The reluctant low hanging fruit: On-chain payments / Friederike Ernst

Transcript

hi guys you know all the five that are left good I talk about Unchained payments um and I am sure you've been around for you know a while so you know that um this has always this has been hailed as like the primary use case for crypto for a super long time right so basically what's crypto here for it's for payments somehow this has not really happened yet um and I will talk about why I think that is and how that is beginning to change so why is this there's actually a

surprising number of challenges if you want to do on-chained payments and I would actually go through them one by one um so the first one is uh scalability um why scalability because obviously if you don't have fully scalable systems and there's more demand than Supply then prices go up and for payments by and large you rely on the fact that payments are fairly cheap right so if you look at ethereum ethereum has reached the capacity of on average 1.25 million transactions per day this varies by day because there's no hard block size limit anymore so we basically just

just fluctuates a bit and transactions can consume uh various various amounts of gas so how much gases is consumed is more or less stable and the uh that that then corresponds to a fluctuating number of transactions there's fundamentally nothing on the ethereum roadmap that's going to change this number of just over a million transactions per day in the next three years okay so this is kind of what we'll have to deal with um for now so

um there was a meme going around on Twitter a while ago about Bitcoin and lightning and basically you know lightning proponents saying how lightning is going to fix everything and then people are kind of doing the math and kind of finding out that basically if every human on earth um were to start a lightning Channel at Birth and then close it again um 80 years later um that would still be too much for um the lightning plus Bitcoin blockchains so we laughed about this but the fact of the matter is ethereum and layout who's on ethereum aren't actually that much better so let's do some maths so this is the average transaction fee it's logarithmic so um what you want to

look at is the red line that's ethereum and you can see that the average transaction fee currently is like something between five and ten dollars fluctuates a little bit is this a this is here okay um this is on mainnet so obviously you'll say well but Layer Two is they're cheaper this is true their twos are cheaper so these are the current transaction fees I put this yesterday last night so this is pretty current data so here actually this was uh ethereum transaction fees were actually pretty uh pretty low and so the uh the transaction fees on edge use well

also fairly low but still significant so basically like just for sending eth like uh like around 10 cents or so um so why is this so on l2s the fees have to rise in lockstep with L1 because in the design of l2s it's inherent that they need to check in with the other one so basically they need to post a transaction to L1 and basically all on that cost gets um gets uh redistributed among everyone who kind of does transactions on L2 so basically if you're on an L2 you have to pay a fractional transaction to L1 as well

um and because they rise lockstep with ethereum if there's transaction spikes on ethereum there's also the fees also Spike on l2s and regularly they they rise above a dollar which is unacceptable for many use cases especially centered around day-to-day payments if you buy a coffee at the coffee place you don't want to pay a dollar in transaction fees 4844 is going to change that little bit so it's going to kind of increase um the uh the block space around tenfold and so basically it makes it 10 times

cheaper um and that will kind of last us a little bit until demand arises but a factor of 10 as you know in demand in blockchain metrics that's nothing right so if you do some maths look at ens names okay so say 10 of the word wanted to register an ens name that's 800 million names and basically just registering these names would take two years of ethereum layer one block time provided that ethereum does nothing else

right so second example um the global stock market so there's 45 000 publicly listed companies so obviously you assume that kind of most trading will kind of happen on l2s but every now and then they'll choose need to settle against each other and also like maybe somewhere else want to trade like directly against each other or another one um and that leaves you less than 30 transfers per per stock per day again this is not this is not even dealing with other people Regis registering their ens names this is again just

literally just stock market settlements on ethereum ethereum does nothing else now okay so clearly um uh basically payments aren't well suited to be on ethereum mainnet and also not really on Layer Two so scalability is a huge issue second problem volatility obviously in the beginning we thought it's fantastic we're just oil paying Bitcoin this not a particularly great idea as Nick explained to you in the last talk kind of you want something that's more or less worth the same today as it is

tomorrow um so people don't want to either get rid of it or huddle it um and that brings you to David coins stable coins segues you right into the next problem area namely regulation okay so um stable coins have been there have been quite a number of stable coins over the years you remember them so there's a I think the earliest one maybe maybe other than uh digital gold was mastercoin that's now Omni um that was launched 10 years ago then there was tether in 2014 X die sorry die in 2015 usdc 2018

um then busd in 2019 and also UST in 2019 obviously there's many more I'll kind of skip over them but you will notice even just looking at this list that some of them have not proved to be particularly stable and how stable Stables are this is sometimes difficult to determine even for people who are in principal experts and not just people who kind of wanted want to just spend something you know to get a coffee okay then there's also the standard denomination in USD that Nick thankfully already talked to you about so basically I will just skip over this um and they are currently under close regulatory

