Core Blockchain Concepts
Distributed Ledger Technology (DLT): This is a shared database maintained by multiple independent computers (nodes) rather than a single central authority like a bank. Everyone has the same copy of the transaction history, making it transparent and difficult to tamper with.
Blockchain: A specific type of DLT where transactions are grouped into “blocks” that are linked together chronologically, creating an unalterable record. Each block typically contains:
- Multiple transactions
- A timestamp
- A reference to the previous block (creating the “chain”)
Cryptocurrency: Digital money native to blockchains (like Bitcoin or Ethereum). Unlike traditional currency, it isn’t controlled by governments or banks.
Public/Private Keys:
- Public key: Similar to your account number that others can send funds to
- Private key: Like your secret password that authorizes spending (must be kept secure)
Miners: Powerful computers that validate transactions and add new blocks to the blockchain. They’re compensated with newly created cryptocurrency and/or transaction fees.
Nodes: Computers that maintain copies of the entire blockchain and verify transactions. These create the decentralized network that gives blockchain its security.
How Blockchain Payments Work
- Initiation: A customer selects a cryptocurrency payment option at checkout and receives the merchant’s public address.
- Broadcasting: The customer uses their wallet to send funds to this address, and this transaction request is broadcast to the network.
- Verification: Network nodes verify the customer has sufficient funds and that the transaction is valid.
- Mempool Stage: Verified transactions enter a “waiting area” called a mempool.
- Mining Process: Miners select transactions from the mempool to include in a new block. They compete to solve complex mathematical problems (in Proof of Work systems) or are selected based on their stake (in Proof of Stake systems).
- Block Addition: The successful miner adds their block to the blockchain, and all nodes update their copies.
- Confirmation: The transaction is typically considered complete after several subsequent blocks are added (confirmations), making it effectively permanent.
Business Applications for Payments
Advantages for Businesses:
- Lower Fees: Can reduce transaction costs compared to traditional payment processors, especially for international transfers.
- Speed: Cross-border payments that might take days with traditional banking can be completed in minutes or hours.
- Accessibility: Enables payments to and from regions with limited banking infrastructure.
- Reduced Chargebacks: Blockchain transactions are generally irreversible, eliminating the risk of chargebacks.
- Programmable Money: Smart contracts (especially on platforms like Ethereum) allow for automated, condition-based payments.
Implementation Options:
- Direct Integration: Businesses can set up their own wallet infrastructure to directly accept cryptocurrency payments.
- Payment Processors: Partners like those mentioned in the document can handle the technical aspects, including:
- Cryptocurrency exchange rate management
- Converting crypto to traditional currency (avoiding volatility risk)
- Checkout optimization
- Compliance and security measures
For most businesses, working with a payment provider simplifies the process considerably, as they don’t need to manage crypto wallets or deal directly with the technical complexity of blockchain technology.
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