On June 1st, Visa experienced a major malfunction, which resulted in thousands of users across Europe being cut off from the largest international payment system. Holders of credit and debit cards, as well as representatives of various businesses, could not send or receive payments between 2:30 PM and 10:00 PM. According to the Financial Times, the official cause of the failure was a system malfunction of the hardware that the company has yet to report of to the Parliament of Great Britain. In light of this incident, the crypto community again stressed the vulnerability of centralized systems, noting that such crypto exchange payment networks as Bitcoin have been working without failures since their launch. We examined the key principles of the operation of the two payment systems, Visa and Bitcoin, and learned whether the world is ready for the transition to decentralized solutions offered by cryptos.
Traditional Payment Systems
Visa is the largest international payment system that conducts about 150 million transactions a day, while its network capacity is 24,000 transactions per second. Visa cards are accepted for payment in 200 countries of the world, and the company's annual turnover is $4.8 trillion. But, like any centralized service, the entire Visa payment system is based on the work of a group of private servers, which renders them vulnerable to system failures and potential attacks.
The process of how the transactions within such a payment system take place is described in detail by Carlos Domingo, founder of SPiCE VC and CEO of Securitize. According to Domingo, when paying for purchases using a plastic card or phone (via Apple Pay and Google Pay), information from the magnetic chip or phone is sent to the so-called “buffer processor,” which processes payment data from the seller and the bank serving the outlet. Hundreds of such processors around the world process transactions on a daily basis. The buffer processor then sends the received information to one of the international card associations (such as VISA International, MasterCard International, American Express, or Diners Club International), which in turn determines which bank the account is in, to which the buyer's card is attached. After that, information about the buyer's account is sent to the operator of the payment system, which verifies the information received with the data in the bank that had issued the card.
If the balance of the buyer's account allows them to make a purchase, the approved transaction is returned in reverse order: from the issuing bank to the payment system operator, then to the international card association and to the buffer processor, and then to end up with the seller and the bank servicing his or her trading premise.
Thus, several intermediaries are required to conduct the payment. Moreover, when it comes to international money transfers, the entire process can take several days, while each of the intermediaries charges a higher commission for conducting or confirming the payment.
Cryptocurrency Payment Systems
Bitcoin is a peer to peer payment system that utilizes a cryptocurrency of the same name and a transfer protocol that is entirely different from that of Visa. It is based on a decentralized distributed network known as a blockchain. This network operates as a kind of registry, where chronologically registered transactions are recorded. Each of the network members keeps a copy of it. This ensures a high level of network security and transparency of the complete transaction history, and also allows for conducting transactions without intermediaries. It is thanks to the blockchain that users can send and receive cryptocurrencies directly to each other. Moreover, since the launch of the primary blockchain in 2009, the Bitcoin network has maintained continuous operation for 99.99% of the time.
To conduct a transaction on the Bitcoin network, users need to have an address from which the cryptocurrency is sent, the address to which it is sent, as well as an electronic digital signature (EDS) with which the transaction is signed. The EDS involves the use of a private and public key, which is called asymmetric encryption. Thanks to this system, network users can safely send and receive encrypted messages (transactions) with cryptocurrencies.
Nevertheless, at the moment mass adaptation of crypto exchange payment systems, in particular, Bitcoin, is hampered by a key problem of scalability and low bandwidths of such networks. For instance, if Visa can handle up to 24,000 transactions per second, Bitcoin's maximum speed is 7 transactions per second. As a result, so-called mempools are formed in the network, or groups of unconfirmed transactions that are waiting to be added to the blockchain. Moreover, the scalability problem leads to network congestion, increased commission fees for transactions, and an increase in the time required to confirm the transactions.
Mass Adaptation Is a Matter of Time
Despite the problems of scalability, experts are sure that the introduction of decentralized payment systems is a matter of time. To achieve this, the members of the crypto community are actively working on solutions that will help in the development of this segment of the crypto market.
One of the most popular solutions was the Lightning Network protocol, which was conceived as an add-on for Bitcoin's blockchain. This protocol is a network of bilateral payment channels, according to which network users can conduct an unlimited number of payments without writing them to the blockchain account, as only the final balance gets written there. In this connection, the protocol became an alternative to increasing the block, as well as solving the problems of network scalability and low block capacity.
SegWit (Segregated Witness) is the second most popular offering, which reduces the size of transactions and increases network bandwidth fourfold. Also, the introduction of SegWit allowed Bitcoin Core developers to conduct a study of the effectiveness of the Schnorr multi-signature technology as a solution to Bitcoin's scalability issues in early 2018. This technology involves the grouping of digital signatures and keys, which will reduce transactions and speed up their verification, thereby solving the problem of low network bandwidth and high commission fees.
The coming mass adaptation of decentralized systems is also evidenced by the fact that many representatives of the financial sector are joining alliances and consortia, such as EEA, R3, and Hyperledger to develop and implement blockchain solutions in their sectors.
As for Visa, at the end of 2016, it announced the development of Visa B2B Connect, a decentralized solution for international corporate payments. The platform is scheduled for release in mid-2018. And also in May of this year, it became known that MasterCard patented its own "universal" blockchain-based solution that will help in managing business processes inside the company and will also be used for payment transactions. Moreover, according to CCN, over the past year, 12 of the 26 Chinese banks have integrated blockchain technologies.