VISA Forges New Connection Between Fiat And Cryptocurrency

Payments giant and credit card company VISA, have announced they are providing support for cryptocurrency payments using the USDC stablecoin starting with partner Crypto.com. USDC is an ERC-20 token that runs on top of the Ethereum blockchain network. This makes use of a stablecoin to settle payments using VISA payment products through their partners. At the moment VISA will pilot the payment system with Crypto.com, a cryptocurrency platform and digital exchange, with plans to offer the service to other partners. VISA is going to make using cryptocurrency much more available for payments. This legitimizes cryptocurrency payments for goods and services, since VISA is a financially regulated entity.

This is a bridge between traditional finance with emerging fintechs involved with cryptocurrency and digital assets. VISA had tried to bridge cryptocurrency payments before, but plans fell through. Perhaps VISA is now ready to provide the service with more knowledge and understanding of cryptocurrency. This allows VISA to better understand the new space fintechs are operating from, which involves innovative products that implement digital currency and blockchain technology. Perhaps it is a sign that changes are coming to traditional financial systems. VISA has been warming up to cryptocurrency and other digital currency (non-crypto) as evident from their more recent postings.

Before VISA, payments processors like PayPal and Square have provided support for cryptocurrency. PayPal has paved the way for users to buy cryptocurrency like Bitcoin through their app. Square allows their customers to buy, hold and sell cryptocurrency through their platform, including the Cash app. Prior to that, there were not many mainstream apps other than those provided by digital exchanges like Coinbase that allow their users to purchase cryptocurrency. VISA is different in that it is providing a way for customers to make payments with the cryptocurrency they hold. This is a layer that has been missing and it could accelerate utility of cryptocurrency as a payment method. Using the blockchain may also provide faster settlements compared to the current system, but scaling remains to be seen on blockchain networks like that of Ethereum.

While the purpose of cryptocurrency is for open direct payments system (Peer to Peer), VISA is not exactly that type of platform. It still operates under the traditional financial system, which is highly centralized and permissioned. That means VISA is not exactly an open network, it requires a membership for its customers. That is why the product they offer is more of a bridge between the traditional fiat system and cryptocurrency. The decentralized aspect of a transaction still falls under the blockchain layer, but through a VISA payment gateway. In the case of USDC, the payment is from a user’s digital wallet on the Ethereum blockchain or even a custodial wallet that supports USDC. What VISA provides is a way to make that payment possible to retailers who will accept the transaction. VISA has so many partners in the retail space that they work with, this opens opportunities for cryptocurrency companies like Crypto.com to have access to more traditional financial markets.

VISA could also open another bridge, this time to the DeFI space of the blockchain. Most platforms in DeFi run over the Ethereum network, but other platforms like Binance, Polkadot and Cardano offer their own ecosystems that provide DeFi apps. If there is integration to support VISA, that can bring more users to the DeFi space who are using VISA credit cards or payment applications supported by the VISA network. At the moment, VISA and other credit card companies do allow customers to purchase cryptocurrency from digital exchanges. Opening up to support decentralized exchanges in the DeFi space are more challenging due to regulatory compliance. If this can be resolved, it opens up the space to allow interoperability of dissimilar payment networks to become possible.

This is overall good for the Ethereum network. VISA will not only need to have USDC, but also Ethereum’s native token ETH (ether). In order to process transactions using USDC, small denominations of ETH are used to pay for costs called “gas” which are part of the transaction fees paid to the network. This is for processing transactions that have to be verified and secured on the blockchain. It may also be likely that it will be VISA’s partners who hold the USDC and ETH, while VISA just helps bridge the retail merchants with the cryptocurrency payment as the settlement layer. The main issue with Ethereum has been scaling, but the development community is fast tracking efforts to scale the network.

With VISA’s announcement, other payment companies like Mastercard and American Express should take notice. This introduces a business model that brings cryptocurrency native platforms with the traditional retail space. The predominant form of payment in the VISA network is by credit and debit card. By integrating a cryptocurrency method into the network, it opens up new channels for making payments. The choice of using a stablecoin also makes plenty of sense given that cryptocurrency is very volatile. This changes the narrative that cryptocurrency is trying to replace traditional finance. Before that can happen, it must have greater utility. Perhaps VISA can help bring it to more mainstream adoption, to the point where we can buy toilet paper with cryptocurrency.

(Image Credit: Photo by Tom Fisk)

Bitcoin Wrapped In Ether – Yummy!

