Blockchain in Payments

A distributed, append-only ledger where records (blocks) are cryptographically linked in sequence. Each block contains the previous block’s hash, a timestamp, and a Merkle root of transactions — making history tamper-evident without a central authority.

A broad category of shared databases maintained across multiple nodes with no single point of control. Blockchain is one DLT type; Directed Acyclic Graph (DAG) structures used by Hedera Hashgraph and Nano are others.

A computer that maintains a complete copy of the blockchain and independently validates every transaction and block against the consensus rules. Full nodes are the backbone of decentralization — no single node is trusted over another.

A network participant that proposes and attests to new blocks. In PoW chains these are miners; in PoS chains they are validators who stake collateral. Validators earn block rewards and transaction fees in return for securing the network.

The algorithm by which distributed nodes agree on the canonical state of the ledger. Bitcoin uses Proof of Work (PoW); Ethereum uses Proof of Stake (PoS). Consensus defines throughput, finality latency, and energy profile — key constraints for payment use cases.

A consensus mechanism where miners compete to find a nonce that makes the block-header hash fall at or below a difficulty target — in Bitcoin, double SHA-256 (Litecoin and Dogecoin use Scrypt). The winner earns the block reward. Provides the highest security guarantees but is energy-intensive and limits throughput (~7 TPS for Bitcoin).

A consensus mechanism where validators lock up (stake) native tokens as collateral to earn the right to propose and attest to blocks. Slashing penalizes dishonest validators. Used by Ethereum (post-Merge 2022), Cardano, and Solana.

A property of a distributed system that can reach consensus as long as fewer than one-third of nodes (f < n/3) are malicious or fail. PBFT and Tendermint (Cosmos) are BFT protocols; the Ripple Consensus Protocol is a federated variant. Critical for permissioned chains used in wholesale payments.

The point at which a transaction is irreversible. Bitcoin uses probabilistic finality (6 confirmations ≈ 60 min); Ethereum provides economic finality after two checkpoint epochs (~12.8 min); XRPL achieves 3–5s finality. A critical metric for payment settlement design.

The number of blocks added on top of the block containing a transaction. More confirmations make a double-spend attack exponentially more expensive. Bitcoin payment processors typically require 1–6 confirmations; high-value transactions up to 30.

An attack where the same funds (a UTXO, or an account balance) are spent in two conflicting transactions. Consensus prevents this in the main chain; payment channels and Layer 2 systems require additional guards (HTLCs, time locks) to prevent off-chain double-spends.

The process of creating new blocks in a PoW blockchain. Miners bundle pending transactions, construct a candidate block, and hash it with different nonces until finding a valid hash. The winner proposes the block and earns the reward plus fees.

The queue of unconfirmed transactions on each node waiting to be included in a block. Miners prioritize higher-fee transactions. During congestion the mempool grows and fees spike — a key variable in payment cost modelling.

The first block in a blockchain (block 0). It has no predecessor and is hard-coded in the node software. Bitcoin’s genesis block (3 Jan 2009) includes Satoshi Nakamoto’s message: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks."

A protocol rule change. A soft fork is backwards-compatible (old nodes still accept new blocks). A hard fork creates an incompatible chain split (Bitcoin Cash from Bitcoin, Ethereum Classic from Ethereum). Payment integrations must monitor planned forks to avoid replay attacks.

The hash function at Bitcoin’s core: used in PoW (mining), Merkle trees (transaction IDs), and address derivation (hash160 = RIPEMD160(SHA256(pubkey))). Produces a 256-bit digest; second-preimage resistance makes history forgery computationally infeasible.

Ethereum’s primary hash function. Used for address derivation (last 20 bytes of Keccak-256 of the 64-byte public key), EVM storage slot keys, event topic IDs, and Solidity function selectors. It is the original Keccak submission: NIST’s final SHA3-256 (FIPS 202) changed the padding, so the two give different digests.

A binary tree where leaf nodes are transaction hashes and each parent is the hash of its two children. The Merkle root (32 bytes) stored in the block header binds all transactions. Enables SPV proofs — lightweight clients can verify a transaction was included without the full block.

