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Web 3 Payments - World Changer

Crypto-based payments will change the financial world

The crypto and DeFi infrastructure will significantly alter what we think of as payments, and by that virtue, will also change our ideas on cash flow management.

The origins of crypto technology are rooted in the medium-of-exchange properties of Bitcoin. As the world "grew closer" with Internet adoption, we needed a financial and payment system that adapted. The idea of Bitcoin was that I can pay you something of value, without the need to ask permission from a bank.

Everything else - self custody, store of value, transparency - sprang from the desire to create a peer-to-peer payment system.

To start, we need to look back a little at how payments have evolved.

History Lesson

Obviously, there was a time when we bartered one good for another, and this had to assign value to each good or service. One cow is worth 10 chickens, which is also worth plowing my field.

Later came the idea of bank notes, where I could deposit my gold with a bank, and receive notes in return. The notes were bearer instruments, meaning I could exchange them for goods or services, and the receiver could then go to the bank that issued the notes, and receive the requisite amount of gold.

The ancillary to bank notes was the idea of being able to measure value at any moment.

Much later came checks. Basically, an IOU from the bank, which did require some trust on the part of the recipient. Rather than carrying a bunch of bearer instruments, I could just write my payment amount on a piece of paper. This kicked off a long process requiring banks to develop systems to communicate with each other to verify assets and move them.

Later still came credit cards, which allowed me to pay for my goods and services now, but settle up later. Of course, it also opened up the uncollateralized loans to the public. While a bank stepped in to pay the vendor, I was left to pay the bank back in a timely manner, or start to accrue interest. This introduced the bank as the intermediary in small retail transactions in addition to their role as institutional lender.

With the growth in Internet technology and adoption, we have seen more opportunities for payments. The credit card systems extended to debit cards, so my money moved straight to the vendor, without a bank and loan in the middle.

We also saw fintech apps and payment systems that more easily allowed me to move money from my bank to that of a friend or vendor - Zelle, Venmo, CashApp. Smart phones added to the ease, by allowing me to store credit and debit card information on my phone, and make payment by tapping.

All these changes in payment were meant to make it easier for me to pay for my goods and services, and easier for vendors to receive funds...and it worked.

I can pay for any goods or services, or just pay my friend back, with a tap of my phone.

The cost of that convenience...the processing fees charged to the vendors who allow credit or debit card payments, which usually amount to 2.5% of the price. Additionally, the access to credit cards has caused household debts to moon.

Along this path we still had to rely on banks to be connected to each other and process the transactions. After all, they are the keepers of our deposits. We also had to adhere to their fees, and their rules - they don't work weekends or holidays. This friction caused by banks creating and enforcing their rules also brings up the idea of settlement of transactions and funds.

When I use my credit card to pay for an espresso on Saturday, the coffee shop might not receive money into their bank account until Tuesday, at which time the net worth of the coffee shop increases by the price of my espresso from Saturday - minus 2.5%.

This is because, regardless of the easy front end - credit card, Apple wallet, Venmo - the back end of bank-to-bank transactions hasn't changed in decades.

So, Where Does Crypto Fit In?

As I mentioned early in this post, Bitcoin was originally created for peer-to-peer payments. I could pay for something with bitcoin, and because the Bitcoin network is responsible for not only processing the transaction, but also keeping track of the assets I hold, we don't have to go through banks. We can transact anytime we want, and the accounts are settled immediately. If I send bitcoin in exchange for coffee, the coffee shop has that increase in net worth immediately, verifiably, without the 2.5% charge.

Of course, this opens up a host of other problems we won’t to address now, like the need of the coffee shop to accept bitcoin, and therefore, have a wallet, or some way to easily accept. The process, however, has gotten easier through the use of QR codes. We also won't discuss the different security needs of a business or individual to accept crypto and hold it.

The volatility of bitcoin and other crypto assets doesn't lend itself to routine payments for goods and services, so we have developed stablecoins - crypto assets that hold their value at $1. We won't go into different types of stablecoins, and their stability mechanisms right now. But we will assume stability and trust for the sake of payments discussion. However, I do understand stability of these tokens is a risk.

Now, we have the ability to send crypto assets to each other pretty quickly and easily, the transaction is settled immediately and we can verify that our account values have changed, usually without the 2.5% fee or the need to borrow money for a short period of time.

This is already an improvement, which explains why Visa, Mastercard, PayPal, Venmo, and CashApp have all made inroads into utilizing the crypto infrastructure to facilitate payments.

