Blockchain-based Cross-border Payment System: Technical Architecture and Efficiency Optimization

Problem Description

Traditional cross-border payments rely on multiple layers of intermediaries among banks (e.g., the SWIFT system), leading to high settlement delays (typically 2-5 days) and expensive fees (up to 3%-7% of transaction value). Blockchain technology, through decentralized ledgers and smart contracts, enables peer-to-peer cross-border payments, improving efficiency and reducing costs. This topic requires an in-depth analysis of the core components of its technical architecture and explores how to optimize transaction throughput and settlement speed.

1. Pain Points Analysis of Traditional Cross-border Payments

Step-by-step Details

• Long Intermediary Chain: Remitting bank → Correspondent bank → Clearing institution → Receiving bank, each layer requires reconciliation and compliance checks.
• Currency Conversion Costs: Reliance on multi-currency settlement accounts (Nostro/Vostro accounts) ties up liquidity.
• Time Zone and Compliance Delays: Different national working hours and Anti-Money Laundering (AML) review processes extend processing times.

Example: A user sending \(1000 from China to the USA might incur a \)30 fee deducted by intermediary banks, with funds in transit for 3 days.

2. Basic Architecture of Blockchain-based Cross-border Payments

Core Components

1. Distributed Ledger (DLT)

   • Function: All participating nodes (banks, payment institutions) share the same ledger, synchronizing transaction records in real-time.
   • Technology Choice: Consortium chains (e.g., Hyperledger Fabric) balance efficiency and permission control; public chains (e.g., Stellar) are more suitable for small payments.

2. Smart Contracts

   • Functionality: Automatically execute compliance checks (e.g., AML rules), currency exchange, and settlement.
   • Example Workflow:

     1. Remitter locks funds into a contract address
     2. Contract verifies the payee's KYC status
     3. Real-time invocation of an exchange rate oracle for currency conversion
     4. Funds are automatically released to the payee
     

3. Stablecoins and Central Bank Digital Currencies (CBDC)

   • Role: Mitigate risks associated with cryptocurrency price volatility, using assets like USDC or the digital yuan (e-CNY) as settlement mediums.

3. Key Technologies for Efficiency Optimization

(1) Increasing Transaction Throughput

• Sharding Technology

  • Principle: Divides the network into multiple subgroups (shards) that process transactions in parallel.
  • Case Study: The Zilliqa chain increased TPS (transactions per second) from 10 to 2,828 via sharding.

• Off-Chain Channels

  • Application: Bidirectional payment channels (e.g., Lightning Network) facilitate high-frequency, small-value transactions, with only the final result settled on-chain.

(2) Reducing Settlement Latency

• Consensus Algorithm Optimization

  • Traditional PoW (Bitcoin): Requires waiting for multiple block confirmations (~1 hour), resulting in high latency.
  • Alternatives: PBFT (Practical Byzantine Fault Tolerance) or PoS (Proof of Stake) reduce confirmation times to seconds.
    • Example: RippleNet's consensus algorithm can complete cross-border settlement within 3-5 seconds.

• Cross-chain Interoperability

  • Need: Asset transfers between different blockchain networks (e.g., Bitcoin and Ethereum) require cross-chain bridges.
  • Technology: Hash Time-Locked Contracts (HTLC) ensure atomic swaps, avoiding intermediary risks.

4. Comparison of Practical Cases

5. Challenges and Limitations

• Regulatory Compliance: Varying cryptocurrency legislation across countries (e.g., China's ban on private stablecoins).
• Scalability: Increased network communication overhead and potential latency growth as consortium chain nodes proliferate.
• Privacy Protection: Transaction data transparency to nodes necessitates technologies like Zero-Knowledge Proofs (ZKP) for enhanced privacy.

Summary

The core advantages of blockchain-based cross-border payments lie in disintermediation and process automation. Through optimization via smart contracts and consensus algorithms, near real-time, low-cost settlement becomes achievable. Future integration with CBDCs and cross-chain technologies holds the potential to further break down global payment barriers.