The elliptic curve used by Bitcoin, Ethereum and other EVM chains, and Tron for key generation and signing (ECDSA, and Schnorr in Bitcoin Taproot); Solana, Stellar and Cardano use Ed25519 instead. A 256-bit curve providing ~128-bit security. The same private key generates different addresses on different chains due to different encoding and derivation.

The signing algorithm authorizing blockchain transactions. A transaction signed with the private key proves ownership of the corresponding address without revealing the key. Ethereum adds EIP-155 chain ID to prevent cross-chain replay attacks.

An efficient signature scheme (BIP-340) activated in Bitcoin with the Taproot soft fork in November 2021. Enables key aggregation (MuSig2, BIP-327: multiple signers produce one compact 64-byte signature), batch verification, and simpler multi-sig. Smaller witness data reduces transaction fees.

A random 256-bit number that fully controls a blockchain address. Anyone holding the private key can sign transactions and spend funds. Never transmitted on-chain; loss means permanent loss of funds. Custody (hardware wallet, HSM, MPC) is the critical security decision.

Derived from the private key by elliptic-curve scalar multiplication (secp256k1 on Bitcoin and Ethereum). Not secret — it is used to verify signatures. Most address formats encode a hash of the public key plus a checksum (Bitcoin P2PKH/P2WPKH, Ethereum); Taproot (P2TR) and Solana addresses encode the (tweaked) public key itself.

A human-readable identifier for a receiving endpoint. Bitcoin uses Base58Check (P2PKH starts with 1, P2SH with 3), Bech32 (SegWit v0, bc1q…) or Bech32m (Taproot, bc1p…). Ethereum uses 20-byte hex with EIP-55 checksum casing. In Bitcoin an address is a locking-script template that UTXOs are paid to; in Ethereum it identifies an account holding a balance, nonce and (for contracts) code.

A 12–24-word encoding of a wallet’s entropy (BIP-39; 12 or 24 words are typical). PBKDF2-HMAC-SHA512 over the words and an optional passphrase yields the HD wallet’s master seed, which deterministically re-generates all private keys. Anyone with the seed phrase controls all funds across all derived addresses. The highest-value secret in a crypto payment system.

A wallet deriving all key pairs from a single root seed using a tree of child keys (BIP-32). One seed phrase backs up infinite addresses. BIP-44 standardizes the derivation path: m/44’/coin’/account’/change/index — enabling account isolation across coins and chains.

Three interdependent Bitcoin Improvement Proposals: BIP-32 defines HD key derivation, BIP-39 defines mnemonic encoding of the seed entropy, BIP-44 standardizes coin-type derivation paths. Universally adopted across hardware wallets (Ledger, Trezor) and mobile wallets.

A key management technique where the private key is never assembled in one place — multiple parties each hold a share; signatures are computed jointly using threshold ECDSA or Schnorr without reconstructing the full key. Used by institutional custody platforms such as Fireblocks, BitGo (TSS wallets) and Copper.

A model where the user holds their own private keys (or seed phrase) and signs transactions directly, with no third party able to move or freeze their funds — "not your keys, not your coins". The opposite is custodial holding, where an exchange or provider controls the keys on the user’s behalf. Self-custody removes counterparty and exchange-insolvency risk but shifts the full burden of key security and backup onto the user: lose the seed phrase and the funds are unrecoverable. Implementations range from hardware wallets (Ledger, Trezor) and mobile/browser non-custodial wallets to MPC and multisig setups that reduce single-point-of-failure risk.

A cryptographic method proving a statement is true without revealing underlying data. ZK-SNARKs (succinct; many need a trusted setup) and ZK-STARKs (transparent, larger proofs) are used in ZK rollups (validity proof for batch of transactions) and CBDC privacy designs.

A lightweight method, described in section 8 of the Bitcoin white paper, for a client to verify a transaction was included in a block using only block headers and a Merkle proof, without downloading the full chain. BIP-37 Bloom filters were the first way light clients found their transactions; BIP-157/158 compact block filters are the privacy-preserving successor. The basis for most mobile Bitcoin wallets and payment verification in low-resource environments.

Bitcoin’s accounting model. Every transaction consumes previous outputs (UTXOs) as inputs and creates new outputs. Your "balance" is the sum of UTXOs locked to your addresses. This model enables parallel validation, simplifies auditing, and is analogous to physical coins.

