by Kyle Samani
Since the advent of Bitcoin, people have been talking about the inevitability of crypto-based payments. And yet, 13 years since the launch of Bitcoin, payments over crypto rails have not yet entered mainstream consciousness.
Why have crypto payments struggled? And why is that changing now?
Historical Challenges with Payments over Crypto Rails
- Volatility. No one wants to pay for anything using a volatile medium of exchange. This is further complicated by potential capital gains tax obligations.
- For most of crypto’s history, there weren’t credibly scalable blockchains.
- Non-custodial wallets were pretty bad. Mobile support was almost non-existent.
- Paying for goods and services by typing in addresses or scanning QR codes is not a great user experience.
- The crypto payments companies that were around—BitPay, etc.—were primarily focused on general purpose commerce, in which crypto didn’t offer a significant advantage over traditional payment rails.
Recent Improvements
- Stablecoins. There are $100B+ in stablecoins between USDC and USDT alone, plus a smattering of decentralized stablecoins including DAI, UXD, USDH, and more.
- A handful of scalable blockchains with high throughput, low latency, and low transaction fees have emerged.
- Non-custodial wallets have become a lot better on three major fronts: key management has become butter via solutions like Web3Auth and Magic; fiat on ramps have become a lot better because of Moonpay, Ramp, and others; and mobile wallets have proliferated, such as Rainbow, Phantom, and Key.
- The biggest change on this front has been the rise of crypto debit cards that allow users to spend crypto held at exchanges like Coinbase, Binance, etc.
- Crypto payments are starting to emerge in specific verticals, rather than as horizontal general purpose payment.
The rest of this post will elaborate on the 5th change, as this is the least discussed of these major areas and in my opinion the most important question: understanding why certain markets will adopt payments over crypto rails first.
Legacy Payment Modalities
This is obvious, but worth stating: existing payment rails are fairly comprehensive, and pretty good at serving most forms of commerce that exist today. The providers of these systems—Visa, ACH, Zelle, Paypal, Stripe, etc.—have all been iterating on their respective payment systems for decades. They each specialize in different payment flows: you don’t use ACH to pay for coffee, and you don’t use Stripe to pay a friend for covering lunch at a restaurant, etc.
If payments over crypto rails are going to be a thing, then the natural question is: what verticals are being materially underserved by existing payment rails?
There are a few verticals that exemplify this now, and I expect more will naturally emerge over the next few years. The remainder of this post will dive into a few of these verticals.
Arbitrary, Bi-Directional Payment Flow
I highlighted this specifically in my keynote at the 2022 Multicoin Summit.
One of the defining features of the internet is that it enables arbitrary, bi-directional packet flow. Prior to that, all large-scale communication media—television, radio, etc.—were one-way.
For roughly the first decade of the internet, information flow was mostly one way. But the rise of social media changed that, enabling everyone to start publishing content on the internet by leveraging the core trait of the internet allowing for bi-directional packet flow.
The history of data flow online parallels payment flow. If you go to a website, you can easily send money out the door using a credit card. But if you go to a website, it’s much harder to receive financial value of any form (requires KYC, connecting to a bank account, etc.).
Crypto makes it easy to receive value—either in the form of fungible or non-fungible assets—just by presenting a public key. Overtime, this will become a more common design pattern across the internet.
Here are a few examples of places we’re seeing this manifest:
- First, the most prominent early example of this is Brave’s BAT, which allows users to be rewarded for viewing ads across the internet. It doesn’t quite feel like this particular use case has found tight product-market fit, but there is a lot of interesting action happening around this core behavior flow.
- Second, large scale, small dollar real-time affiliate marketing payouts. Almost every e-commerce store has a function that says “refer a friend, get $10 off your next order.” The reason this paradigm is so common is because it’s much easier to implement a coupon system than it is to facilitate a large number of $10 cash payouts. Crypto rails trivialize this. There are a handful of startups building in this area today.
- Third, in learn-to-earn systems. It is very common for businesses to pay lots of money to Google and Facebook to drive traffic to their properties. However, once a user is on a website, there is no way to pay that user to route their attention on that website. This is a weird quirk of history. If anything, you would expect the opposite: that it would be easier to route payments to people if they are on your website relative to routing payments to Google/Facebook. We expect this design pattern to emerge in games, in education, and many other destinations around the internet.
