The Rise of Blockchain Payments: Cryptocurrency and Beyond
- All, Insights
Fast and reliable financial transactions play a pivotal role in efficient business operations. Technological advancements have opened new opportunities to optimize payment processing. One such advancement is blockchain technology.
Blockchain payments are faster, more cost-efficient, and more transparent than conventional digital payments. Additionally, blockchain payments are known as highly secure, with a minimum risk of payment data leakage. Blockchain payment processing is increasingly used by businesses worldwide. The blockchain market is projected to reach $94bn by 2027, which is almost 13 times more than in 2022. Banking and financial services, retail and e-commerce, and government organizations emerge as the main blockchain users.
It is obvious that blockchain technology is in a strong position within the fintech market. This article explains how blockchain payment works and how it can be applied in business.
What is blockchain?
Blockchain is a decentralized data storage based on a subsequent chain of blocks. Each block contains a certain portion of data and hashes from the previous block. This means that the data in each block is cryptographically linked with the data in the preceding block.
Changes made in any blockchain block require recalculating the hash in that block. This, in turn, requires recalculating the hash in the next block and so on down the chain. Thus, a change in one block leads to changes in all blocks of the blockchain. Those blocks are located on multiple machines worldwide. Meanwhile, massive computing resources are needed to recalculate hashes and change data in each block. Given that, it is almost impossible to change data in the network.
There are two types of blockchain: public blockchain and private blockchain.
- Public blockchain is available to anyone. This means that any user who wants to become a participant of the chain can do so.
- Private blockchain is available to a limited number of participants. Special permission is required to get into such a chain.
Blockchain vs. cryptocurrency
The notions of blockchain and cryptocurrency are often used interchangeably, but this is fundamentally wrong. Even though blockchain and crypto have common features, they are distinct concepts.
The main difference between blockchain and cryptocurrency is that the former provides the technology for data recording, while the latter utilizes this technology to run decentralized transactions.
In essence, cryptocurrency is a digital currency used in a decentralized network of users. It is called crypto because it utilizes cryptography methods to check transactions and create new cryptographic units.
Cryptocurrency serves transactions that run on a public digital ledger, which is blockchain. The transaction data is stored on specialized computers within the ledger. Crypto transactions occur directly between transaction participants without intermediaries, such as banks.
To clarify the blockchain vs. cryptocurrency difference, think of blockchain as an infrastructure that enables a specific way of data recording; at the same time, think of cryptocurrency as an application built on top of this infrastructure. Such an application would use blockchain capabilities to run monetary transactions in a new, more secure way.
What do blockchain payments mean?
Blockchain payments mean payment transactions executed with the help of blockchain technology. This includes blockchain cross-border payments, domestic payments, remittances, P2P transfers, etc.
Notably, blockchain transactions do not necessarily rely on cryptocurrency. Traditional national currencies, such as the US dollar or Euro, can be utilized in blockchain money transfers.
The main difference between blockchain payments and traditional payments is that the former uses digital currencies and no intermediaries, while the latter involves central financial authorities. The decentralized nature of blockchain payment solutions makes monetary transactions more secure and less expensive for businesses. That is why companies are increasingly adopting them to streamline operations and reduce costs.
How blockchain payment systems work
Blockchain payment systems work based on a chain of connected blocks containing transaction information. The new block is added to the chain when a new transaction is initiated.
Payment processing using blockchain occurs in four steps:
Once the transaction is confirmed, it cannot be canceled. Information about the transaction is recorded in all the subsequent blocks. This prevents the risk of changing it by cybercriminals.
How businesses can enable blockchain in payment processing
Businesses that want to integrate blockchain payment technology simply need to select a blockchain-based payment gateway or blockchain payment processor.
Typically, a blockchain-based payment provider configures blockchain transactions, so no effort is required from the client side.
Once everything is set up, the company can process blockchain payments similarly to how it processes traditional digital payments.
Below is a typical flow of cross-border payments using blockchain used by banks:
- The customer A creates a payment of $500 from their bank in the US to customer B’s bank in Spain
- Once customer A’s bank approves the transaction, the sum is deducted from the customer’s account
- The deducted sum is sent to the bank’s pool account and is converted into the cryptocurrency of your choice
- The sum in cryptocurrency is then sent to the blockchain payment network you connected and converted into Euro
- The sum in Euro is credited to customer B’s bank account in Spain
What challenges can blockchain payments solve?
81% of businesses believe blockchain technology is easily scalable and admit it is widely used in various areas. Mass adoption of blockchain in finance is not surprising because it solves different challenges for businesses, including the following:
- Dependency on centralized financial institutions. Blockchain payments occur in a decentralized ledger, which the transaction participants control. No intermediaries are involved in the transaction processing, and no lengthy approval procedures are needed.
- Transaction security. Payment information is the prime target of cybercrime. Storing transaction data in different blocks of the chain makes it impossible to replace transaction data and access sensitive payment information.
- Lengthy processing time. Traditional transactions, especially international ones, can take from several hours to days. With blockchain for payment processing, you can significantly reduce payment time and approach instant processing.
- High transaction fees. All intermediaries involved in a financial transaction charge fees from transaction initiators. Using blockchain for payments, you as a business will deal with one intermediary – a blockchain payment provider whose commission is much lower than that of traditional financial institutions.
- Lack of transparency. Traditional payment systems do not always provide sufficient information about how the transaction progresses. Blockchain technology in finance provides a transparent and immutable ledger to easily track the status of a payment.
Why consider blockchain payments: top 5 benefits
Blockchain and finance make a powerful duo that handles efficient payments. Blockchain benefits for organizations that conduct financial transactions are obvious:
1. Decentralization
Blockchain does not have a single point of control. Thanks to this, transaction participants do not depend on a particular financial authority.
2. Transparency
Transactions on the blockchain are visible to authorized participants, simplifying monitoring and the verification process.
3. Immutability
A ledger in blockchain cannot be changed or deleted, which is why blockchain transaction data is highly accurate.
4. Speed
The system does not require intermediaries, enabling near-real-time transactions even when it comes to cross-border payments in the blockchain.
5. Efficiency
Blockchain payments have lower fees compared to traditional financial transactions thanks to their decentralized and bank-independent nature.
How banks can introduce blockchain-based payments with the DCM Platform
Blockchain payments revolutionize financial transactions by making them faster and more efficient. As leaders in payment technology, banks cannot ignore payment innovations; otherwise, they risk being beaten by competitors.
Modern customers want to send and receive money quickly and effortlessly, even when it comes to cross-border payments. Blockchain technology already makes this possible, so banks actively look for opportunities to integrate it into their payment ecosystem.
DCM Platform is an innovative financial message processing solution that connects traditional financial systems with modern technologies, including blockchain. It empowers regulated institutions to unlock new business models, offer next-gen customer experiences, and operate more efficiently with instant transactions and better asset liquidity. DCM offers an interoperable SaaS platform that seamlessly integrates with any banking infrastructure, eliminating the need for custom developments and legacy modernization.
Reach out to DCM experts today to discover new opportunities for your strategic growth. See our platform in action during a free demo session to confidently plan the modernization of your banking operations and offerings.
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