scrutiny okay no next problem save custody who here has ever lost private keys yeah me too okay so as you know when you onboard someone someone into this space um maybe to us it doesn't seem so crazy anymore but really it is really crazy right so you so you say okay you this is your phone you download metamask okay now now these are your 12 Watts the 12 words you have to write them down you cannot lose them not ever and you cannot show them to anyone not ever otherwise all your assets gonna be gone

this is a terrible this is a nightmare of an onboarding experience right so basically this barely works for us and we're kind of we're crypto natives this is not going to work for the next like 100 million people so basically what we desperately need is um account obstruction what does account abstraction mean account abstraction just means that every um every account is by default not in the UA but a smart contract account and that gives you a couple of really nice properties so what it actually lets you do is it lets you switch out the keys that actually sign for that account right so what you can do for instance is you can onboard someone

um and by just with the email address or log in with Google or whatever you want and you custody their keys for them right and if they then decide that you they don't want you to they don't want you to custody their keys anymore um they give the keys basically they they rotate the keys that you have out and put new keys in that they give that they either keep themselves in self-custody or that they give to someone they now like better okay you can also it also gives you things like social recovery um um then kind of oh yeah I mean social recovery and all other sorts of account um

um recovery you can you know put Guardians and basically the Guardians may not have access to your funds ever but basically if enough Guardians agree that this is really you and you have lost your keys it lets you it lets you kind of uh rotate in new keys um Okay so bottom line self custody is really hard so basically if you want someone to kind of spend money on chain kind of they currently need to deal with self-custody and um I think kind of making this easier and kind of making this more into a spectrum where kind of you have full right to kind of self-custody but you can also have someone custody and you can pick who Cassidy is for you and

basically just use something that works for you this in my eyes is super important okay next next question competition from existing payment providers so how to offer something with a genuinely better ux and I think this is something that we in this space tend to forget right so basically we kind of we have spent the last 10 years or so replicating systems that already existed and kind of made them well we say just as good but quite honestly usually they're paying to use okay so how do you actually offer a user who wants to pay something a better

solution than what they already have namely kind of cash or just you know using a credit card or debit card that they have and they want it anyways and that costs them nothing to use so okay I already I think I can skip this um the other side is the merchant right so the merchants actually pays the whenever you're too lazy to get out your cash the merchant actually pays like between two and four percent on every Visa or Mastercard transaction that you make um just you know for your convenience that you don't have to carry cash around so for the merchants there's actually a huge paying point but the merchant kind of has to take what the customer wants

to pay because often you know the two the couple of percentage points they're not um basically they're kind of a reason why a customer switches to a different provider um but they're not really worth that so basically yeah so basically the the fact that it comes with with overhead um the merchants often can't do anything again against I mean I'm sure you've seen these signs in like taxis or something like please pay by cash if you pay by credit card it'll cost me an extra four percent but basically it's all they can do to ask nicely because basically getting 96 cents on the dollar is often better than not getting anything at all okay so I've actually walked you through

all of the reasons that I think exist or many of the reasons may still be others um that we haven't seen Unchained payments actually happen in any really really significant way um remittance maybe being the exception okay so um I have two suggestions what we can do immediately and what you can use immediately to kind of improve that um the first thing is easy on ramping okay so currently how does it how does um how do payments usually work so if you want to pay on chain you kind of you have to deposit something into an exchange and the exchange basically then you send it to I mean if you send Fiat into an

exchange and then from The Exchange you send it to a self-custodial world then from there you kind of pay it's a little bit of pain so easy on ramping there's this project called monarium who of you has heard of monarium oh it's super nice fantastic that's maybe a quarter of you that's fantastic it's never happened to me before um fantastic so basically what monarium actually lets you do and it only works in Europe so I guess most of you are pretty lucky um it lets you give your wallet an iban okay so basically the thing that identifies your bank account and when you send Euros to that iban they magically show up in your self-custodial wallet as easy as that

often in you know in 20 seconds or something you send money to the ibane shows up in your wallet you can do the same um exactly the other way around so you can actually you can actually send a separate transaction from your wallet okay so you sign the separate transaction you put in other other things that you always put in like iban and receiver and uh reason you're sending it whatever and then you sign the transaction and off it goes into the regular payment rails okay and it does that at zero cost so what monarium actually does it IT issues a uh um a digital Euro um it's called Yuri

