Exchange Brokers are a critical component of the system, paving the way for pay-how-you-want-it / receive-how-you-want-it capability. Exchange brokers (pay-in / pay-out / interchange) are open to both large and small participants. Watch the new video from All Things GRAFT about how the exchange brokers work

The Blockchain Payment solutions space has recently become a very hot topic, with both legitimate developments and a multitude of questionable claims. This article attempts to separate facts from fiction by outlining the lay of the land and Graft’s competitive positioning based on our view of the space.

With that in mind, let’s start with some definitions of key components of the electronic payment chain:

Payment processor — a service provider that processes a payment authorization, settles the transaction, and deposits a merchant payout.

Payment network — a network (or protocol) that provides an infrastructure for processing payments by coordinating the activity among multiple participating parties.

Payment gateway — a service that provides access to a payment network. These categories are important when deciphering what various providers are trying to do.

Centralized Payment Processors

The first class of payment solutions that are operating today are the centralized payment processors such as Coinbase and Bitpay. To enable crypto payments, these players simultaneously act as a payment gateway, a payment processor, and a clearing house. There’s nothing significantly wrong with this approach other than the fact that 1) it goes against the principles of decentralization; 2) it’s not a network, but rather a single entity; 3) it doesn’t scale very well because a payment processor needs to be able to handle an unlimited volume of the transactions and provide cross-border support; and 4) they represent a single point of failure and, more importantly, a single point of attack making themselves extremely attractive to hackers.

Solution Integrators

Integrators usually take existing blockchains and make them work for a specific use case. In the case of payments, they would be the “last mile” solution for making Dash, for example, work at the point of sale. Integrated solutions usually work okay but they only support specific point-of-sale systems, specific merchants, and have limited flexibility. They also decide who gets to participate in the ecosystem and they essentially act as a bank by fulfilling a lot of the clearinghouse functions themselves.

Payment Blockchains

This category includes legitimate blockchain projects that attempt to facilitate cryptocurrency payments. Dash and Ripple are good examples of payment blockchains, as they have made significant advances in facilitating the use of blockchains for payments. Dash implemented on-demand privacy and on-demand speed, whereas Ripple implemented inter-blockchain swaps.

Payment Networks

Payment network implies that there are multiple participants that are being connected together to form a network. In the case of traditional credit/debit card processing networks, they are bridging the issuing banks, acquiring banks, and payment processors into something that works in the context of a single transaction.

Source: PYMNTS.com

Processing a payment at the point of sale is a complex chain of events that includes obtaining pre-authorization or authorization from the issuing bank through the acquiring bank, putting funds on hold, releasing the payment for settlement, and, finally, clearing the payment by transferring the funds from the user’s issuing bank to the merchant’s bank account.

In the case of cryptocurrencies, use of such a network implies pre-authorization by verifying and placing funds on hold in real-time, transferring the payment from the payer’s wallet in the currency of their choice, converting that currency into the currency of choice for the merchant, and distributing the fees — all this is accomplished by accepting and coordinating services from service providers. This is exactly what a network like GRAFT is doing (while providing integration points for the point-of-sale applications, and in a decentralized manner to boot!).

There’s only one other network-like solution (other than GRAFT) that’s looking to resemble some fragment of a payment network: the Lightning Network. However, the Lightning Network concerns itself with instant currency swaps, without much regard for fees or compatibility with the merchant point-of-sale systems and processes. It also relies on pre-existing payment channels, making it suitable for repeat transactions as opposed to what you would see in the point-of-sale environment.

Suspects

Unfortunately, the blockchain space is rife with projects looking to capitalize on general lack of knowledge to pass themselves off as a legitimate payment solution in order to raise funds. They call themselves payment networks without building anything resembling a network, or a blockchain payment solution without having anything close to a viable solution. Their white papers are usually vague and full of buzzwords with little substance of the specifics of implementation. It’s often painful to watch millions, if not billions, of dollars being flushed into projects that show no signs of real technology or other innovation.

