P2P Off-Chain Payments: An Indispensable Map for the Future of Crypto Payments

Author: GaryMa

Recently, the first fully Bitcoin-isomorphic Layer2 solution CKB released a prototype of Fiber Network, a next-generation common Lightning Network built on Nervos CKB and off-chain channels. It offers fast, low-cost, and decentralized multi-currency payments and P2P transactions for RGB++ assets. The value proposition behind this is that the current crypto payment model has deviated from the “P2P electronic cash system” envisioned in Satoshi Nakamoto’s Bitcoin whitepaper. As the industry evolves, the crypto payment model seems to continually introduce rent-seeking intermediaries and centralization bottlenecks that crypto was originally meant to eliminate. This article attempts to review the evolution of crypto payment models and further explore the vision of CKB in constructing P2P off-chain payments.

Bitcoin: The Origin of the P2P Electronic Cash System

Currently, the industry may primarily view Bitcoin as a store of value. However, we shouldn’t forget that Satoshi Nakamoto positioned it as “a peer-to-peer electronic cash system” in the Bitcoin whitepaper. Bitcoin’s original goal was to develop a decentralized P2P payment system that could operate without the involvement of central banks or financial intermediaries. Naturally, Bitcoin became the medium for early geeks to exchange gifts and rewards on forums.

However, as Bitcoin’s price rose and the mainnet’s throughput limitations became apparent, Bitcoin as a P2P electronic cash system seemed to lose appeal for mainstream markets.

On-Chain Payments via Smart Contract Platforms

We cannot deny that the advent of smart contract platforms has promoted a more diversified blockchain ecosystem, leading to the evolution of on-chain payment models. However, despite stablecoins like USDT being used for on-chain payments, these solutions do not appear to be the ultimate answer for crypto payments due to their inherent limitations.

At the root of the issue is perhaps the divergence of smart contract models like Ethereum from the original P2P ethos. Even though these platforms champion “decentralization,” they still fundamentally differ from P2P architectures. The former may still include hierarchies or intermediaries, while the latter aims to eliminate them, enabling direct interaction between participants.

A general-purpose world computer may not be the best choice for crypto payment infrastructure.

The “everything on-chain” mindset of these smart contract platforms overburdens the network. Despite various scaling solutions, their combined effects still struggle to meet the basic infrastructure requirements of payment systems. For instance, Visa, as a global payment network, can handle over 65,000 transactions per second, while Ethereum’s average TPS is 12, and various L2s average only a few dozen. Even Solana, with its high hardware requirements for validators, has an average TPS of about 2,000. This comparison only addresses throughput; factors like latency, cost, and privacy are not even considered here. While privacy coins like Zcash and Monero are working to address payment privacy, they have inadvertently been associated with the gray market, making privacy a controversial topic.

Unlike Bitcoin’s PoW consensus mechanism and UTXO model, most smart contract platforms adopt account models and contract-centric designs, which introduce centralization elements by tightly coupling asset ownership with application logic. This transforms P2P (Peer-to-Peer) interactions into peer-to-contract (Peer-to-Contract) relationships. For example, token contract owners can directly modify the balance of tokens in your account.

Therefore, while on-chain payments can meet certain crypto payment scenarios, from a holistic perspective — considering throughput, latency, cost, and privacy — they still fail to provide the optimal solution.

The Hybrid of Cryptocurrency and Traditional Payment Systems: Transitional Products

The fusion of cryptocurrencies with traditional payment systems is on the rise, driven by the high profit potential of the crypto industry, intense competition in traditional payments, high operational costs, and the advantages of new technologies in payments.

Common scenarios include crypto-to-fiat gateways, using cryptocurrencies to purchase goods or services in the real economy (e.g., crypto prepaid debit cards, third-party payment platforms like Revolut).

While the integration of crypto with traditional payment systems bridges some gaps, it still comes with many limitations and drawbacks. For example, crypto prepaid debit cards suffer from high fees (conversion fees between crypto and fiat, monthly fees, etc.), card funds can only be used for purchases and not for real transfers, and KYC requirements, along with varying regulatory requirements across regions and potential platform risks, raise sustainability concerns.

What Should Crypto Payments Look Like?

This isn’t to say that the above-mentioned crypto payment models are wrong; they simply need to match their respective use cases.

If a whale needs to transfer a large sum worth billions of dollars, then transacting in BTC on the Bitcoin network might be the safest on-chain option. In such a case, concerns like throughput, cost, and latency might not matter much, although privacy might be a bit unsatisfactory. Even though the address is anonymous, tracking methods could still uncover some clues.

What if we aim to achieve the user experience of Web2 mobile payments? Or, thinking even further, some believe that crypto payments are the ideal method for machine-to-machine payments in the future IoT era. Similarly, crypto payments can also apply to task settlement payments between AI agents amid the AI boom. In such cases, frequent small transactions would likely become the norm, but current smart contract platforms seem incapable of meeting these demands.

At this point, those who have been in the industry for a few years might recall a term: the Lightning Network.

Indeed, these are precisely the scenarios that the Lightning Network solution envisioned.

Returning to the Vision: Bitcoin’s Technology Stack and common Lightning Network for P2P Off-Chain Payments

After much back-and-forth, the direction returns once again to Bitcoin’s technology stack. Of course, this doesn’t mean trying to turn Bitcoin back into an electronic cash system, but rather learning from Bitcoin’s technology stack to address current system shortcomings and build a genuine P2P payment infrastructure.

Bitcoin’s Technology Stack: PoW + UTXO

The PoW consensus mechanism and UTXO model distinguish Bitcoin from mainstream smart contract platforms. The combined advantages include:

● True decentralization: PoW allows all participants to compete equally, without reliance on centralized institutions, ensuring fairness and censorship resistance.