um and the basically it's backed one to one by deposits um that they hold in audited bank accounts um and basically the moment you actually send them the money into the bank account they uh Min the Euro then and there for you okay so basically you can actually see this here there's mine so if you want to send me money this is this is this is it so you can this is my blockchain address but you can also see that basically this is the iban it's a Spanish um uh it's a Spanish iban they're going to add more countries because apparently Germans really don't like having Spanish ibands but um yeah so basically this is this is the iban you send money here it'll show up in my wallet how nice is that

okay so um the second thing is safe custodial wallet sorry pardon me self-custodial payments so 2022 was the year of self-custodial wallets why was that so we saw the FTX crash Celsius sorry the Terra Luna Fiasco and then we kind of saw the episodes with Silicon Valley Bank with credit Swiss with Signature Bank and so on so a lot of people actually wanted to

serve custody so who their own crypto and self-custodial wallet providers like trezza and Ledger they reported a huge spike in demand during the um during the spike of this basically during the height of this crisis it was estimated that 15 million Bitcoins were actually moved from exchanges and into safe custody so if you think about if you think about the difference between a bank account and a self-custodial wallet um

if you bear this difference in mind basically what I will posit to you is the same for payments okay so instead of kind of paying with something that is at that point custody by someone else you actually custody it until you pay and this is It's called noses pay it's new so you can actually sign up for it now uh noticespay.com it's a little bit uh I mean you'll see it up here you can be the first person on the wait list these will actually roll out next month and what it actually does is this thing here that looks like a credit card and actually is a Visa credit card it's also

a hardware wallet okay so it actually stores a key on this card um and when you pay at the point of sale terminal like any literally any Visa point of sale terminal worldwide you tap it and in that moment your um your card so your Hardware wallet signs the transaction sending the funds to um signs the message sending these funds to an off ramp okay that transaction is registered by the payment provider and and said as you know this payment was received um and within seconds so just as long as it takes you with your regular Visa card

you can actually pay at any terminal it just gets taken out of your self-custodial wallet then and there um it takes around six seconds and um that's a lot better than some other Visa cards out there so 10 seconds is the limit that Visa access except so what happens under the hood um under the hood so basically Visa actually allows you to send one kind of uh it has one empty slot that you can send information in this is kind of where this signed message is being transmitted through the Visa protocol um and the hardware wallet is a key on a notice save or noses chain

um so basically that allows you recovery in in case of card loss so basically you if you lose your private key namely that card you can just rotate keys in and out and you can be issued a new um credit card and all of the transactions themselves also for um for um for transaction fee reasons happen on an edge one roll up or noses chain um and that's really it so basically it's I mean it's really easy like you can all do it you don't need to you know any training it's like using regular Visa card and I think that's beautiful good

thank you guys so you can also you can also find out more of course um we are hiring as always so check out our openings and we have our own conference um depcon we host it every year it's in September um it is in Berlin blockchain week so if you're up for that come join us for that and thank you very much for staying for this last Talk of the afternoon do I have time for questions are there questions hi hey Mona hi thanks for that

um just a question on diagnosis pay the last slide um you talked about loss what about theft is there a way to quickly react and switch it to yes you can roll or have limits or something yeah you can rotate the keys out hi um how do you moneram issues this Euro e thing um how do you see people using it because it's not there's very little use for your e anywhere in D5 today yeah um apart from their curve pool um that I know of at least so so how do

you see them how do you see users using it today yeah absolutely so there's fair so I think there's like 10 million or so in circulation so even from that you can see that there's fairly limited usage that's because um no one's really providing liquidity for this at the moment but yeah that that will change so I assume it'll be a lot more attractive to use it and I can tell you for instance that we in-house we actually use this um as one of our primary bank accounts just for payroll and so on because it's literally zero fees um regard regardless of kind of where you send the assets so um to us it's it's a fairly new product so basically um we we've um we've synced with the

monarium guys super closely so for instance things like um uh export of transactions that didn't exist when we when we first started using it in our accounting department obviously complained so um yeah so basically they actually had to go on chain they were super unhappy about it so but basically now you can just bike download it and you can bike upload kind of transactions and so on so yeah it's kind of it's being it's still um under active development obviously and I assume that there will be more liquidity in time um I guess these are all super cool but I guess they're they're probably all KY seed I'm guessing like is there what's sort of the future of

kyclist transactions yeah absolutely so basically um if you get a bank account on monarium you need to do light kyc this completely cracked otherwise they're not allowed to issue you and I ban likewise if you um if you want a noses pay um debit card you need to go through kyc this is correct so basically what actually happens is um that the entire layer is the layer tool on knows this chain um that kind of caters to noses pay will be fully um will be open to fully kyc people only so you can offer them whenever anyone can offer them but yeah to kind of on-ramp you need to go through kyc and I I totally understand that it's it's a pain point and I I understand the