Ethereum’s ledger model: each address has a balance and nonce. Transactions debit/credit balances directly (like a bank account). Simpler for smart contracts than UTXO but requires nonce ordering to prevent replay and imposes sequential execution constraints.

The unit of computational work in the Ethereum EVM. Each opcode has a gas cost — fixed for most, dynamic for storage writes, memory expansion and cold account access; the sender sets a max fee and a priority tip (EIP-1559). Total fee = gas used × effective gas price. Gas prevents infinite loops and aligns economic incentive with resource consumption.

Ethereum’s fee reform (London upgrade, August 2021). A protocol-managed base fee is automatically adjusted per block and burned — which makes net ETH supply shrink only when the burn exceeds staking issuance. Users add a priority tip to incentivize validators. Fees become more predictable for payment integrations — replacing the unpredictable first-price auction.

The incentive paid to block producers for including a transaction. In Bitcoin: fee = sum(inputs) − sum(outputs). In Ethereum: fee = gas used × effective gas price. Fees spike when block space is scarce. Fee estimation is a critical component of payment gateway UX.

A Layer 2 payment channel network on Bitcoin. Two parties lock funds in a 2-of-2 multi-sig UTXO (channel open), exchange signed off-chain state updates at near-zero fee, then settle on-chain by broadcasting the final state (channel close). Enables sub-second Bitcoin micropayments whose throughput is not bounded by block space.

A mechanism where two parties lock funds on-chain in a multi-sig or smart contract, then exchange off-chain signed state updates. Only the channel open and close transactions are broadcast. Used by Lightning (Bitcoin), Raiden (Ethereum), and general state channel designs.

A smart contract primitive for conditional payment. Funds are locked until the recipient reveals a secret (hashlock) within a deadline (timelock). Lightning uses HTLCs for multi-hop routing — all hops complete or all refund atomically, enabling trustless payment routing across third-party nodes.

A trustless cross-chain exchange using paired HTLCs. Two parties swap assets on different blockchains without a custodian: each locks funds with the same hashlock; revealing the secret on one chain reveals it on the other, completing both legs atomically.

Off-chain protocols inheriting the security of a Layer 1 blockchain while extending throughput and reducing fees. Types: payment channels (Lightning), optimistic rollups (Arbitrum, Optimism), ZK rollups (zkSync, Starknet), and state channels. Critical for reaching payment-scale TPS.

A Layer 2 that executes transactions off-chain and posts the compressed transaction data (since Dencun, usually as EIP-4844 blobs) to Layer 1. Optimistic rollups (Arbitrum, Optimism, Base) assume validity unless a fraud proof is raised in a ~7-day challenge window; ZK rollups (zkSync, Starknet) also post a validity proof, so their state is final on L1 once the proof is verified (minutes to hours), with no challenge window.

An independent blockchain with its own consensus linked to a parent chain via a two-way peg. Assets move via locking/minting (bridge). Polygon PoS is an Ethereum sidechain. Sidechains are faster to launch than rollups but do not inherit Layer 1 security — users trust the sidechain’s own validators and bridge.

A protocol moving assets between two blockchains: lock asset on source chain, mint wrapped version on destination. Bridge smart contracts hold large TVL and are a frequent exploit target (Ronin Bridge $625M, Wormhole $320M). Trust assumptions (centralized vs. light-client-based) vary widely.

Transferring value or messages between separate blockchains. Approaches: bridges (lock/mint), atomic swaps (trustless, slow), IBC protocol (Cosmos), Chainlink CCIP (message passing), and XCM (Polkadot). Essential for multi-chain payment routing and stablecoin portability.

The Cosmos standard for passing authenticated messages and tokens between IBC-enabled chains. Uses light-client proofs to verify state without trusting a third party. The de facto standard for the Cosmos ecosystem and a blueprint for trustless cross-chain payment networks.

A digital asset designed to maintain a stable value relative to a reference currency (usually USD). Types: fiat-backed (USDC, USDT — off-chain reserves), crypto-backed (DAI — over-collateralized), and algorithmic (undercollateralized; historically volatile). The primary medium for crypto-native payments.

A fiat-backed stablecoin issued by Circle — under US state money-transmitter licences, and as a MiCA e-money token via Circle’s French EMI licence since July 2024. Each USDC is backed 1:1 by USD (cash + short-term T-bills), with monthly third-party attestations. Native on Ethereum, Solana, Avalanche, Base, XRPL, and others (Circle ended Tron support). The dominant stablecoin for institutional payments and DeFi.

