Blockchain technology has revolutionized various sectors over the past decade, from digital asset investment to smart contracts and new ownership models for the creator economy. One of the most transformative applications of distributed ledger technology (DLT) is blockchain payments, which offer businesses faster, cheaper, and more accessible methods of transferring money globally. However, many businesses still find the concepts of blockchains, keys, miners, and mempools complex and distant from traditional banking systems. This guide aims to demystify blockchain payments, providing a clear, step-by-step explanation of how a transaction is completed on the blockchain and what the crypto payment experience entails. For businesses looking to integrate blockchain payments easily, Transfi Payments offers a seamless solution.

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Distributed ledger technology (DLT) forms the backbone of blockchain systems. Imagine a decentralized database where data can be securely shared and validated by multiple participants. This structure eliminates the need for a central authority, such as a bank, ensuring transparent and tamper-proof record-keeping. By enabling faster, more secure, and cost-effective transactions, DLT has the potential to revolutionize the payment industry, making financial services more accessible to everyone.

What is a Blockchain?

A blockchain is a specialized form of distributed ledger technology (DLT), but it is important to note that not all DLTs are blockchains. This technology utilizes cryptographic hashing and consensus mechanisms to form a linear, tamper-resistant chain of data blocks. In the realm of cryptocurrencies, blockchains serve as decentralized ledgers, meticulously recording every transaction ever conducted. Notable examples of blockchains include Ethereum, Solana, and Bitcoin.

DLT, as a broader concept, encompasses a variety of technologies and architectures, including blockchains, directed acyclic graphs (DAGs), and more.

What is Cryptocurrency?

Cryptocurrency, often referred to simply as crypto, is a digital currency intrinsic to blockchain technology.

It functions as a medium of exchange across a decentralized network of computers, free from the control of any single entity like a bank or government. Examples of cryptocurrencies include Bitcoin (BTC), Ethereum (ETH), and stablecoins such as Tether (USDT). When you own cryptocurrency, such as Bitcoin, you possess a bitcoin address with a balance recorded on the blockchain. Cryptocurrencies leverage the infrastructure of distributed ledger technology (DLT) to facilitate secure, decentralized, and transparent transactions.

What are Miners?

Miners are the powerhouse participants in a blockchain network, employing their formidable computing capabilities, known as ‘hash power,’ to validate new blocks. Different blockchains adopt varied methods for this process, with the most prevalent being ‘proof of work’ (PoW) and ‘proof of stake’ (PoS).

In PoW, miners engage in a computational race to solve complex mathematical puzzles. The first one to crack the puzzle earns the privilege of adding the block to the chain. Blockchains like Bitcoin, Litecoin, and Dogecoin utilize this method.

Conversely, PoS involves miners pledging a ‘stake’ of coins for a chance to be randomly selected as the block validator. The more coins staked, the higher the likelihood of being chosen. Blockchains using PoS include Ethereum 2.0 (ETH2), Cardano, Solana, and Tezos.

Regardless of the consensus mechanism, miners who successfully validate new blocks are rewarded with a combination of newly minted coins and transaction fees. The primary role of miners is to secure the network. The excessive cost of mining serves as a deterrent against malicious activities and spam.

What are Nodes?

Nodes are the vigilant sentinels of a blockchain, overseeing and validating every transaction. These computers are dispersed globally, each maintaining a complete copy of the blockchain’s ledger. For instance, Bitcoin nodes can be found in diverse locations such as Malta and the UK, all holding identical copies of the Bitcoin ledger.

Nodes communicate with one another to ensure they all recognize the same transactions, achieving a consensus on the legitimacy of payments. Their collaborative verification process upholds the integrity and accuracy of the blockchain, ensuring a unified and trustworthy record of transactions.

Public Address vs. Private Keys

In the world of blockchain, coins move between users via public addresses, which are akin to bank account numbers. These addresses are unique strings of cryptographically generated characters, often presented as QR codes for mobile convenience.

For instance, an Ethereum public address might look like this:

0x9581d30a99e23e75330cf1fc4a537dbd3f56d226

Depending on the blockchain network, a public address might remain static, as with Ethereum, or change with each transaction, as with Bitcoin. Additionally, every transaction is accompanied by a unique transaction hash, serving as proof of validation and addition to the blockchain, thereby enhancing user privacy.

Private keys, on the other hand, are the keys to your crypto vault. They grant access to and control over the funds sent to your public address. Unlike public addresses, private keys must remain secret, much like a PIN number for a bank account. If someone gains access to your private key, they can take everything you own.

To manage private keys, most people use a mnemonic code—a sequence of 12-24 words generated by their wallet provider. These codes are cryptographically derived from the private key, making them easier to remember while maintaining security.

Types of Cryptocurrency Wallets

A cryptocurrency wallet is essentially a fusion of a user's private key and public addresses, both crucial for viewing balances and conducting crypto transactions.