frustration but this is this is kind of kind of if you if you're looking at kind of Bridging the existing payment system with kind of what we have built on chain in terms of terms of self-custody and so on it's unfortunately currently the price you have to pay sorry hi um so great talk like lots of problems with payments on on blockchains and so on but like do you have a vision where this is going or where it can go at the end or do you think we just have to explore like do small incremental steps and then end up at something that hopefully is uh decent yeah so um I think in use it in terms of user experience I think there's a lot we can

do and we can do now basically it just needs a lot of a b testing and I think we'll be okay in terms of kind of what we can actually give the user in terms of usability um from a from a from a regulatory perspective we're limited so basically yes we as as I said we kind of they have we have to do kyt we have to do kyc for the for the customers and so on but at least kind of what basically if you have a bank account you go through that anyways um but basically here basically the the user um the uh the situation for the user in my eyes is strictly better because you are actually in custody until you pay so

basically you gain something it's still it's still not not nice in ways that the banking system is also not nice but you definitely gain something you know coming from there hi can I refund my payment so if I ordered the pizza but uh driver didn't arrive can I get a refund no can you get a refund a refund yeah um yeah so basically this is yeah this is this is actually a sticky point so yeah there's a way of there's basically there's no way of doing refunds on these so basically if you if you didn't like your pizza you can't ask for yeah it's like yeah sorry another question if uh so my funds must be deployed on noises safe

right um so basically monarium works on uh no it doesn't need to be so basically on noises safe um no so basically the so basically notices pay automatically deploys the knows the safe for you so basically you're just given an address basically this is abstracted away from you for a monarium you can use it with a safe you can also use it with an eoa and it works on um so notice pay wax or nurses chain um which is also obstructed away from you but um monarium can give an eye band to your address on mainnet polygon and noses chain over here thank you uh on one of the last slides you uh have mentioned are the layer twos and gnosis so to plan

like to create the additional layer on top of yeah yeah there are several layer twos already on noses so basic gnosis is um a credibly neutral layer one blockchain that's just as you connected to ethereum so um gnosis actually has layer twos built by exactly the same teams that are building them on on uh on ethereum deployed on gnosis um and gnosis itself has 120 000 validators which is like 20 of what ethereum has so um yeah so basically you have the same issues with the layout who's only on noses as you have with the layer tools on ethereum namely that kind of they

have centralized sequences and so on but in principle the infrastructure is more or less identical thank you hi it's the Visa card integrated with agnostic safe yes so basically the Visa card um the um the key that's on the hardware wallet that is at the same time the Visa card

and that is one of the assigners of a gnosis safe and uh what what if the diagnostic save is multi-sync does it does it affect the payment somehow or what if the nose is safe is what mold is multi-sake Yeah so basically it's a one out of two so basically any key okay is what I want to do so you can be two out of two yeah but I mean transaction you don't need no you don't need to your device doesn't need to approve so basically this is we've seen this before so basically where kind of you have to it's de facto 2fa this is not that so basically um here it's exactly like on your regular credit card so basically if

you're if so I'm not sure what the limit is here but in Germany so we see if you um spend more than 50 euros then you have to put in a four digit PIN and it's exactly the same and otherwise it's just tap I can't hear it on live I was just wondering if you're also planning to integrate other off-rams on-ramps or is it just monarium at the moment in principle we're happy to integrate um whoever wants to be integrated so I

think there's no um there's no reason why it's only why it should only be monarium so we know in monarium to be trustworthy and uh and reliable but basically any other off and on-ramp we're happy to kind of onboard as well okay and we're working on a second version that will also work with Google and Apple pay so obviously this currently you actually have to tap it um but yeah so uh they will also work as virtual wallets hey um uh I was I'm just wondering what the process was like to interact with Visa like the Visa Network where it's I guess it's not a permissionless uh um I like that description it's not no it's

definitely not permissionless it's probably also not an open standard and did they like interacting with you or how did it work um I don't know whether they liked interacting with us but um basically they they have a set of rules that they follow in terms of kind of issuing these um uh the the memberships that's kind of what what it's called and yeah you just have to adhere to that this is basically the same than sold pay or um yeah so basically so I pay is one of the issuing Partners on on the um on the issuance sides site so

basically notices pay um currently does not hold so basically if you go into payments it's a nightmare so basically there's like there's a stack of like 20 companies that sit on top of each other and they all need some sort of license and what not so basically yeah we kind of there's there are providers who do that for us in the back end and so I'll pay is one of them cool thank you so much for coming to this talk and asking so many questions I love that [Music]