Here are some “giveaways” that can help identify suspicious projects:

• They are based on ERC20, EOS, or other smart contract tokens rather than dedicated blockchains.
  It’s very easy to create these tokens, but unless the project will act as a bank and take on the brunt of arbitrage in releasing the funds before they themselves collect those funds, there’s no way for them to overcome the speed issue. They are also subject to the underlying network fees that the token is built on.
• They advertise a “crypto credit card” that can be processed by a traditional credit card network.
  The impossibility here is that none of the traditional payment networks will license anyone but an issuing bank to accept network-backed payments. Unless the crypto credit card is backed by their own issuing bank which gets licensed by a traditional payment network (an unlikely scenario), this claim is quite dubious. Those that manage to pull off this feat will become a single-bank-backed, centralized solution, at the complete mercy of the local regulatory environment and traditional network continuous licensing.
• They are creating their own point-of-sale devices.
  It’s easy to private label a payment terminal found on Alibaba or similar manufacturer marketplaces. The problem with this is a merchant will not place a new terminal into the store without PCI and other rigorous certifications, not to mention that it would have to integrate with their point-of-sale software. Adding new terminal to a store, or especially a chain of stores, is an extremely difficult and expensive process which implies significant integration, certification, testing, and employee training costs that must be thoroughly justified.

Summary

There are distinct and important differences in payment solutions, with true payment networks providing the most open and flexible option for payment processing, while centralized and integrated processors can provide “point” solutions.

There is quite a bit of disinformation in the cryptocurrency payment processing space, so it’s important to understand how payment ecosystems work in order to tell fact from fiction as you proceed to navigate this treacherous market space.

GRAFT vs. Others

Pay-in, pay-out and interchange brokers (aka exchange brokers) are a critical part of the system, and will likely be quite lucrative!

True to decentralization principles we’re also working on making it super-easy to launch an exchange broker – straight from the wallet!

** Exchange brokers are subject to laws and regulations of their jurisdictions

New Video from All Things Graft explaining GRAFT Super-node and Real-Time Authorizations (RTA) protocol! Thanks Jose!

FOR IMMEDIATE RELEASE

About the Patent

The non-provisional patent application covers various facets of the network, but perhaps most importantly the multi-purpose Supernode layer which acts as the “pre-frontal cortex” of the network, handling super-fast sale and interchange transactions.

Why did we file this patent?

With the recent patent activity in the field of blockchain-enabled payments we felt compelled to protect GRAFT project and its eco-system participants from potential IP related encumbrances. Since it has been close to a year since we published the original white paper, it was the right time to get this done.

We hope the patent will help secure “freedom to operate” protection from patent claims in the future. While decentralization is at odds with patent systems in general, the system participants such as merchants, service, technology, and distribution providers might be interested in getting extra protection in the jurisdictions where they operate.

* Additionally the patent opens up potential licensing opportunities for private (non-competing) uses of the code, providing the project with additional revenue streams to help sustain operations and ongoing research and development.

As mentioned in the original white paper, the network relies on pay-in and payout brokers to facilitate near instant payments with any fiat or cryptocurrency, and near-instant merchant payouts into any fiat or cryptocurrency. What follows is a more detailed description of how the system operates along with the fees that are present.

Pay-in broker takes a certain amount or risk accepting the cryptocurrency of payment while quickly releasing GRFT in exchange (without waiting for the cryptocurrency of choice confirmations). This risk for broker is mitigated by relatively small(er) retail transaction amounts and is subject to the authorization sample validating the transaction across originating currency network. The risk for the merchant is mitigated by a GRFT bond transaction equal to the amount of pay-in, which is generated by the broker at the beginning of transaction. The bond is put on hold by the authorization sample until the broker approves the altcoin payment to the merchant. As soon as the altcoin transaction (from buyer to the broker) is received and validated, the authorization sample approves the payment to the merchant and releases the GRFT payout (from the broker to the merchant). The broker is able to set different limits for different amounts / history and risk levels.

