Revitalizing Cross Border Payments through Decentralized Oracles

While researching the use of decentralized oracles and their implementation in the fintech industry, it became evident that cross-border payments stand out as a leading application. Digging deep into this use case has unboxed many questions that I had in my mind for a decade.

Party A is sending money to another party! Simple, isn't it? But have you ever thought about how the cash flows from the source to the destination? What are the complications behind the scenes, and how many stakeholders are involved in ensuring this transaction is completed flawlessly in minutes, hours, or sometimes days?

I was able to grab the insights and would love to share them in this article. After you read this article, you will understand how the transaction is covered, how cross-border payment works, and how an oracle can be utilized.

Most of us (at least the demographic where I come from), while sending money, would have seen three options (RTGS, NEFT, IMPS). However, there are many other options as well. For this article, let me take RTGS (Real-Time Gross Settlement) as an example.

When a person initiates a payment of $500 from Bank A to Bank B in an RTGS system, the transaction involves several steps to ensure immediate and final settlement. Here’s how it typically works:

1. Payment Initiation - Customer Request: The customer instructs Bank A to transfer $500 to a beneficiary account at the Bank - Payment Order: Bank A creates a payment order and submits it to the RTGS system for processing.
2. Verification and Authorization - Bank A Verification: Bank A verifies the customer's request, ensuring there are sufficient funds in the customer's account. - Authorization: Once verified, Bank A authorizes the payment and prepares to transfer the funds.
3. Settlement in RTGS System - Submission to RTGS: Bank A submits the payment instructions to the RTGS system. - Debit and Credit Accounts: The RTGS system immediately debits $500 from Bank A’s account and credits $500 to Bank B’s account within the RTGS system. - Bank A’s Account: Bank A’s settlement account held at the central bank is debited by $500. - Bank B’s Account: Bank B’s settlement account held at the central bank is credited by $500.- Finality: The settlement is final and irrevocable. The transaction is completed in real-time, meaning Bank B now has the funds immediately available.
4. Notification and Reconciliation - Notification to Banks: The RTGS system sends confirmation messages to both Bank A and Bank B regarding the successful settlement of the payment. - Notification to Beneficiary: Bank B updates the beneficiary’s account with the $500 credit and notifies the beneficiary of the incoming funds.
5. Account Updates - Customer Account Debit: Bank A debits the customer’s account for $500. - Beneficiary Account Credit: Bank B credits the beneficiary’s account for $500.

Now, if you look at this example, the actual flow takes a few mins to hours depending on the time zone you initiate the transaction and the bank's working hours. From a user standpoint, they had to wait or utilize IMPS for immediate settlement. IMPS mostly incurs some additional charges to handle this transaction. When you consider cross-border payment, it takes not hours, but days, sometimes weeks.

Cross-border payments are crucial for individuals, businesses, traders, institutions, and other international organizations. Utilizing blockchain for these payments simplifies and streamlines the process.

With the advancement of blockchain technology and decentralized finance (DeFi), there is an increasing demand for cross-border payments within the Web3 ecosystem, as more people and businesses seek to transact with digital assets.

Blockchain cross-border payments are transactions between parties in different countries, facilitated by blockchain technology.

Traditionally, these payments were managed by banking and financial institutions, involving a complex network of intermediaries like correspondent banks and clearinghouses. This often led to high transaction fees, lengthy processing times, and a lack of transparency.

In contrast, blockchain-based cross-border payments aim to remove intermediaries, lower costs, and enhance the speed and security of financial transactions. A decentralized oracle plays a crucial role in enhancing cross-border payment solutions using blockchain technology by providing reliable and tamper-proof external data to smart contracts. Here’s how decentralized oracles contribute to cross-border payment solutions:

1. Reliable Exchange Rate Data: Decentralized oracles can fetch and provide accurate and up-to-date exchange rate data from multiple sources. It ensures that cross-border payments are converted at fair and current rates, reducing discrepancies and ensuring transparency for both parties involved in the transaction.
2. Real-Time Transaction Verification: Oracles can confirm the completion of off-chain events required for transaction settlements, such as the receipt of funds in a foreign bank account. It enhances trust and reduces the risk of fraud by ensuring that all conditions for a transaction are met before funds are released.
3. Compliance and Regulatory Data: Decentralized oracles can provide necessary regulatory compliance information, such as anti-money laundering (AML) and know your customer (KYC) verifications. It helps in adhering to international financial regulations and compliance requirements, which is critical in cross-border transactions.
4. Automated Settlement: Smart contracts can use data from oracles to automatically execute payment settlements once predefined conditions are met. It reduces the need for intermediaries, speeds up the transaction process, and lowers costs associated with cross-border payments.
5. Transparency and Security: Oracles ensure that the data fed into the blockchain is accurate and verified by multiple independent sources, enhancing the overall transparency of the payment process. It provides security against data manipulation and reduces the risk of single points of failure, which is essential for the integrity of cross-border payments.
6. Dispute Resolution: In case of disputes, decentralized oracles can provide trusted data to verify claims and automate the resolution process. It streamlines the resolution of disputes by providing a neutral, verifiable source of truth, reducing the time and cost associated with manual dispute resolution.

Advantages of using decentralized oracles for cross-border payments include:

• Speed: Transactions are processed in real-time or near real-time.
• Cost: Reduced transaction fees compared to traditional banking systems.
• Trust: Enhanced trust through tamper-proof data and smart contract automation.
• Transparency: Clear and transparent transaction details accessible on the blockchain.

By leveraging decentralized oracles, cross-border payment solutions on the blockchain can achieve higher efficiency, lower costs, and greater trust, making international transactions smoother and more reliable.