The largest stablecoin by market cap, issued by Tether Ltd. Dominant in trading pairs and cross-border remittances in emerging markets (Philippines, Nigeria, Argentina). Deployed across about ten chains — Tron (TRC-20) and Ethereum (ERC-20) hold the bulk of supply. Reserves are mostly US Treasury bills plus cash equivalents, gold and BTC, attested quarterly by BDO Italia. Not MiCA-authorised, so delisted for EEA users since 2025. Its separate US token, USAT, launched in January 2026 under the GENIUS Act, issued by Anchorage Digital Bank. See the dedicated Tether (USDT) guide tab.

A decentralized crypto-collateralized stablecoin issued by the Maker protocol (rebranded Sky in 2024, which also issues the 1:1-convertible successor USDS). Users lock ETH, other crypto or RWA in vaults and mint DAI above a minimum collateral ratio set by governance for each vault type (well above 100%, e.g. around 150%). The peg is held by stability fees, the savings rate and a USDC peg-stability module. The DAI contract has no freeze function, though a large share of its collateral is centralised assets such as USDC.

A digital currency issued and backed by a central bank — the digital equivalent of fiat cash. Retail CBDCs target consumers (e-CNY in pilot; the digital euro, which left its preparation phase in October 2025 and needs EU legislation before any issuance); wholesale CBDCs target interbank settlement (Project mBridge). Key design decisions: token vs account-based, privacy model, programmability, and intermediary role.

A CBDC restricted to financial institutions for large-value settlement and cross-border payments. Project mBridge — started by the BIS Innovation Hub with the central banks of China, Hong Kong, Thailand and the UAE — ran real-value multi-CBDC pilots and reached minimum viable product in 2024; the BIS exited in October 2024 and the central banks now run it. Seen as a near-term application that does not disintermediate retail banks.

A representation of an asset from one blockchain issued as a token on another. WBTC (Wrapped Bitcoin) on Ethereum is an ERC-20 backed 1:1 by BTC held by a custodian (BitGo, with BiT Global since 2024). Enables Bitcoin liquidity in Ethereum DeFi. Introduces custodial risk.

The international standard (ISO 22739:2024, second edition, replacing the 2020 edition) defining official vocabulary for blockchain and DLT: DLT, distributed ledger, permissioned / permissionless chain, smart contract, node, consensus, genesis block. Used in regulations, contracts, and technical specifications to ensure interoperability of terminology.

The Ethereum token interface standard defining 6 required functions (transfer, transferFrom, approve, allowance, balanceOf, totalSupply) plus 2 events. All compliant tokens are interoperable with any ERC-20-aware wallet or exchange. The foundation of the DeFi token economy — USDC, DAI, and thousands of payment tokens implement ERC-20.

The Ethereum standard for non-fungible tokens — each token has a unique ID and owner. Used for ticketing, identity credentials, loyalty programs, and proof-of-payment NFTs. EIP-2981 lets a contract signal a royalty on secondary sales, but payment is voluntary — each marketplace decides whether to honour it.

FATF Recommendation 16 applied to virtual assets. VASPs must collect and share originator/beneficiary information (name, account or wallet address, and originator address or ID) for transfers of USD/EUR 1,000 or more; the EU’s Transfer of Funds Regulation (EU) 2023/1113 applies from the first euro since 30 December 2024. Implemented via TRISA, OpenVASP, Notabene, and similar VASP-to-VASP messaging protocols.

FATF’s category for entities that exchange, transfer, safeguard, or administer virtual assets on behalf of others. Includes exchanges (CEX), custodians, and some DeFi protocols. VASPs are subject to AML/CFT registration, KYC requirements, and the Travel Rule.

Know Your Customer and Anti-Money Laundering requirements for crypto VASPs. Exchanges must verify user identity (passport, proof of address, source-of-funds). On-chain analytics platforms (Chainalysis, Elliptic, TRM Labs) trace fund flows and screen against OFAC sanctioned addresses.

