A blockchain-based payment commitment system
Payment commitments are a major trade make-or-break element in a B2B trade cycle. Both customers and suppliers are cautious about risk-free payments. Traditionally, customers resorted to Banks to guarantee their payments to suppliers in the form of Bank Guarantees/Letters of Credit, etc.,
Vakku is enabling a blockchain-based trustless payment commitment system, whereby, customers can leverage the benefit of blockchain, can create an irrevocable payment commitment by themselves.
Vaakku is a project for Chia Hackathon. What is Chia? Chia is a new blockchain and smart transaction platform that is easier to use, more efficient, and secure. Chia blockchain uses Proof of Space & Time as a consensus mechanism, which consumes a lot of less energy compared to Bitcoin’s Proof of Work consensus & transaction costs are much cheaper compared to Ethereum’s gas fees.
Chia blockchain is a coin-first approach, where the coins can be programmed for specific use cases. Chia’s coin model is similar to Bitcoin’s UTXO (unspent transaction) model and this approach is widely different from Ethereum’s smart contract approach. This makes Chia, a perfect use case for the payments & payment commitments.
What are Payment Commitments?
Let’s walk through the below trade,
Alice is a wire manufacturer, wants to buy 100Mt of copper rods as raw material for the manufacturing process.
Bob, is a copper rods trader.
Alice approached Bob for placing an order of 100Mt of copper rods. Alice is happy about the technical specifications, the price, delivery & other terms of the deal, now they started talking about payment,
Alice proposed payment after delivery, Bob finds this risky, as they both are doing their first trade. Bob thinks, what if Alice didn’t pay after taking copper rods all the way to Alice’s factory? What if Alice delays in making payment?
Bob counter proposes the payment terms as Advance payment. Alice finds this risky, what if Bob didn’t deliver the copper rods after the advance payment?
This leads to a payment dilemma.
Ok, what was the traditional solution for such a payment dilemma?
Bob, the supplier, asks for a Letter of Credit (LC) from a bank. Such that upon Bob fulfilling his supplier’s task of delivering the copper rods at agreed terms & conditions, Bob is ensured of his payment from the LC issuing bank.
To get the LC issued, Alice approach his bank & either deposits cash collateral or from his banking facilities apply for the LC. The LC issuance time varies from 1 to 3 banking days and costs of LC issuance.
After the delivery of Copper rods, Bob will submit the LC required docs to the bank & if it all complies with the LC terms, the LC issuing bank will pay Bob. This process is called LC negotiation & this usually takes around 3–7 working days depending on the geographical location of the banks, as the physical documents will be couriered between banks, Yes, Physical docs in courier.
Is there a solution for the payment dilemma in Blockchain? YES!!!!
Blockchain is an immutable array of history. Once a transaction is committed on the blockchain, it cannot be manipulated or revoked, and hence transactions & commitments are irrevocable.
Usually, in a blockchain transaction, there are two parties, sender & receiver. A beautiful transaction type exists in blockchain and that is Multisig transaction. As the name suggests, a transaction requires multiple parties to sign off and such multisig transaction can be carefully structured into a B2B payment, such transaction can be trustless, without any intermediary such as Banks/financial institutions.
Payment Commitments in Chia Blockchain
Chia is a new blockchain, in layman terms, has taken the best of Bitcoin & the Ethereum ecosystem, environmental friendly in terms of mining, less expensive in terms of Gas costs. Chia’s coin can be independently programmed & such a program is called a puzzle in the Chia ecosystem. A multisig transaction can be designed in such a way, such transaction can replicate the payoff & a Letter of Credit. For example, let’s walk through a below proposed 4 of 5 multisig transaction in tandem with our previous Alice & Bob copper rod purchase example,
Proposed parties in the payment commitment process:
Party 1: Customer’s accountant — creates a multisig payment transaction
Party 2: Customer’s warehouse personnel — signs when the goods received from the supplier
Party 3: Supplier: signs when the goods have been shipped
Party 4: Customer’s Management — signs when the customer’s warehouse personnel signs that goods are received
Party 5: Arbitrator — Customer or supplier reaches out to arbitrator in case of any dispute.
Chia’s multisig delegated transaction is similar to Bitcoin’s Graftroot multisig transaction.
Using Chia Blockchain, a payment commitment system can be made which can supplement the swift system in the traditional banking system.