Creating a new crypto wallet is like forging a new set of keys—one public, one private—thereby establishing a new user on the blockchain. Various applications exist to simplify wallet management, allowing users to handle multiple types of cryptocurrencies within a single wallet or maintain separate wallets for each currency.

Two Main Types of Crypto Wallets

Custodial vs. Non-Custodial Wallets

Custodial Wallets: Managed by third parties, often crypto exchanges like Coinbase or Binance. In this setup, the third party holds the private key, effectively owning the cryptocurrency.

Non-Custodial Wallets: Here, the user holds the private key and thus owns the cryptocurrency. However, losing the private key means losing access to the crypto, and anyone with the private key can access and transfer the funds.

Hot vs. Cold Wallets

Hot Wallets: These are online wallets, easily accessible but reliant on the security measures of the provider.

Cold Wallets: Physical hardware devices, about the size of a USB stick, that can be secured traditionally, such as in a safety deposit box or bank vault.

Just like in traditional banking, it is practical for users to have different wallets for savings and everyday spending. Typically, a 'cold' wallet is used for savings, while a 'hot' wallet is used for convenience in daily transactions. Merchants might also employ a cold wallet for balance sheet assets and a hot wallet for operational expenses and customer payouts.

Step-by-Step Blockchain Payment Process

Initiation: A user broadcasts a request to send cryptocurrency.

Verification: A node receives the request and verifies it by communicating with other nodes.

Mempool: Verified transactions are placed in a mempool, awaiting selection by miners.

Mining: Miners solve cryptographic puzzles to earn the right to add a block of transactions to the blockchain.

Network Consensus: Other nodes add the new block to their copies of the blockchain, verifying its accuracy.

Completion: The transaction is complete, witnessed by thousands of nodes globally, and publicly verifiable.

Want to integrate blockchains with your business? Here’s a complete guide for businesses to integrate blockchain seamlessly.

The Blockchain Payment Journey: What the Payer Experiences

1. Checkout: Choosing Crypto

At checkout, the merchant offers a crypto payment option. The customer, intrigued by this modern payment method, decides to go the digital route.

2. Selecting Currency and Confirming Exchange Rate

The customer picks their preferred digital currency, agrees to the current exchange rate, and receives the merchant's public address—a unique string of characters, often presented as a QR code for convenience.

3. Sending Funds

Opening their crypto wallet, the customer sends the required amount to the merchant's public address, including the blockchain’s processing fee. It is a seamless transfer from one digital wallet to another.

4. Transaction Verification

The transaction request is broadcast to the blockchain network. Nodes, the vigilant overseers, check to ensure the customer has enough funds to complete the payment.

5. Awaiting Validation

The transaction is then added to a block, waiting for miners to validate it. These miners, equipped with powerful computers, race to confirm the transaction.

6. Approval by Nodes

Once a miner validates the block, it needs certification from at least three nodes. This multi-step verification ensures the transaction is legitimate and secure.

7. Completion and Recording

Finally, the transaction is completed and permanently recorded on the blockchain, an immutable ledger. The customer sees confirmation, knowing their payment journey has successfully concluded.

For businesses looking to buy and sell digital assets seamlessly, Transfi Ramp offers a comprehensive solution that encompasses all these benefits and more.

How Can a Payment Provider Support You?

A payment partner can transform your crypto payment process, enhancing both ease of acceptance and user experience:

Optimized Checkout Experience

• They can refine your checkout page to boost conversion rates, highlighting the most popular cryptocurrencies prominently for quick and easy selection.

Competitive and Secure Exchange Rates

• By securing and holding competitive crypto exchange rates, they ensure you can offer guaranteed pricing to your customers for a set period, adding a layer of certainty to each transaction.

Hassle-Free Crypto Handling

• Providing a dedicated wallet for customer payments means you will not need to hold any crypto assets on your balance sheet, alleviating the burden of managing and securing these digital assets.

Seamless Currency Conversion

• They can handle the conversion of received cryptocurrencies into fiat currency, depositing the converted funds into your bank account after deducting any applicable fees. This simplifies the process and ensures you receive payments in your preferred currency without the complexities of crypto trading.

Optimized Checkout Experience

• They can refine your checkout page to boost conversion rates, highlighting the most popular cryptocurrencies prominently for quick and easy selection.

Competitive and Secure Exchange Rates

• By securing and holding competitive crypto exchange rates, they ensure you can offer guaranteed pricing to your customers for a set period, adding a layer of certainty to each transaction.

Hassle-Free Crypto Handling

• Providing a dedicated wallet for customer payments means you won’t need to hold any crypto assets on your balance sheet, alleviating the burden of managing and securing these digital assets.

Seamless Currency Conversion

• They can handle the conversion of received cryptocurrencies into fiat currency, depositing the converted funds into your bank account after deducting any applicable fees. This simplifies the process and ensures you receive payments in your preferred currency without the complexities of crypto trading.

Still some doubts in mind? Have a look at “Questions to ask before investing in blockchain projects.”