallets, which offer users a Web2-level user experience.

2.4 B2B payment

Cross-border B2B payments are one of the most promising applications of encryption payments. Traditional payment systems are inefficient in this area, while encryption payments can significantly increase speed and reduce costs. Major use cases include:

• XB supplier payment
• XB Accounts Receivable
• Financial Operations
• Foreign aid payment

2.5 payslip

Encryption payment provides a more efficient way of compensation for freelancers and contractors, especially for practitioners in emerging markets.

2.6 Currency acceptance for deposit and withdrawal

The currency acceptance for deposits and withdrawals is a highly competitive market, but it has matured in recent years. They are one of the most critical parts of the payment process. P2P channels are particularly common in certain areas and can offer more competitive exchange rates than traditional 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. Global licensing coverage is extremely challenging, requiring multiple licenses across different jurisdictions.

4. Challenges

The popularity of encryption payments faces many challenges:

• The question of whether the chicken or the egg came first.
• The high failure rate of currency acceptance for deposits and withdrawals, user experience barriers, high fees, and inconsistent quality.
• Privacy issues
• Difficulty in establishing banking relationships
• Compliance has not reached the level of traditional payment companies.

5. Future Outlook

In the next 5 years, the encryption payment industry may see the following developments:

1. Annual payment volume reaches 200 billion to 500 billion USD
2. More than 30 new banks have launched natively on the encryption payment channel.
3. Fintech companies are competing to stay relevant, with dozens of encryption-native companies being acquired.
4. Three encryption networks designed specifically for payments have emerged.
5. 80% of online merchants accept encryption currency payments
6. The card organization network expands coverage to approximately 240 countries and regions.
7. Most of the 15 main remittance channels are completed through encryption payments.
8. On-chain privacy primitives are adopted
9. 10% of foreign aid expenditures are sent through encryption payment channels.
10. The market structure for currency acceptance in deposits and withdrawals will become rigid.
11. The number of P2P currency acceptance liquidity providers has increased significantly.
12. Over 10 million remote workers receive payment through encryption.
13. 99% of AI agent business is conducted through encryption payment channels.
14. Over 25 well-known partner banks in the United States support encryption payment companies.
15. Financial institutions attempt to issue their own stablecoins.
16. Large messaging platforms integrate encryption payment features.
17. Loan and credit companies began using encryption payment channels.
18. Non-USD stablecoins begin large-scale tokenization
19. CBDC is still in the experimental stage.

6. Conclusion

Encryption channels are becoming the superconductors of payments, laying the foundation for a parallel financial system. They offer faster settlement times, lower fees, and the ability for seamless cross-border operations. This concept has matured over a decade of development, and currently, hundreds of companies are dedicated to making it a reality. In the next ten years, encryption channels are expected to become the core of financial innovation, driving global economic growth.