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This is where the concept of account abstraction enters the scene. Account abstraction applies the automation principles inherent in smart contracts to crypto wallets, specifically Externally Owned Accounts (EOAs). Similar to its utilization in smart contracts, account abstraction empowers wallet owners to customize their wallets. These potential modifications encompass arrangements for recurring payments, protocols for access management, and alterations to payment methods for network charges.

The notion of account abstraction has stirred discussions within the blockchain community since its inception and appears poised to manifest in the near future. Prominent Layer 2 networks such as zkSync and Starknet are reportedly exploring applications for this technology.

Now, let’s delve into the mechanics of account abstraction and its operation.

Account Abstraction, Externally Owned Accounts (EOAs), and Smart Contracts

At its core, account abstraction disentangles Externally Owned Accounts (EOA) and smart contracts from the rigid ECDSA (Elliptic Curve Digital Signature Algorithm) digital signature scheme and the network’s consensus layer. The ECDSA serves as the validation system for EOAs and smart contract accounts, utilizing the private-public key pairing system to govern access management and the transaction execution structure for blockchain accounts. Moreover, every transaction is subjected to validation through the consensus layer.

To unravel this intricate framework, let’s break it down step by step.

First, we must understand the two types of accounts present on Ethereum and similar EVM networks:

• Externally Owned Accounts (EOAs):
• EOAs represent personal accounts owned and controlled by individual participants within the network. These accounts are denoted by cryptographic addresses, often referred to as wallet addresses. These addresses facilitate the reception and tracking of transactions involving EOAs.

EOAs operate via a public-private key pairing mechanism that encrypts information, allowing only transaction participants or holders of corresponding public keys to access complete transaction and account data. The private key serves as the exclusive means of controlling an EOA, granting the private key holder the rightful ownership to sign transactions without limitations. This system is governed by the ECDS algorithm.

The ECDS algorithm generates a signature by utilizing the transaction and the EOA’s private key. This signature encodes the transaction and its proof, enabling the recipient to verify the transaction by decrypting it using the corresponding public key. Transaction validation occurs through the network’s consensus layer, culminating in finality once these conditions are met.

• Smart Contracts:
• Functioning as a virtual computer, the EVM (Ethereum Virtual Machine) translates code fragments into state-altering instructions, much like a vending machine. These code fragments define smart contracts. Unlike EOAs, smart contracts are also represented by addresses. However, a significant divergence lies in the signature system; transactions can be executed without mandatory private-public key requisites. This characteristic empowers developers to engineer automation through smart contracts.

With a grasp of EOAs, smart contracts, and their distinctions, we can revisit the concept of account abstraction.

Mechanics of Account Abstraction

Account abstraction endeavors to infuse EOAs with the automatability inherent in smart contracts. Nevertheless, EOAs were initially structured differently and are compelled to adhere to their original design to align with network regulations. However, this original design proves overly rigid and intricate, particularly for users who possess moderate technical acumen. To actualize this vision, EOAs must be abstracted (isolated) from this stringent system, giving rise to the term “account abstraction.”

A parallel concept was introduced for smart contracts (EIP-2938), outlining a set of implementations that enable smart contracts to circumvent the signature algorithm. This extension prolongs transaction validity by executing arbitrary EVM bytecode. This functionality aims to empower smart contracts to manipulate gas prices and limits within their comfort zone.

EIP-4337 introduces an account abstraction system for EOAs that can bypass the consensus layer using an alternative mempool, a pseudo-transaction, and bundlers for transaction packaging and inclusion in blocks for validation. Ethereum’s co-founder, Vitalik Buterin, took to Twitter in October 2022 to endorse the benefits of EIP-4337.

By circumventing the consensus layer, accounts gain the flexibility to challenge certain original blockchain rules and effectuate several adjustments. However, what does this signify for users?

Potential Applications and Advantages of Account Abstraction

Visionary leaders and pioneering projects are exploring avenues to apply account abstraction, ushering in fresh opportunities for blockchain technology and propelling mass adoption. The potential use cases for account abstraction include:

• Enhanced User Experience:
• Blockchain technology and cryptocurrencies are maturing into alternatives to conventional financial systems. This evolution can be largely attributed to their robust security mechanisms. Yet, this security comes at the expense of an inflexible design that poses challenges and may lead to irreversible losses.