● Security and resistance to attacks: PoW ensures that attackers require substantial computational power, increasing attack costs and enhancing system security, effectively defending against 51% attacks.

● User-controlled assets: The UTXO model gives users direct control of their assets without needing to trust third parties, enhancing privacy and ownership.

● Scalability: The UTXO model allows nodes to verify specific transactions, increasing system scalability, especially in transaction verification.

● Free competition and governance: Miners compete for rewards through their own efforts, and users can transfer assets freely without needing central institution approval, aligning with the ideals of liberty and decentralization.

common Lightning Network Solution: Reviving the P2P Vision

Bitcoin’s base layer provides a secure, decentralized foundation for storing and transferring value. However, it faces scalability and transaction speed limitations. To address these issues, the Bitcoin community introduced the Lightning Network, a second-layer solution running on top of the Bitcoin blockchain, with the following key advantages:

● Efficient micropayments: Off-chain payment channels enable instant, low-cost, high-throughput micropayments, reducing the load on the main chain and making it ideal for frequent transactions.

● Privacy protection: Transactions don’t need to be broadcast publicly, offering a more private payment method and reducing the risk of surveillance on users’ financial activities.

● Disintermediation: Direct P2P payment channels eliminate intermediaries, fostering true decentralized value transfer.

● Scalability: The network supports higher transaction frequency and speed, solving Bitcoin’s base layer scalability issues and fitting global payment needs.

● Facilitating new applications: It supports machine-to-machine (M2M) payments and IoT interactions, opening up new payment and pricing models.

● Bitcoin compatibility: As a second-layer solution, it retains Bitcoin’s security and decentralization features.

However, we cannot ignore the current slow development of Bitcoin’s Lightning Network. For the past two years, its capacity has hovered around 5,000 BTC, with the number of channels declining from a peak of 80,000 to around 48,000, and the number of active nodes remaining at approximately 13,000.

The sluggish progress can likely be attributed to two main reasons: a lack of application scenarios and Bitcoin itself not being a stablecoin, making it difficult for ordinary people to use it for everyday payments.

This may have been one of the motivations behind CKB’s release of the Fiber Network. Fiber was inspired by the Bitcoin Lightning Network, sharing a similar goal of providing a high-performance, low-cost micropayment network. However, Fiber Network does not aim to replace the Lightning Network; the two are complementary rather than competitive. As a later entrant, Fiber Network possesses some unique qualities that enable it to more flexibly address the challenges currently facing Bitcoin’s Lightning Network:

● Based on the Turing-complete CKB, it has more flexibility and can achieve functionalities and innovations that are difficult to realize on Bitcoin. This makes Fiber Network simpler in some implementations and capable of addressing scenarios that the Lightning Network struggles with.

● The on-chain costs of CKB are relatively lower compared to Bitcoin, giving it an advantage in liquidity management.

● It supports multiple digital assets and user-defined tokens, including BTC, CKB, and stablecoins.

To promote the adoption of P2P off-chain payment models like the Lightning Network, CKB has proposed a common Lightning Network solution composed of three key parts:

● Creating a connected and inclusive Lightning Network universe: Encouraging the expansion of the Lightning Network beyond Bitcoin and supporting other blockchains in developing their own Lightning Network implementations. For example, CKB has introduced Fiber Network (CFN), Liquid has its own Lightning channels, and Cardano is developing Hydra. These different implementations are interoperable, creating a highly liquid global value network that enables seamless asset transfers between channels.

● Expanding Lightning Network nodes: Building a global, distributed, censorship-resistant network through dedicated hardware devices and encouraging users to set up their own nodes using personal devices and open-source software to facilitate fast, low-cost payments across multiple blockchain networks.

● Establishing a P2P application ecosystem: Providing a fast, low-cost, scalable payment infrastructure to enable widespread innovative applications and services, reshaping traditional business models, and creating new opportunities for value creation and exchange. This could include Lightning Network-based DEXs, content platforms driven by microtransactions, and more.

By now, we may have a rough idea of the P2P off-chain payment ecosystem that CKB aims to build. It is fundamentally different from the current mainstream crypto ecosystem dominated by EVM. It uses PoW + UTXO as the foundational tech stack and the Lightning Network as the upper-layer infrastructure, naturally forming a P2P payment infrastructure that perfectly aligns with our vision of a true crypto payment model:

● High throughput: The inherent advantage of off-chain payments via Lightning Network channels.

● Low latency: Off-chain transactions provide instant confirmation, delivering a second-level payment confirmation experience.

● Low cost: Reducing the frequency of on-chain transactions lowers user transaction fees, making small payments feasible and efficient.

● Privacy protection: The Lightning Network’s off-chain payment channels allow for private transactions without broadcasting them on the public blockchain, without the stigma or risks associated with specific privacy coins.

At this point, the future map of crypto payments may finally be fully realized. Whales can opt for Bitcoin’s mainnet for large-value transfers, while ordinary users can still choose stablecoin transfers across public blockchains. For small, high-frequency micropayments or IoT and AI agent scenarios, a robust Lightning Network-based P2P off-chain payment infrastructure will be available.

Conclusion

From Bitcoin’s P2P electronic cash system in 2008, to Ethereum and other smart contract platforms enabling on-chain payments in 2014, to today’s integration of cryptocurrencies with traditional payment systems, the crypto payment model has undergone several evolutions but has yet to achieve the ideal blueprint for the industry. Now, Nervos CKB bravely returns to Bitcoin’s original vision, reviving the core ideas of the Lightning Network and exploring the possibilities of P2P off-chain payments through the Fiber Network, driving the actualization of this payment model. This not only completes the map of crypto payments but also actively explores future payment scenarios, especially in the realms of IoT and AI agent payments.

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