You can take two good things and combine them together to get the best of both. In LA’s streets you can get what some would consider one of the city’s iconic sandwiches. It is the hotdog wrapped in bacon. It brings you the meaty flavor of a hotdog with the greasy goodness of bacon. Now think about the top digital asset Bitcoin (BTC). What would you wrap it with if you were to compare it to a hotdog wrapped in bacon? How about Ether (ETH), the Ethereum blockchain’s token. BTC is your hotdog, while ETH is your bacon. It actually exists and it is called Wrapped Bitcoin (WBTC).

Wrapping one cryptocurrency with another uses the hotdog wrapped in bacon example as a simpler way to illustrate an analogy. Wrapping in this sense means to create a protocol to represent one cryptocurrency on another cryptocurrency’s blockchain. BTC can be represented on the Ethereum blockchain by issuing an ERC-20 token called WBTC. This allows BTC integration with smart contracts that can be traded on the Ethereum network using the ERC-20 standard.

In Wrapped Bitcoin, BTC is locked into a smart contract and issued as WBTC. This allows BTC holders to access DeFi systems on the Ethereum blockchain. It is as good in value as BTC which is verified by a Proof-of-Reserve system. This ensures a 1:1 peg between the issued or minted WBTC tokens and BTC. The actual BTC is still on the Bitcoin blockchain since you cannot store it on the Ethereum blockchain. The BTC is taken under the custody of the WBTC token issuer, so it is not directly with the WBTC token holder. It is maintained by a group called the WBTC DAO, who are the custodians of the BTC. The group’s members include blockchain-based organizations like BitGo, Ren and Kyber.

What is the purpose of WBTC?

As mentioned earlier, it is primarily for giving BTC holders a way to gain access to the DeFi markets. A large portion of the DeFi space uses the Ethereum blockchain and BTC is not directly compatible with it. It is a bridge that allows BTC holders to use DeFi protocols to provide liquidity or participate in other services that yield returns. WBTC is a way to bring the value from BTC into the DeFi space without having to convert BTC to ETH. BTC (as of 2020) has the largest cryptocurrency market cap and this is crucial in helping bring liquidity to the DeFi space as well as expanding on the collateral types available.

This is a great way for BTC holders to take part in the DeFi markets. Many BTC holders have plenty of value stored, but are not able to use it if they are HODLing. DeFi provides ways for cryptocurrency to earn even while HODLing, using decentralized protocols like Uniswap, Curve and Yearn. Most DeFi protocols will only support ERC-20 or ETH since they execute from smart contracts on the Ethereum blockchain. WBTC is a protocol that allows BTC to be wrapped in an Ethereum ERC-20 token. Holders would not need to convert their BTC to ETH during this process.

Minting WBTC

To enter the DeFi space, Bitcoin holders would have to deposit their BTC into a smart contract of a WBTC issuer (e.g. BitGo, Coinsquare, etc.). This can be a digital exchange or DEX (Decentralized Exchange) that accepts BTC. Once the BTC has been deposited, WBTC tokens are minted that have a 1:1 value to the BTC that was deposited. Once the holder receives their WBTC, they can now use it for loan collateral, providing liquidity and swapping for other tokens. Digital exchanges will most likely require a KYC (Know Your Customer) in compliance with the law before the WBTC can be issued. On a DEX or over-the-counter it is not required (check with the exchange requirements always). The WBTC can be cashed out to either BTC or ETH.

Another way to get WBTC is through a DEX like Uniswap. Instead of depositing BTC into a smart contract, anyone who holds ETH can purchase WBTC. It requires connecting a digital wallet like Metamask to perform the transaction with ETH. The WBTC is already available in the market and it does not require BTC for purchase in this case. Since WBTC is an ERC-20 token, it can be purchased with ETH very easily.

Other Uses For WBTC

WBTC can be put to use in DeFi yield farming protocols. This allows WBTC holders to put their digital asset for lending and trading purposes. In return, the WBTC holders earn yields as a their return on investment. These yields are fees collected from the transactions. Rewards can be issued in the form of governance tokens, which allow the holders to participate in digital governance through voting. This provides holders a way of participating in decisions that govern these protocols.

Yield farming requires the holders to deposit their WBTC. In return, they are issued another token. Examples of these tokens include SNX (Synthetix token), REN (Ren Project token) and BAL (Balancer token). The tokens are specific to which protocol is used by the yield provider. To learn more about yield farming, there is an article on Coindesk that explains it a little bit further. (Link here)

The Best Of Both

Wrapped Bitcoin brings the best of two blockchains. It is a way to interoperate between two digital assets at the protocol layer. The value of Bitcoin and the decentralized applications on Ethereum. BTC is the digital asset while ETH is the protocol that utilizes it for liquidity, trades and financing. The Ethereum blockchain is serving as a transaction layer that can bring more capital into diverse markets. Bitcoin can provide the capital, as institutional investment grows in the digital asset. WBTC provides a way for investors to bring capital for yielding returns using the Ethereum blockchain.