Blockchain users must navigate the intricacies of accepting and revoking permissions for decentralized applications (dApps), managing seed phrases and wallets, all while scrutinizing each transaction. This intricate process detracts from the user experience, particularly for newcomers seeking to enter the space (hence the popularity of centralized exchanges).

While account abstraction may not entirely resolve these issues, it has the potential to significantly enhance the usability of blockchain wallets. Projects within the blockchain realm can leverage account abstraction to deliver products equipped with pre-designed flexible features, making basic operations more accessible for users with limited technical expertise.

• Reduction of Seed Phrases:
• One of the key objectives of account abstraction is to reduce reliance on private keys. It’s worth noting that while account abstraction doesn’t eliminate the need for private keys entirely, it can facilitate the creation of contracts and protocols that mitigate the necessity for seed phrases. This streamlining of seed phrase management aims to simplify how blockchain enthusiasts handle their seed phrases.

This is achieved by enabling EOAs to establish multiple points of control for their accounts and instituting recovery mechanisms for lost private keys. Smart contracts can be devised to allow users to set alternative access routes involving authentication methods beyond seed phrases.

Accounts can be safeguarded using two-factor authentication systems, and EOAs can designate a recovery account for their wallets. The recovery account functions similarly to personal email addresses when utilizing the “Reset password” option on Web 2.0 platforms.

Another approach involves designing a recovery system through smart contracts that pose questions to users. Access would be granted to individuals who accurately answer these questions.

Additionally, account abstraction can curtail the need for seed phrases by constructing an infrastructure where users can create multiple accounts linked to the same seed phrase. The primary account’s seed phrase can unlock sub-accounts, while an additional recovery option backs up the seed phrase for the primary account. This enables users to establish accounts managed by a group without disclosing the seed phrase to all parties involved.

• Redefined Fee Payment System:
• For transactions to occur, EOAs must remit fees in Ether (ETH). Consequently, new users must fund their accounts with ETH to initiate interactions within the network. While faucet projects endeavor to encourage adoption by offering small quantities of native tokens to newcomers, this approach often falls short and opens avenues for misuse. Account abstraction has the potential to rectify this in two major ways.

Firstly, it introduces an alternative fee payment structure. Smart contracts could be devised to permit accounts to settle consensus-layer fees using a currency of their preference.

Furthermore, account abstraction empowers one account to settle transaction fees on behalf of another account. Users could manually select the account to perform this function or automate the process through smart contracts. Cryptocurrency projects could leverage this functionality to cover transaction fees or gas charges for users engaging with their smart contracts, potentially reducing the fees borne by each transaction through smart contract-backed fee coverage.

• Streamlined Automated Payments:
• Presently, EOAs must validate transactions by signing them before they are processed on the blockchain. Even transactions initiated via smart contracts require validation prior to execution. Recurring transactions also necessitate validation for each instance, which may become cumbersome for frequent and multiple transactions.

With account abstraction, EOAs can establish an automated confirmation protocol for recurring transactions. These transactions can be swiftly confirmed without requiring intervention from the EOA owner. This automation can also be extended to future payments. Automated payment systems facilitated by account abstraction could incorporate diverse authentication mechanisms such as biometrics and two-factor authentication to simplify transaction authorization.

• Consolidated Execution of Complex Actions:
• Similar to the scenario discussed earlier, the requirement for EOAs to actively endorse each transaction can prove tiresome. Herein lies the role of account abstraction. It can be programmed to bundle multiple operations and sign them collectively, streamlining the process. For instance, it could entail endorsing and executing a swap within a decentralized exchange, all in one transaction.

Challenges to Embracing Account Abstraction

The potential applications outlined above are intriguing, fostering anticipation among blockchain enthusiasts for the improvements and novel opportunities that may emerge. However, given that account abstraction is still an emerging concept, it’s plausible that compatibility issues with existing smart contracts may arise, potentially resulting in elevated costs for interactions with the blockchain network. Additionally, since smart contracts demand greater computational resources, this could translate to higher gas fees.

While current blockchain-level security remains inviolable, the proliferation of hack incidents within decentralized applications built on the blockchain is noteworthy. Account abstraction, along with the products harnessing its capabilities, might introduce a new layer of vulnerability to blockchain wallets, potentially creating exploitable vulnerabilities. The alternative account management structures and external authentication systems facilitated by account abstraction could potentially reduce the security standards of blockchain wallets to those reminiscent of the Web 2.0 landscape.