The design space around sending value to users once they arrive at a web page is massive and under-explored, and is almost certainly going to be pioneered on crypto rails.
Bootstrapping New Networks
We have written extensively about proof of physical work (PoPW), specifically in the context of Helium and Hivemapper. The beauty of token systems is that they can be used to overcome the cold-start problem by creating economic incentive for true believers and early pioneers to start building out a network, well before it can realize broader market network effects. In the context of geographically distributed physical infrastructure, this is paramount. A telecom network with five hotspots or a mapping network with five cars is functional, but largely worthless. But token-based incentive systems have demonstrated an ability to overcome the cold start problem.
There are natural payment flows that need to be coupled to these incentive systems. Given the natural feedback cycle between payment flows and inflationary token incentives, the payment systems must coexist on the same financial rails as the token incentive system.
This paradigm not only applies to PoPW. It can apply to any network that uses token incentives to solve the cold-start problem. For example, Blackbird is using token incentives to build a crypto-native loyalty, membership and payments platform for the restaurant industry. Merchants and consumers receive tokens every time a transaction is completed using Blackbird. In this instance, the payment rails need to be coupled with the incentive system.
This paradigm is still widely underappreciated, and will become commonplace in the years to come. As this new incentive system proliferates, so will the associated payments over crypto rails.
Payment Rails For Crypto-Native Assets
For assets that are natively represented on-chain—most notably NFTs—it’s quite natural that payment flows are also on-chain. In this payment flow, fiat-on ramps such as Moonpay, Ramp, Beamo and others are making it easier to facilitate payments using card network rails. The important thing here is that the NFT sellers receive value on-chain, where it’s more likely to remain on-chain rather than being transferred back to traditional financial rails.
Value flow around NFTs roughly started by roughly mirroring offline collectibles: one-way flows from buyer to seller (e.g., digital art sales). But as NFT economies have evolved quickly, so have their associated payment flows. Now NFT economies encapsulate more rapid turnover of assets, royalty payments, collective ownership, syndicates and funds, and more.
The next major evolution of this market is in creating closed-loop systems that facilitate the creation, display/marketing, and sale of NFTs for non-technical users. What does this mean?
Today, the process of NFT creation, display/showcase/marketing, and sale are disjointed. Creation happens using some creative tool (e.g., Octane Render). Display/marketing/showcase and sale happen using some sort of auction house (e.g., Christie’s, or Magic Eden, or Solanart, etc.).
There are a handful of teams such as Portals that are building closed loop systems that facilitate the entire workflow around NFTs from creation through showcase, and ultimately to sale (and remixed re-sale!). As these universes blossom, they will naturally support economies with organic money flow in all kinds of directions. All of this will run on crypto-native rails.
High-Risk Payments
There are certain types of payments that face much higher chargeback rates. The largest categories are adult content and online gaming.
OnlyFans charges creators 20%, and immediately pays out 12-13% to payment processors. Passes is building a suite of tools that enable creators to engage with their fans, and Passes uses crypto rails for payments. Passes pays 0% for payments over crypto rails, and is sharing those savings with creators.
Gaming payments processors charge 5-15% per transaction, and Steam charges 30%. Moreover, payments processors frequently impose a 30-day payout delay to mitigate chargeback risk. These terms are quite onerous, and game developers are actively seeking solutions to address them.
Payments over crypto rails naturally solve all of these problems. Beamo offers credit card and multi-chain payments at 1%, and is passing those savings to gamers and games developers. It is no coincidence that every mainstream gaming studio in Asia has shifted their entire company IP strategy into web3. Beamo makes payments frictionless, allowing gamers to build new communities and monetize.
Creator Monetization
Creators face a lot of problems in monetizing their likeness. But one of the largest is lack of transparency over payment flows in web2 systems. If a creator posts a video that produces 1M vs 10M views, it is difficult if not impossible to understand differences in revenue. Combined with additional variables like different subject areas, languages, or geographies, it is almost impossible for creators to actually understand their income streams on web2 platforms.
