Discover our unique crypto payments solution.
This post assumes you have some basic knowledge of Layer 2 solutions and blockchain payments infrastructure. Check out our dummies guide to PPN if you need a refresher.
In today’s era of online banking, VISA and PayPal, you don’t have to know (nor care) how any of it works. Financial infrastructure isn’t a conversation starter. You just want to make payments, and know they’re getting to where they need to go — fast.
In the traditional world of cryptocurrency, you become your own online bank, VISA and PayPal. You don’t need any of these intermediaries, as these (mostly) peer to peer systems allow you to send funds directly to your friends via the blockchain.
But as blockchain finance has grown in popularity, it requires more sophisticated infrastructure to handle the sheer amount of daily transactions.
This is one particular area which cryptocurrency projects are battling with — scalability. Scalability is a blockchain network’s ability to grow and handle more users as they join.
Blockchain transactions have become slow and expensive. It can take hours for your transaction to be processed (confirmed on-chain, or added to a number of blocks), especially when the network has a large backlog of payments to process. Fees can be high when the network becomes clogged up like this. The faster you want you transaction processed, the higher the fee you will pay. Users are then less inclined to make smaller, more frequent kinds of payments, like you make with your everyday purchases.
These limitations lead to a dissatisfying user experience, which also removes our competitive edge against traditional finance payment systems.
It’s all about Layers
There are multiple teams out there trying to solve the scalability issue.
These teams have been developing Layer 2 solutions — side chains and payment channels — which run next to the original blockchain so that it doesn’t get clogged up.
We have developed our own Layer 2 solution which utilises state channels. Payment channels were the first type of state channel to be described — and have been around for a while. In fact, the original Bitcoin implementation had a rudimentary version of these, where these off-chain interactions allowed users to modify ownership of locked Bitcoin. The term “state channels” is a more generalised term and can refer to off-chain interactions beyond payments alone.
The PPN’s payment channels move your transactions off-chain, allowing for a nearly unlimited number of transactions without relying on the blockchain. They then become instant, private and free (no fees).
Some leading examples of their application are the Lightning Network (Bitcoin) and Raiden Network (Ethereum).
Using smart contracts, we can enable any of our users to open up unidirectional (one way) payment channels where they can transact as much as they’d like off-chain. Each user ‘stakes’ how much they’d like to transact by topping up their PLR tank, similar to topping up a prepaid debit card. It’s your fuel which powers your interactions with the PPN.
Your transactions are stored off-chain until the moment in time you want the remaining balance be available on-chain. Using this system, you can send funds to anyone in the network.
The core advantages of payment channels are:
💸 Free (no fees)
You’ll only ever pay to open and then close your payment channel. That’s two transactions fees for the potentially unlimited amount you make in between.
⚡️ Instant
If you’re to make a regular crypto payment now, how fast your transactions are processed will depend on the state of the blockchain. With payment channels, you can transact as often as you’d like, with all transactions logged instantly off-chain.
🚪 Private
As your transactions are offline (off-chain), they are completely private. There will be no official record of your transactions.
⚔️ Secure
Using payment channels, we use digital signatures to prevent double spending and fraud.
How do these transfers work?
The way we route all these transfer is similar to the traditional cheque — bank-issued papers which let you write IOUs to people. Funds are then drawn from your chequing account when the cheques are cashed in.
A cheque is a document that orders a bank to pay a specific amount of money from a person’s account to the person in whose name the cheque has been issued. The person writing the cheque, known as the drawer, has a transaction banking account where their money is held.
Cheques had a long sequence of numbers along the top, known as a routing sequence. This told the receiving bank branch where the cheque should be sent to; it had a unique serial number for the bank, for the specific branch and then for the sender’s account.
The PPN is somewhat similar. Everyone belongs to the same ‘Pillar bank’ and issues cheques until they are cashed in (when the payment channel is closed).
This is an adaption of the Lightning Network system, which is peer to peer and routing is decentralised. Here’s an example of how it works:
With this solution, you don’t need to open up a payment channel with someone else directly. You just need a ‘path’ or route to whoever you want to transact with through payment channels that already exist, making it decentralised. This technique is considered by some as less efficient, as it routes transactions over multiple channels.
The PPN accepts some degree of centralisation by implementing a Hub and Spoke system. Connext is a good example of a this ETH based payment channel system.
In our case, Pillar acts as the payment ‘hub’, so you open up one direct payment channel with us and we will redirect your payments to others in the network (or even outside the network).
While we won’t be an intermediary for each individual transaction, we will be an intermediary for the one-off transactions when opening and closing channels.
This model is secure and simplified, though introduces some degree of centralisation. However, it’s a tradeoff we’re willing to make to ensure that your transactions are seamless and provide the kind of elite user experience you’re accustomed to.
The PLR Meta-Token
While the PPN native currency is the PLR token, it allows other currencies to be sent by creating a synthetic asset — a representation of a certain amount *equivalent* to the denomination that was sent. Our payment channels let you send funds without worrying about currency.
If you’ve filled up your PLR tank with PLR meta-tokens, you won’t have to exchange your funds into any other currency before sending it. Just like today when you send a friend some money for beer, you don’t need to care if their account is in Euros, Japanese Yen or New Zealand Hobbits (their official currency?). Your bank will just change it for you — but you bet they’ll charge you *a lot* for it. We do the same, automatically converting your PLRs into whatever intended currency.
So even if your friend needs some DAI, the hub in our network receives a payment from you in PLR and sends an equivalent amount of DAI to your friend, in an off chain token swap.
Do you know about the Smart Wallet?
Decentralised Finance has the opportunity to empower people everywhere — to make our financial lives more autonomous, free and private. We don’t just want to mimic that of fintech and traditional finance, we want to make it better.
The PPN is our homegrown solution which lives inside the Pillar Smart Wallet. Like other solutions today, we believe it will help to solve blockchain’s scalability issues and create a frictionless crypto experience.
Read about the Smart Wallet here.
Pillar Smart Wallet for Dummies Pt. I
If you like something a little more technical, dive deeper in our GitHub…