In exchange for this service, the pay-in broker substructs 0.25% exchange fee from the GRFT payment to the merchant, while the supernodes participating in the authorization sample charge their standard GRFT transaction fee (0.5%).

The following flow (sequence) diagram shows how bitcoin acceptance pay-in broker performs the exchange transaction and accepts bitcoin payment on behalf of merchant point of sale. The buyer can use any wallet supporting bitcoin. The merchant receives payout in GRFT.

Payout broker exchanges GRFT into the payout currency of choice as requested by the merchant. The transaction is asymmetrical – meaning that the second leg of the payment is usually longer (sometimes much longer) to settle on the receiver side. To make sure that the payout broker delivers the payment with no double-spending, the broker stakes a bond with amount equal to the amount of the transaction. The staking is done by putting on hold the GRFT payment from the merchant by authorization sample. If authorization sample detects (after the grace time) that the payout funds weren’t received by the merchant, it cancels the transaction and payout broker does not receive the GRTF payment from the merchant.

In exchange for this service, the pay-out broker receives 0.25% exchange fee. In addition, the authorization sample supernodes charge their regular transaction fee (0.5%).

Same exchange brokers can (and most likely will) alternate as a pay-in and payout brokers. For example, let’s review Bitcoin Exchange Broker (EB) which wants to perform both pay-in and payout exchange operations.

The broker has a Bitcoin wallet with 0.01 BTC in it. The broker receives a payout request from a merchant to exchange 100 GRFT to 0.01 BTC (assuming the current exchange rate is 0.01 BTC = 100 GRFT). The flow of such payout transaction between the broker and the merchant is shown in the diagram below.

The broker accepts the request and sends 0.01 BTC (minus bitcoin network fee) to the merchant, while the merchant generates the 100.75 GRFT payment (100 GRFT amount + 0.25 GRFT broker fee + 0.5 GRFT authorization sample fee) to the broker and transmits it to Authorization Sample. The sample puts 100.75 GRFT transaction on hold and notifies the broker who then sends 0.01 BTC to the merchant. Upon BTC transaction settlement (10-60 mins for the sake of argument and depending on the bitcoin network fees), the 100 GRFT transaction is released and the exchange broker now has the 100 GRFT payment plus 0.25 GRFT profit.

The broker can now switch into the pay-in broker mode. As pay-in broker, the EB receives a request to exchange 0.01 bitcoin into 100 GRFT. The broker accepts this request and transfers 100 GRFT (minus fees). As soon as 0.01 BTC is received, the broker is able to become a payout broker again and now has 0.01 BTC and 0.25 GRFT profit.

Assuming (conservatively) that a single pay-in/pay-out cycle takes 1 hour, the broker can make around 12% in a single 24 hour period (without compounding), making for a lucrative business model for the Exchange Broker* (*estimation only).

Beyond Merchant Payments: DEX

The system described above can function beyond the GRAFT intended payment ecosystem and extend into a real-time decentralized exchange (DEX). Due to the fact that the untrusted exchange operations (atomic swaps) are close to real-time to the outside entity leveraging the GRAFT authorization/validation layer (the network of GRAFT supernodes), the same atomic swaps can be extended to provide real-time exchanges, such as BTC<->ETH.

As you may have heard, GRAFT is getting listed on Cryptopia. The trading is schedule to start in a few hours, around 4am UTC on the 18th of July 2018 with the following trade pairs will be available – GRFT/BTC, GRFT/LTC and GRFT/DOGE.

Here’s the original announcement.

Cryptopia is a very reputable exchange located in New Zealand and a solid potential partner for parts of GRAFT network – we’re VERY excited about working with them!

One thing to note is that currently Cryptopia has a deposit wallet set up as a non-integrated address, with payment ID as a separate field from the wallet address. This is an older way to do it and is incompatible with the mobile wallets which expect an integrated ID.

We’re working through this issue with Cryptopia, but for now, the deposits are only available from CLI wallets. (warning: Cryptopia uses paymentID for user identification, so if you try to do a deposit without specifying PaymentID, it will be lost)