The existence of crypto payment rails doesn’t magically fix this; however, crypto rails can facilitate new kinds of applications and experiences that offer creators transparency and auditability around their income flows. We believe that the next generation of creator monetization tools will be built on crypto rails for precisely this reason.
For example, let’s consider Arpeggi. Arpeggi is pioneering some of the most interesting ideas in creator monetization, specifically in the domain of making beats (music). For context, most modern beats are composed of unique stems, which are individual noises that repeat on some frequency. Arpeggi provides a toolset that allows stem creators to upload stems, and allows beat producers to remix those stems into an actual beat. Arpeggi conducts an attribution analysis of each stem’s contribution to the beat, and then will automate payment flows as revenue comes in for that beat. This can happen in near real-time!
While Arpeggi in a vacuum does not displace Spotify or solve the distribution problem, I highlight it to showcase how payment flow and attribution can be re-imagined for creators. Many other creator monetization apps are incorporating the ideas that I just described in Arpeggi. If creators will ever have meaningful revenue streams on using fan-engagement tools that are separate from web2 distribution platforms like YouTube and TikTok (many creators are pushing their fans in this direction), I expect the new platforms will leverage crypto rails because they so radically improve the payment flow for creators. There is some pain in moving away from web2 platforms; therefore, the new tooling provided by web3 platforms must be better along many dimensions to justify that cost for creators.
Today, creators don’t yet expect transparency or timely payment flows, we expect that over the next few years some new creator monetization tools will break out that are built on crypto rails, and this will re-shape norms and expectations across the industry. Teams such as Audius, Passes, Geneva, and many others are building towards this future.
International Payroll
The rise of remote work has increased the number of people who work either part or full time for a small company based in another country. Companies like Deel,which makes payroll systems for companies that have a heavy international employee base, have quickly become unicorns.
Talk to anyone who has set up international payroll and they will tell you how difficult it can be. Crypto doesn’t solve all of these problems (e.g., compliance and taxes), but it can solve those directly tied to sending money across borders. Deel announced crypto payouts in February, and I expect many more companies in this space to roll out similar features. A lot of people around the world want to be paid on crypto rails, and payroll tools are evolving to support this.
Crypto-Native Neobanks
There are millions of people today who want to keep the vast majority of their net worth on crypto rails. However, most banks don’t seamlessly bridge traditional banking rails and crypto. This creates a lot of UX challenges for those people.
Consider automatic, monthly credit card payments. This concept is very convenient, and also incongruent with crypto systems (which explicitly disallow 3rd parties from debiting a users account). If a bank understands that the customer is storing their assets on crypto rails, the bank should send an email to the customer with a link to send the payment amount. The user would just click the link and authorize the payment with their private key in a process that should take about 5 seconds from start to finish. You can imagine similar workflows around sending ACH and wire payments from a crypto wallet, etc.
Juno is building a bank that allows users to manage their money seamlessly across traditional and crypto rails. Over the next few years, these crypto-native banks will come to represent billions in spending, and will unlock more new uses for payments over crypto rails.
Real-Time Interest Payments
Most traditional banks pay interest monthly. DeFi protocols like Compound, Aave, and others pay interest in real time. For many users, this is a huge draw. Being able to open an account, refresh the page 5 minutes later, and see a growth in account balance is psychologically powerful. Receipt of real-time interest payments can also be facilitated through streaming payments services such as Superfluid.
Online Communities
People want to connect with those who share similar interests. This desire has manifested over many online media over the last few decades, notably Reddit, FaceBook groups, game forums, etc.
The most pure expression of this is captured by what I like to colloquially refer to as “community chat box platforms,” such as Discord, Geneva, and Satellite. People love to chat, and they love to chat about shared interests. It’s only natural that they congregate around a community chat box for a subject of interest.
As more people spend more time in these communities, as these people build relationships and connect with one another, and as these communities collectively conduct more group commerce, more money will naturally flow. We expect a lot of these payment flows will route over crypto-native rails because it’s cumbersome to connect chatbox identity to myriad web2 payment rails. However, if you assume that everyone on the community chatbox systems already has a public key which can be used to receive value, then integrating in-app closed-loop payment flows is trivial.
Let’s talk payments
Since 2009, people have been dreaming of leveraging crypto rails for payments. We are finally ready for an explosion of crypto-enabled payments protocols and businesses.