Conclusion

Blockchain technology and cryptocurrencies have ushered in the era of “you are your own bank.” Over time, the shortcomings of traditional banking systems have underscored the significance of personalized financial systems. However, perfection remains elusive; the current blockchain technology design excels in securing and virtualizing assets but falls short in accommodating a more adaptable, user-friendly framework.

Decentralized finance lacks the ease of account recovery enjoyed by participants in traditional finance and centralized exchanges. Account abstraction strives to address this gap and improve blockchain adoption.

Predicting the shortcomings of this technology remains challenging, given its nascent status. Critics speculate that flexible access management might compromise security, yet such notions are mere assumptions. It’s essential to recognize that account abstraction is an emerging technology in its infancy. Always conduct thorough research and risk assessment before interacting with protocols. This article serves an educational purpose and should not be construed as financial advice.

Understanding Cryptocurrency and Digital Payments

In order to appreciate the benefits of cryptocurrency and digital payments, it is essential to understand their fundamental concepts.

Cryptocurrency is a digital or virtual form of currency that uses cryptography for secure financial transactions, control the creation of additional units, and verify the transfer of assets. It operates independently of any central bank and is decentralized, offering freedom from government control and interference.

One of the most notable features of cryptocurrency is its use of blockchain technology. Blockchain is a decentralized ledger that records and verifies transactions across multiple computers, ensuring transparency, security, and immutability.

When a transaction is initiated in the cryptocurrency network, it is broadcasted to all the participating computers, known as nodes. These nodes validate the transaction by solving complex mathematical problems, ensuring that the transaction is legitimate and the parties involved have the necessary funds to complete it. Once the transaction is verified, it is added to a block and linked to the previous blocks in the chain, creating a permanent and unalterable record.

Blockchain technology eliminates the need for intermediaries, such as banks, as it allows direct peer-to-peer transactions. This not only reduces transaction costs but also enables faster settlement times, as there is no need to wait for third-party approvals or clearances.

Moreover, the decentralized nature of blockchain ensures that no single entity has control over the network. This makes it resistant to censorship and manipulation, as altering a transaction would require the consensus of the majority of nodes in the network.

What are Digital Payments?

Digital payments, on the other hand, encompass a broader range of technology-driven transactions that facilitate the exchange of money electronically. They include various forms such as electronic fund transfers, mobile payments, and online wallet systems.

Electronic fund transfers (EFT) allow individuals and businesses to transfer money from one bank account to another without the need for physical cash. This can be done through online banking platforms, mobile apps, or even by using a debit or credit card at a point of sale.

Mobile payments have gained significant popularity in recent years, with the widespread adoption of smartphones. These payments can be made by scanning QR codes, using near-field communication (NFC) technology, or through mobile banking apps. The convenience of mobile payments enables users to make transactions on the go, without the need for physical cards or cash.

Online wallet systems, also known as e-wallets, are digital platforms that allow users to store, manage, and transact with their money electronically. These wallets can be linked to bank accounts or loaded with funds from various sources, providing a secure and convenient way to make online purchases or transfer money to other individuals.

Unlike traditional cash transactions, digital payments rely on electronic devices and networks. They offer convenience, speed, and efficiency, making monetary transactions seamless and hassle-free.

Furthermore, digital payments contribute to financial inclusion by providing access to financial services for individuals who may not have access to traditional banking systems. This is particularly beneficial in developing countries where a significant portion of the population remains unbanked.

In conclusion, understanding the concepts of cryptocurrency and digital payments is crucial in today’s digital age. Cryptocurrency revolutionizes the way we perceive and use money, offering a decentralized and secure alternative to traditional financial systems. Digital payments, on the other hand, provide convenience and efficiency, making monetary transactions faster and more accessible. As technology continues to evolve, it is important to stay informed about these advancements and embrace the opportunities they bring.

The Evolution of Digital Payments

The history of digital payments can be traced back to the earliest forms of electronic fund transfers. Let’s explore the journey that has led us to the current era of cryptocurrency and digital payments.

In the 1970s, electronic funds transfer (EFT) emerged as the first form of digital payment. It allowed the transfer of funds between financial institutions and paved the way for the development of online banking. This innovation revolutionized the way people managed their finances, providing a faster and more convenient way to transfer money.