Regulation (EU) 2023/1114, establishing a comprehensive framework for crypto-asset issuers and service providers. Stablecoin rules (e-money tokens pegged to one currency, asset-referenced tokens) apply from 30 June 2024, the rest — including Crypto-Asset Service Providers (CASPs) — from 30 December 2024; the transitional period for pre-existing providers ended on 1 July 2026 at the latest. The first major unified jurisdiction-wide crypto regulatory framework.

The Guiding and Establishing National Innovation for U.S. Stablecoins Act, signed into law on 18 July 2025 — the first US federal framework for payment stablecoins. Only permitted issuers (bank subsidiaries, OCC-licensed non-banks, or state-qualified issuers below $10B outstanding) may issue; they must hold 1:1 reserves in cash, deposits, short-dated Treasuries and similar assets, publish monthly reserve reports, and may not pay interest to holders. It takes effect on the earlier of 18 months after enactment or 120 days after final regulations.

Hong Kong’s licensing regime for fiat-referenced stablecoins, in force since 1 August 2025. Issuing such a stablecoin in Hong Kong — or a Hong Kong-dollar-referenced one anywhere — requires an HKMA licence with full reserve backing and par redemption, and only licensed issuers’ stablecoins may be offered to retail investors.

The formal process for proposing Bitcoin protocol changes. Key BIPs: BIP-32 (HD wallets), BIP-39 (mnemonics), BIP-44 (derivation paths), BIP-141 (SegWit), BIP-340/341 (Schnorr/Taproot), BIP-370 (PSBT v2). Consensus requires broad miner and full-node adoption — no single party controls it.

The governance process for Ethereum protocol changes. Core EIPs change consensus and ship in network upgrades: EIP-1559 (fee market, London 2021), EIP-4844 (blob transactions, Dencun, March 2024), EIP-7702 (EOA code delegation, Pectra, May 2025), EIP-7594 (PeerDAS, Fusaka, December 2025). ERCs are application-level standards with no fork needed — ERC-20, ERC-2612 (permit), ERC-4337 (account abstraction).

An Ethereum application-level standard that gives smart-contract wallets account features without a protocol change: users sign UserOperations, bundlers submit them to a singleton EntryPoint contract, and paymasters can sponsor gas. EIP-7702 (Pectra, May 2025) complements it by letting an ordinary EOA delegate to smart-wallet code. Enables gasless transactions (paymaster pays fee), social recovery (replace lost key via guardians), batched operations, and spending limits. Critical for mainstream crypto payment UX.

Self-executing code stored on a blockchain running deterministically when called. Written in Solidity (Ethereum), Rust (Solana, Near), or Cairo (Starknet). Enables programmable money: escrow, lending, DEX, subscriptions, and conditional payments — without custodians or intermediaries.

The sandboxed, deterministic, stack-based runtime that executes smart contract bytecode identically on every Ethereum node. EVM-compatible chains (Polygon, Avalanche, BSC, Arbitrum, Base, zkSync) share tooling and Solidity contracts. Gas metering prevents resource abuse.

Financial services built on smart contracts with no custodial intermediary: lending (Aave, Compound), DEXs (Uniswap, Curve), derivatives (dYdX), yield aggregators, and stablecoin issuance. DeFi replaces intermediaries with auditable open-source code but introduces smart contract, oracle, and liquidity risk.

A DEX design where liquidity is pooled in a smart contract instead of matched in an order book. Price is set algorithmically (Uniswap v2: x·y = k; Curve: stable-swap invariant). Liquidity providers earn trading fees. Enables instant token swaps useful for payment FX conversion.

A service bridging real-world data (exchange rates, payment status, identity) to smart contracts. Chainlink is the dominant decentralized oracle network. Payment contracts need oracles to trigger settlement on fiat events, verify off-chain delivery, or access currency exchange rates.

A wallet requiring M-of-N key signatures to authorize a transaction. Bitcoin native multi-sig (P2MS, P2SH, P2WSH, or Taproot script paths); Ethereum smart contract multi-sig (Safe, formerly Gnosis Safe). Used for corporate treasury, exchange hot wallets, payment escrow requiring multiple approvals, and DAO governance.

A unique on-chain token (ERC-721 or ERC-1155) representing ownership of a digital or physical asset. Payment use cases: event ticketing, loyalty credentials, subscription passes, proof of payment, and royalty-bearing digital goods. Smart contract royalties enable programmable revenue splits.

