What Are Web3 Payments?
A Web3 payment is the transfer of cryptocurrencies from one party to another in exchange for goods and services. With Web3 payments, people can conduct business without having to go through an intermediary such as a bank. While traditional payment solutions rely on trusted intermediaries to make transactions, Web3 payments use decentralized peer-to-peer systems.
Web3 payments are the latest point in the evolution of the payments industry. Traditional payment systems have had problems with long settlement times, high transaction costs, and fraud, particularly as it relates to cross-border payments. The Web3 payments industry uses crypto and blockchain to offer a faster, cheaper, and more decentralized means of making transactions.
Why Web3 Is the Future of Payments
Web3 payments are exciting for both fintech entrepreneurs and general consumers. From a business perspective, Web3 payment solutions have a much lower overhead than traditional payment systems. And users benefit from Web3 payments because they’re flexible and transparent.
Many merchants and users are interested in using Web3 payments. In 2021, 63% of merchants in financial services and healthcare and 80% of merchants in luxury goods were willing to accept cryptocurrency payments. Below are some reasons why Web3 payments will take a central stage in the payments industry.
1. Democratized Access to the Global Economy
About 1.4 billion adults globally are unbanked—meaning that they do not have access to a bank account and are disconnected from the global economy. Even for many people that have access to financial services, the level of access depends on their location. For instance, while PayPal is available in more than 200 countries, users in some regions can send but not receive money “due to the complexities of global finance.”
In other countries, people may have access to the global economy, but live in economies subject to hyperinflation, limiting their ability to participate. Others may live under regimes where governments or financial institutions can halt access to financial services with little regard for the rule of law. For these reasons, the global financial system as we know it is imperfect.
Web3 payments provide a monetary system that solves these issues and levels the playing field for people around the world. With Web3 payments, there are no geo-fencing or IP restrictions; anyone from anywhere in the world can use the system. The system is also safe from government tampering and regional hyperinflation; it is a global system where everyone plays by the same rules. As a result, we are seeing high adoption of Web3 payments where they are most needed. For example, Vietnam has the highest crypto adoption rate in the world, in large part because it has a very high unbanked population.
2. Cheaper Unit Economics
Traditional financial institutions incur high operational and overhead costs to deliver their services, and they have to maintain physical offices across many cities and countries of the world. Western Union has more than 42,000 agent locations in the U.S. alone, for example.
These offices require significant human involvement, increasing operational cost, and in today’s markets, those operational costs have become a concern. In 2021, 61% of global banking executives said that cost reduction was a strategic priority for them, and that trend is continuing into 2023 with global banks already set to cut at least 6,000 jobs as part of measures to manage operational expenses.
These operational costs make it difficult to run a profitable bank. Indeed, McKinsey’s 2022 Global Banking Annual Review reports that “many banks in Europe were already unprofitable; only 25 percent of the 300 largest European banks were valued above book in 2021.” To offset those costs, traditional financial institutions pass some of the operational burden on to their users through fees.
In contrast, Web3 payment solutions incur relatively few operational costs. For one, they don’t need physical locations; the service is entirely digital. Anyone from any part of the world can use the service, provided they have an internet connection. Secondly, Web3 payment solutions are automated. Yes, they require a team to build and maintain the service, but Web3 payments are far more scalable than their traditional counterparts, further lowering operational overhead.
All this translates to better unit economics, which in turn means more competitive pricing for users and lower transaction fees. For example, in 2020, a company sent $1 billion in a Bitcoin transaction and only paid $3.54 in transaction fees, which simply isn’t possible in traditional banking infrastructure (both in the context of sending a transaction of that size and of having such small fees to process it).
3. Enabling Micropayments
Traditional payment providers have minimum transaction sizes because processing costs make it impractical to handle payments below a certain value. Merchants will pay an assessment fee, processing fee, and interchange fee when they accept credit card payments. These fees range in value, but in general, it doesn’t make sense to send payments worth less than a dime because the fees will outweigh the amount being sent in the first place.
Web3 payment solutions on the other hand can support microtransactions, which enable new forms of community engagement. For example, microtransactions can offer new incentive structures in social networks (see DeSo), advertising models (see Verasity and Brave), and video games (see CropBytes).
