Greetings, curious minds exploring the realm of cryptocurrency. Today, let us embark on an exploration tour to the intricate processes underlying crypto acquiring. Unlike traditional transactions, where a user and their bank confirm a transaction, the crypto world introduces a fascinating paradigm shift, involving parties that would never be part of a deal in a conventional finance world. Join us as we delve into the discreet world of deposits, holds, and withdrawals, unraveling the distinctive features that set traditional and crypto acquiring apart. Secure your digital key and join us on the way into the heart of the crypto landscape.
The bigger picture
Let’s start with the general business logic of the crypto acquiring process and see how it differs from what we usually see and do with fiat money:
Stage 1. Deposit
Users receive unique payment details usually containing wallet information, memo ID (if supported by the blockchain), and payment amount. There’s usually a payment deadline as the seller (not the acquiring platform!) takes on some exchange rate risks, freezing the rate until the deadline. As users transfer funds, the acquiring platform awaits a certain number of confirmations or ‘block height’. Here lies one of the major differences between conventional and crypto flows. Traditionally, a transaction is confirmed by the user and their bank. But in the crypto world, when a user initiates a transaction, it is broadcasted to the network and included in a pool of unconfirmed transactions. Miners or validators on the network then compete to solve a complex mathematical problem through a process known as mining.
Once a miner successfully solves the problem, they create a new block of transactions and broadcast it back to the network. When the majority of nodes in the network reach a consensus that the new block is valid, the transaction within it is considered confirmed. The number of confirmations indicates how many blocks have been added to the blockchain after the block containing the transaction. For example, if a transaction has six confirmations, it means that six subsequent blocks have been added to the blockchain since the block containing the transaction. Generally, a higher number of confirmations increases the security and irreversibility of the transaction. As a sufficient number of confirmations have been granted, funds are credited to the seller’s wallet and payment notifications are sent, essentially updating the coin count in the database.
Stage 2. Holding
This phase serves as a waiting area for coins until a withdrawal request from the seller is received. It’s crucial to note that what the seller sees on their acquiring platform account may well differ from the actual blockchain process. I will address this topic further on, as I provide further details of the process in different crypto networks. Meanwhile, as the acquiring platform profits from its operations, it sends this profit to its cold wallets. However, profit transfer and distribution are beyond the scope of this article.
Stage 3. Withdrawal
Sellers initiate withdrawal requests or these requests are generated automatically based on a pre-defined schedule or triggered by specific events, like accumulating a certain sum on the platform. Funds are then deducted from the seller’s account, and the transaction is sent to the blockchain mempool.
Zooming in the networks
Now, let’s delve into the specifics across different blockchains—BTC, ETH, and XRP—chosen for their leadership in their respective network types.
Account-Based Networks. One key = one wallet.
There are two implementation options:
1. Ethereum-Like Native: for example, ERC-20 for ETH or BEP-20 for BNB
Each payment generates an address in the blockchain. Naturally, all private keys are stored by the acquiring platform. The acquiring platform tracks incoming payments, waits until the necessary block height is reached, and then sends payment notifications and credits the seller’s account. Periodically, depending on the acquiring platform’s business processes, funds are transferred to a bucket.
It’s advisable to initiate fund transfers during periods of minimal fees or send transactions to a mempool with a minimal commission. The platform typically has no urgency, so it can afford choosing the right time and/or destination for the transfer. Consequently, holding occurs within our bucket. Fund withdrawal is a transaction to withdraw funds from the bucket to the user-specified wallet.
2. Etherium-Like Non-Native: for instance, USDT/USDC in ERC-20/BEP-20 networks
Non-native tokens in such network are abstract smart contracts. A transaction is essentially a call method for these smart contracts. Each method call in a smart contract requires the native token. However, these tokens are absent from our wallets. Therefore, it’s necessary to transfer a small amount of the native token to order wallets to cover the transfer fee to our bucket. The token transfer itself also incurs a fee on our part.
To optimize costs, wallet reuse is an option after the previous order on the wallet has been processed. Moreover, the same wallet can be used for orders in different currencies, as the fee only needs to be transferred once. Costs of fund transfers from constant addresses can be reduced using various smart contracts enabling bulk transfers. Some networks allow transfers facilitated by fees deducted from the recipient’s wallet.
XRP
Account-Based. One key = one wallet. However, there’s also a Memo ID (or memo tag).
All orders are issued to the same hot walled, each specified with different Memo IDs. Payment differentiation occurs based on these Memo IDs. Storage and withdrawal processes generally mirror those of Ethereum.
BTC-LIKE
UTXO (Unspent Transaction Output). One key = multiple wallets.
From a single key, we generate a new wallet for each payment. All funds are stored in these wallets and await withdrawal requests. At the time of withdrawal, we locate the necessary amount in these wallets and form a single withdrawal transaction. Due to Bitcoin blockchain unique operating features, it is necessary to empty all wallets involved in a transaction completely. Thus it may be required to transfer the change to a new or existing wallet.
The choice is yours… or maybe not
As you see, there are distinctive differences not only between traditional methods but also within the diverse realm of crypto acquiring. Traditional transactions, anchored in user-bank confirmations, offer comfort of familiarity and stability. On the flip side, crypto transactions present a fascinating array of choices within their own domain. Ethereum-like native transactions provide efficient payment tracking and periodic fund transfers, making them suitable for streamlined operations. Etherium-like non-native options introduce abstract smart contracts and cost optimization possibilities, allowing for versatility in transaction handling. Similarly, XRP’s account-based system stands out for its meticulous payment differentiation. Lastly, UTXO, while requiring comprehensive wallet management, offers increased privacy and security. The choice among these methods depends on specific needs, preferences, and desired outcomes. Last but not least, your choice may well depend on the history that your company or your potential buyers have with cryptocurrencies. Sometimes process familiarity and/or popularity of a specific currency within your market segment may predefine the optimal network and method choice.
Disclaimer 1: Not your keys = not your coins.
Disclaimer 2: This article is not financial advice.
Read Also: How Do You Find The Right Crypto Wallet?