Implementing Blockchain Payment Systems
Written by: Siddhartha Singh, Product Manager, TribalScale
I am still very new to various use cases of blockchain, but coming from a finance and product management background, I really believe that blockchain payment systems will be talked about a lot more frequently in the near future. But before diving deeper into implementing blockchain payment systems, we first need to understand what blockchain is.
What is blockchain?
First and foremost, blockchain is a database, comparable to a general ledger used by accountants to record transactions and payments. Here is how this comparison works:
- Every page in that ledger refers to a block that is connected to either the previous page or the next page number.
- With the above interconnectivity, it becomes possible to detect if any page has either been removed or deleted.
- Again with this interconnectivity, it becomes easier to arrange these pages and figure out any suspicious activity associated with the page.
- It also becomes impossible to tamper any previous entry in this book ledger without anyone noticing it as all these pages are built tightly interconnected to each other.
In blockchain, every transaction is recorded chronologically and can digitally log the entire lifecycle of money. Recording this automatically means blockchain technology vastly improves the efficiency of the process, reducing the time and cost needed to keep accurate records.
Community-based network — Blockchain is distributed, validated and maintained around the world by a network of computers. Instead of having a single authority such as a bank, a large community oversees the records in blockchain and no single entity or person has any control over these records. It is based on decentralized technologies and hence functions as a peer-to-peer (P2P) network.
Decentralized — Each transaction, or multiple transactions in a block, are recorded via independent nodes at the same time. Nodes can be on a smartphone, computer or a server, providing a complete financial record of every transaction and offering significant protection from fraud.
Immutable — Blocks cannot be altered in any way and no single node has control of the chain. Any changes that are attempted are immediately seen and corrected using a consensus mechanism across all the other nodes. Hacking the chain is not mathematically impossible but it is essentially economically unfeasible to change more than half the blocks to achieve the required 51% attack.
Improved security and automated implementation — The use of third-party intermediaries to validate transactions can be reduced or even eliminated altogether. Every financial transaction requires validation, from simple merchant shopping to investment banking, and they all need to be payed for “touching” the transaction. This is the area where many of the disruptors and innovators in fintech believe huge cost and time savings can be made.
Blockchain for financial services
From a finance perspective, blockchain technology has led to the introduction of Bitcoin, Ethereum and thousands of other cryptocurrencies, making it one of the most important innovations in finance today. It has also created the misconception that cryptocurrency and blockchain must always co-exist, although this is simply not the case. Several banks and insurance companies, such as JP Morgan and MetLife, are using their own private blockchains, without cryptocurrencies, to simplify, streamline and verify transactions and contracts.
Payments is an area of finance for which blockchain technology is ideally suited — tracking and verifying account payables/receivables, using smart contracts to automate processes and remove third parties, whilst also practically eliminating duplications and errors. However, early trials on public blockchains involved cryptocurrencies, which proved to be too slow and volatile for any practical solution. The increasing value of Bitcoin for example, has meant the transaction fee — payable in coins — has almost become prohibitive. Merchants and their banks were also very concerned about value swings during the transaction processing, as well as the privacy and transparency needed for fraud and money laundering prevention required in B2B transactions.
The conclusion was that fiat currency or credit were still the better solutions for these transactions. However, a permissioned blockchain solution without any tokens but with its significantly higher transactions per second (TPS) speed, privacy and adherence to regulatory frameworks can provide the ideal solution. Essentially, blockchain provides immutable verification that the transaction has taken place and confirmed by each party. For merchants and banks, the technology makes it safer, quicker and cheaper whilst leveraging the best elements of existing systems and processes and upgrading areas where step change improvements can be made.
With distributed, immutable features providing improved privacy, accuracy and security, it would be difficult to find a use case in financial services that would not benefit from adopting blockchain. Banking, lending, insurance, trade finance and asset management would all benefit from using the technology, which the finance sector acknowledges will save billions for banks and major financial institutions over the next decade.
How to implement a blockchain payment system
Before beginning, many things must be established to implement a blockchain payment system seamlessly.
Step 1: Define your project scope
While defining your project scope, you should figure out which approach you’ll be taking to implement a blockchain payment system. Some strategies you can adopt are:
- Building a new blockchain network and cryptocurrency.
- Developing a new token on a blockchain network like Stellar or Tezos.
- Using a crypto-payment gateway.
- Using Ripple or Stellar to implement a payment system.
Step 2: Determine your front-end technology stack
After defining your project scope, the next step is to determine your front-end technology stack. For deciding it, you first need to figure out what kind of front-end application you wish to provide your users and accordingly choose the technology stack for it.
For example, you may use Node.js for a web application or Swift for a native iOS application.
Step 3: Determine your blockchain platform
After deciding your front-end technology stack, you must choose a blockchain network platform. There are many blockchain network platforms with great benefits that you can use to implement the blockchain payment system in your business. However, it depends on the approach you choose.
If you plan to build a blockchain network and token from scratch, you should look into the functioning and pricing of some of the most promising blockchain platforms available.
If you plan to develop a new token on an existing platform, you should evaluate the available options before finalizing one.
Step 4: Initiate development
Before beginning with the execution, the final planning step you need to take is constructing a highly competent development team. Your approach will decide the members you’ll need in your team.
For example, if your strategy is to build a new token on Stellar, you will need dedicated Stellar developers in your team.
Some of the necessary members your development team should include are:
- Product Managers
- Blockchain Developers
- App Developers (based on your front-end application requirements)
- Quality Testers
Step 5: Execute your project
The execution of your project will differ according to your project scope. You can either carry out the execution yourself or hire a blockchain development company to help you out with the technicalities.
If you are planning to build a new blockchain network and cryptocurrency, then you must build:
- The infrastructure using a cloud-based Infrastructure-As-A-Service (IaaS)
- Your peer-to-peer network via the latest encryption techniques
- A consensus algorithm
If you are planning to develop a new token on a blockchain network like Stellar or Tezos, you must:
- Create your account and crypto-wallet
- Install and configure relevant tools and APIs
- Code your smart contracts
- Test your smart contracts
- Deploy your smart contracts
- Create crypto-tokens
If you plan to use a crypto-payment gateway, or Stellar or Ripple, you can set them up conveniently to send and receive crypto-payments.
Implementing a blockchain payment system is a highly technical task that requires expert supervision to ensure it has been performed effectively. Therefore, it is always preferable to hire a dedicated blockchain development company to help you perform the task so that you can ensure seamless and complete implementation.
Siddhartha is a Product Manager here at TribalScale with expertise in finance and blockchain-based products. His work is mostly focused on helping product teams find & prioritize high-potential ideas to work on, as well as achieve high velocity & quality by paying attention to details that matter. Outside of work, you can probably find him either hiking or experimenting with cooking.
TribalScale is a global innovation firm that helps enterprises adapt and thrive in the digital era. We transform teams and processes, build best-in-class digital products, and create disruptive startups. Learn more about us on our website. Connect with us on Twitter, LinkedIn & Facebook!