While crypto micropayments have limits today—transaction fees exist on blockchains and are determined by demand for block space—these fees will continue to drop over time as Web3 scaling solutions continue to evolve and gain adoption. Unlike traditional payment systems, Web3 payments have a clear path to supporting micropayments due to their natively digital nature.
4. Unified Transaction Costs
Today, when you send money to various places around the world, you incur remittance fees. The International Organization for Migration reported that the average remittance cost can vary quite a lot globally. It costs 4.1% in South Asia and up to 7.8% in sub-Saharan Africa—exceeding the 3% goal of the United Nations’ Sustainable Development Goals.
With Web3 payments, the cost of transactions is the same worldwide because all users transact on the same blockchain. This levels the playing field and offers a much better user experience. For instance, Bitcoin’s average transaction fee is currently about $0.72 per transaction, and that applies to everyone in the Bitcoin network.
This feature makes it easy for everyone to plug into the global economy and for businesses to offer a consistent and predictable experience for their users. It’s never been easier to send money anywhere in the world.
5. Protecting User Information
Seventy-one percent of data breaches in large organizations are motivated by financial gain and, unsurprisingly, as much as 47% of respondents in an Aite Novarica study have been victims of financial identity theft. Records of user data provide a treasure trove of information that hackers and scammers can exploit to perpetrate financial fraud. A data breach for a single payment application could expose the financial records of millions of users.
Web3 payments protect user information by enabling the use of wallet addresses that don’t have personal information associated with them. Of course, financial fraud is still possible in Web3: users may sign transactions they don’t understand (which drain their wallet) or the private key to their wallet is compromised.
But importantly, Web3 payments remove the risk of a centralized database. There is no centralized honeypot storing the payment info of every user. Users create an account with their wallet, and apps only store the public address; there is no other personal information stored within the app that could be compromised.
Of course, that user protection still has some limitations. For example, Web3 payments make the sender and recipient’s address, along with what was sent, public, which may introduce some risk, and crypto on-ramps and off-ramps (where users convert fiat into crypto and vice versa) often collect a lot of user information. However, there is research being done to increase the privacy of Web3, and as a whole, the space is still well positioned in the long run to protect users.
How Do Web3 Payments Work?
As mentioned, Web3 payment solutions enable users to pay for goods and services using cryptocurrencies, such as Bitcoin or USDT. The transactions are recorded on blockchain networks and maintained by a network of nodes.
To make a Web3 payment:
- Both sender and recipient set up digital wallets. The wallet could be a cold wallet (a hardware wallet that exists offline) or a hot wallet (a wallet that is accessible over the internet).
- The sender gets the recipient’s wallet address—an address is a unique string of letters and numbers identifying the recipient’s wallet, though there are .BTC and .ETH naming services working on making addresses more user-friendly.
- The sender initiates the transaction by sending tokens from their wallet to the recipient.
- The blockchain network verifies the transaction to confirm that it originated from the authentic sender, conforms to network rules, etc.
- The recipient receives the payment after the required number of network nodes have confirmed the transaction.
Users will interact with crypto on-ramp and off-ramp solutions to acquire cryptocurrencies in order to make Web3 payments. Crypto on-ramps enable users to buy crypto with fiat currencies like USD or EUR. Crypto off-ramps enable users to sell or convert the crypto back to fiat.
There are many existing on/off ramps today, including apps like MoonPay, Bitcoin ATMs, and P2P marketplaces. They enable users to move value from the traditional economy into the crypto economy and vice versa. Many developers and merchants also integrate payment gateways directly into their app or service, leveraging tools such as NOWPayments and Binance Pay, in order to streamline checkout and provide a better user experience.
Get Started Creating Web3 Payment Solutions
Web3 payments will see mainstream adoption, and there are many opportunities for builders to capitalize on that coming trend, including creating more tooling and services that can facilitate and accelerate the adoption of Web3 payments. There’s also unexplored territory in Web3 payments, such as building our credit systems, loan infrastructure, and more.
Whatever Web3 payment solutions you want to build, it all starts with writing smart contracts—the fundamental building blocks of Web3 applications. We recently wrote a guide on creating smart contracts to get you started on the journey to building Web3 applications.