Disclaimer: This is not financial advice, just reference. Do your own research always to verify information.

The Ethereum ERC-20 Token Specification

The Ethereum Request For Comment ERC are defined technical protocols from an EIP (Ethereum Improvement Proposal) request to the Ethereum development community. Once the EIP has been approved, it becomes an ERC, and can be implemented on the blockchain. The ERC-20 token was a specification that allowed projects to use the Ethereum blockchain as a source for funding. It became very significant when ICOs (Initial Coin Offering) became popular between 2015 and 2017. That was until financial and trading compliance issues affected the continuation of ICOs due to lack of regulatory clarity. Certain projects will be under scrutiny to participating in ICO if they have not passed the statutes of limitation for the issuance of an unregistered “security”. This falls under the SEC (Securities and Exchange Commission) for most jurisdictions and have since discouraged new projects from issuing an ICO.

Since many projects are already using this as a standard on the Ethereum blockchain, the number of ERC-20 token contracts has grown. By mid-2017, there were around 5,500 ERC-20 smart contracts on the Ethereum network. It grew past 40,000 in 2018 and are further increasing. ERC-20 is not just a technical specification for creating tokens, but it also provides a guideline for how to interact with other wallets, smart contracts and digital marketplaces within the Ethereum ecosystem.

The ERC-20 became a standard on the Ethereum platform not only for funding, but for the issuance of tokens. Several cryptocurrency projects started out as ICO with tokens (e.g. EOS, Tron, OmiseGo). These projects used the Ethereum blockchain to fund their own coins as issued tokens which can later be exchanged for the native cryptocurrency asset once the main network is running. The ERC-20 tokens were temporarily locked into smart contracts that hold a certain amount of Ether. Once the projects were able to build their blockchain, the ERC-20 tokens from the smart contract could be exchanged for the native asset for that blockchain.

As a standard, ERC-20 provides uniformity of technical and protocol standard. This allows developers to follow a procedure, much like how developers create API for their application to communicate with other applications. This reduces complexity of understanding each type of token implementation. A tremendous benefit it brings to the Ethereum blockchain is enhanced liquidity, since Ether or ETH is required to purchase the tokens. That can affect the price of ETH in terms of market cap.

The structure of an ERC-20 token contains 6 functions, 2 events, and 3 token information functions. These functions are invoked and can be be called within a smart contract. From the ERC-20 specification, the following are the 6 functions:

1. totalSupply(): Total supply of Token.

2. balanceOf(address _owner): The balance in the _owner address.

3. Transfer(address _to, uint256 _value): Sends a token of _value to address_to, triggering the Transfer event.

4. transferFrom(address _from, address _to, uint256 _value): Sends a pass from the address_from _value to address_to, triggering the Transfer event.

5. Approve (address _spender, uint256 _value): Approve _spender to extract a certain amount of money.

6. Allowance(address _owner, address _spender): Returns the amount that _spender extracted from _owner.

Decentralized Apps or DApps also support ERC-20. These apps run on top of the Ethereum blockchain. The DApp can be used to query information or even to execute a smart contract. Developers can use the functions when dealing with digital tokens created on the Ethereum blockchain.

The following are the 2 events that are triggered by the functions:

1. Transfer(address indexed _from, address indexed _to, uint256 _value): Triggered when the token is transferred.

2. Approval(address indexed _owner, addressindexed _spender, uint256 _value): Triggered when the approve method is successfully called.

The token also needs to be set with any of these 3 types of token information:

1. Name: Name of the issued Token.

2. Symbol: The name of the Token issued. For example, EtherCent token or ECT on https://rinkeby.etherscan.io/token/0x8caca3dbb57ecb058a82209effde5bf647459771

3. Decimals: Set how many digits this token can reach after the small digits. Generally, the set value is 18, which means that it can reach 18 digits after the decimal point.

The following is an example ERC-20 token created on the Rinkeby test network.

Since Ether (ETH) was released prior to the ERC-20 standard, it does not actually comply with the specification. As a result, this led to the creation of Wrapped Ether (WETH). This is an ERC-20 token that represents Ether at a 1:1 ratio (1 WETH = 1 ETH) which can be exchanged for other ERC-20 tokens.

Since the popularity of ICOs have waned in 2020, ERC-20 tokens are not as common. They are still in use mainly by projects that have not yet released their own native tokens or by new projects that are testing token development (usually on a test network). By keeping their ERC-20 tokens locked with ETH, they are providing a sort of promise to their holders that they can convert it for more value in the future. The converted tokens can then be used within those blockchain projects as a medium of exchange or store of value.