Now...can we take that further?

Of course we can!

Enter Streaming Payments

We are now using crypto assets designed to be worth $1, and the important part is that those crypto assets are programmable.

So let's program them to move more fluidly. I can now move money in a stream over some period of time.

In recent years, we have seen the growth in a metric called MRR - Monthly Recurring Revenue. Businesses were trying to get us to pay monthly for some service, and we would gladly enter our account information and pay each month via program.

Streaming payments, from protocols like SuperFluid, is that, but on steroids. In fact, streaming payments will completely upend cash flow management.

Let's Get Real

I subscribe to a newsletter, and instead of paying monthly, I pay via stream. Every second, the publisher is receiving some small portion of the payment. For me, this isn't a big deal, but for the publisher, there is now a steady stream of income. It means they don't have to wait for a certain day of the month for money to be in the bank account. As we talked about earlier, they don't have to wait several days for settlement either.

When they have money streaming in, they could also stream it out - pay bills, hire contractors, etc.

There is no need to match up timing on payments, only match streams.

Streaming payments make sense for memberships as well, especially if we can couple the payments with some sort of NFT to prove membership. I can pay for my Wall St. Journal subscription via stream, so no more changing credit card info with a new card.

Now, imagine I get paid my salary via streaming payment. I'm no longer waiting for the 1st and 15th of the month to match up cash flows. As the money flows in, I can choose where my expenses flow out. Ideally this will be some sort of drag-and-drop UI. Since the payments are so transparent, I can easily glance and make sure I'm cash-flow positive. For salary purposes I, or my employer, can also send some payments toward taxes, retirement plan, health plan, etc.

Instant settlement and streaming salaries would be such a game changer for so many in the world, and especially for the underserved in the US. They wouldn't have to accept usurious fees to cash checks on the weekends to pay bills.

I know this isn't too much different from the current system or regular ACH or direct deposit. The main differences are the settlement, fluidity, and transparency. Some industries will have to make significant changes.

Insurance

When I make an insurance premium payment now, whether I do so monthly or annually, some of that payment is for a service not yet rendered. For example, when I pay my annual auto insurance premium in January, that is meant for the entire year's coverage. If I get in an accident and total my car in February, my coverage for the cas is also canceled for the rest of the year. So the insurance company had to pay me back the unearned premium. This leads to some accounting headaches for the insurance company, and for me.

If, on the other hand, I'm streaming my payment, I am paying for every second I have coverage, and nothing more. While the insurance company doesn't get to hold my money and earn interest, I also don't lose the use of my money and can better match up inflows and outflows.

Financial Services

Financial Advisors have been using the Assets Under Management (AUM) as their main revenue source for years. In this method, they take a small amount - usually less than 1% - from your account annually to pay themselves for their time and expertise.

The calculation for this fee is often a source of anxiety for the advisory firm, and a frequent area of audit by the SEC or state.

The questions usually arise about 1. when the calculation of asset value is performed, and 2) if the fee is in advance or in arrears.

A streaming payment from the account to the advisor will help solve some of those issues, and is transparent enough to not require a multi-day audit.

Micropayments

One of the unsung killer apps of blockchain technology and crypto is micropayments. Making payments utilizing the current banking / fintech system is not efficient on a small scale. The percentage taken out of a $2.00 payment to compensate all parties - processor, banks, wire transfer, etc. - is large, but can't really be decreased for those parties to survive. Therefore, paying for my $3 coffee with a credit card yields very little for the coffee shop.

Even further, it excludes so many in the world from participating in the economic system. Earning $10 for work performed over an hour might be significant for someone in many countries, but not if half is taken out to compensate providers. The ability to have microtransactions is imperative in building the protocols we need for the DeFi system to survive.

For example, Uniswap is able to charge a 0.03% on all transactions, whether they are worth $1 or $1 million. If they had to use the banking system, there would have to be a minimum charge that might render many swaps inefficient. This would negate so many transactions that being a liquidity provider wouldn't be as profitable, and thus may bring down DeFi.

Summary

Overall, the ability to make payments for various reasons, in amounts very large or very small, for very low fees, anytime we want, with instant settlement, in a form that is programmable, without having to ask a bank for permission to do so is extremely powerful. We will see use cases far beyond the ones I've addressed here, as more people the world over start using the crypto infrastructure.

#payments#defi