The ability to embed spending conditions in currency via smart contracts. Examples: conditional release on delivery confirmation (escrow), royalty splits paid by the contract itself on a primary sale (EIP-2981 secondary-sale royalties are only a signal marketplaces may ignore), time-locked salary streaming (Superfluid, Sablier), multi-party approval workflows, and CBDC spending restrictions.

The set of wallet features enabling consumer-grade payment experiences: QR-code payment (Solana Pay, Lightning invoices), sign-in with Ethereum (EIP-4361), gasless meta-transactions, one-click bridging, and fiat on-ramp integrations. ERC-4337 account abstraction and EIP-7702 EOA delegation are the key enablers.

The first and largest blockchain by market cap. PoW (double SHA-256), UTXO model, ~10-min blocks, ~7 TPS base layer. Supply is capped just under 21 million BTC: the block subsidy halves every 210,000 blocks — the fourth halving (block 840,000, April 2024) cut it to 3.125 BTC. Primary use case: censorship-resistant value storage and payment rail. Lightning Network extends it for micropayments. BIP-341 Taproot (activated November 2021) enables complex spending conditions with a smaller footprint.

The largest smart contract platform. PoS since the Merge (15 September 2022), account model, 12 s slots, ~15–30 TPS base layer. Hosts DeFi, stablecoins (USDC, DAI), and ERC-20 tokens. Rollups extend it to thousands of TPS. Dencun’s EIP-4844 blobs (March 2024) cut rollup data costs by an order of magnitude or more, and Fusaka’s PeerDAS (December 2025) raised blob capacity further.

A payment-focused blockchain using a federated BFT consensus. ~3–5s finality, 1,500 TPS, < $0.001 fees. Built-in DEX and issued-currency ledger. Ripple Payments (formerly RippleNet) uses XRP for on-demand liquidity in some cross-border corridors as an alternative to pre-funded correspondent accounts. Native issued-currency features host stablecoins such as Ripple’s RLUSD and USDC.

A payment-focused open network using the Stellar Consensus Protocol (SCP, federated BFT). Supports issued assets (CBDCs, stablecoins), built-in DEX, and path payments (multi-hop FX conversion in one transaction). MoneyGram uses USDC on Stellar for its cash-in/cash-out remittance service; Circle issues USDC natively on Stellar.

A high-throughput blockchain using PoS with Tower BFT plus Proof of History (a sequential SHA-256 hash chain that acts as a verifiable clock). ~400 ms slots, optimistic confirmation in about a second, ‘finalized’ after 32 slots (~13 s); 65,000 TPS theoretical, < $0.001 fees. The Alpenglow consensus redesign, approved by validators in 2025, targets sub-second finality. Used for high-frequency DeFi, NFTs, and merchant payments via USDC and Solana Pay.

Blockchain eliminates correspondent banking chains by enabling direct wallet-to-wallet settlement in seconds rather than 1–5 days. Stablecoins (USDC, USDT) and networks like Stellar and XRPL are used by remittance providers (MoneyGram, Bitso, Strike) to settle value across borders at < 1% cost vs. traditional wire transfers.

Finalizing financial obligations by transferring blockchain assets. DvP (Delivery vs. Payment) can be atomic in a smart contract — both legs settle simultaneously with no counterparty or settlement risk. J.P. Morgan’s Kinexys (formerly Onyx; JPM Coin) and BNY Mellon pilots use permissioned blockchains for intraday USD settlement.

A service accepting crypto payments and optionally converting to fiat for merchants (BitPay, Coinbase Commerce, Stripe Crypto, Strike). Key features: QR checkout, automatic fiat conversion at spot rate, stablecoin settlement, on/off-ramp liquidity. Shields merchants from crypto price volatility.

Services converting between fiat and crypto. On-ramp: fiat → crypto (exchange or bank ACH/card buy). Off-ramp: crypto → fiat (sell/withdraw to bank). Critical for real-world utility. Regulated almost everywhere — e.g. as money services businesses / money transmitters in the US and as CASPs under MiCA in the EU; KYC/AML required.

A custodial platform where users deposit funds and trade against an order book (Coinbase, Binance, Kraken). The primary on/off-ramp. Subject to VASP regulations and Travel Rule. Internal settlement is off-chain; only net withdrawals hit the blockchain.