However, it was not until the 1950s that the introduction of credit cards truly transformed the way we make payments. Credit cards provided a secure and convenient way to transact without the need for physical cash. This breakthrough allowed people to make purchases and pay for services with ease, significantly reducing the reliance on carrying large amounts of cash.

With the advent of the internet in the 1990s, online payment systems started to emerge. Companies like PayPal and Google Wallet revolutionized the way people made payments for goods and services online. These platforms provided a secure and convenient way to transfer money electronically, opening up new possibilities for e-commerce and online transactions.

The Rise of Cryptocurrency

In 2009, cryptocurrency burst onto the scene with the introduction of Bitcoin, the first decentralized digital currency. Bitcoin’s revolutionary blockchain technology and its promise of secure, peer-to-peer transactions created a wave of excitement and interest. It offered an alternative to traditional banking systems, allowing users to have full control over their finances without the need for intermediaries.

Since then, numerous cryptocurrencies have emerged, each offering its unique features and benefits. Ethereum, for example, introduced smart contracts, enabling developers to build decentralized applications on its blockchain. Ripple focused on facilitating fast and low-cost international money transfers, while Litecoin aimed to improve upon Bitcoin’s transaction speed and scalability.

The rise of cryptocurrency has not only transformed the way we think about money but also opened up new opportunities for innovation and financial inclusion. It has challenged traditional banking systems and sparked discussions about the future of money and the role of central banks.

As digital payments continue to evolve, we can expect to see further advancements in technology and the emergence of new payment solutions. From mobile payments to biometric authentication, the possibilities are endless. The future of digital payments holds great promise, offering convenience, security, and financial empowerment to individuals and businesses around the world.

The Benefits of Digital Payments

While cryptocurrency offers a unique set of advantages, digital payments as a whole bring numerous benefits to individuals and businesses alike.

Convenience and Speed

Digital payments offer unparalleled convenience and speed. With just a few taps on a mobile device or clicks on a computer, transactions can be completed within seconds, eliminating the need for manual paperwork or physical visits to banks. Additionally, digital wallets and payment platforms combine multiple payment methods and streamline the entire payment process, making it easier than ever to transact.

Reduced Costs and Increased Efficiency

Digital payments significantly reduce transaction costs compared to traditional payment methods. They eliminate the need for physical infrastructure, paperwork, and intermediaries, thereby lowering operational expenses for both buyers and sellers. Moreover, digital payments allow businesses to automate payment processes, reducing the time and effort required to reconcile transactions and manage cash flow.

Enhanced Tracking and Control

Traditional payment methods often lack transparency, making it challenging to track transactions and detect fraudulent activities. In contrast, digital payments provide a clear trail of transaction history, allowing for easy auditing and enhanced security. Businesses can also implement robust financial management systems that provide real-time insights, enabling better control over their financial activities.

Real-world Applications of Crypto and Digital Payments

Cryptocurrency and digital payments have gained significant traction in various sectors, transforming the way we transact and interact with money.

Cryptocurrency in E-commerce

The rise of e-commerce has been fueled by the acceptance of cryptocurrencies as a legitimate form of payment. Major platforms and online retailers now offer the option to pay with crypto, providing users with more flexibility and privacy. For international transactions, cryptocurrencies also eliminate the need for currency conversions, simplifying the payment process and reducing fees.

Digital Payments in Everyday Life

In our everyday lives, digital payments have become the norm. From contactless payments using devices like smartphones and smartwatches to peer-to-peer payment apps, the convenience of digital payments has revolutionized the way we shop, dine, and split bills.

Furthermore, digital payment platforms and mobile wallets have empowered individuals to manage their finances efficiently, track expenses, and create budgets.

In conclusion, cryptocurrency and digital payments offer a wide range of benefits that are reshaping the global financial landscape. From enhanced security and accessibility to convenience and speed, these technologies have the potential to revolutionize the way we transact and store value. As they continue to evolve, the possibilities for their adoption in various industries are limitless. By embracing cryptocurrency and digital payments, individuals and businesses can unlock a world of financial possibilities.

A transparent and fair regulation framework, vibrant fintech ecosystem and ease of doing business make Singapore the ideal place for fintech companies to set up shops.

In the PwC’s fintech’s state of play report 2022, 31 per cent of fintech companies in Singapore are providing payment-related services. A strong regulatory framework in a highly respectable financial industry, Singapore has positioned itself as the hub for payment and crypto companies. More than 500 applications were submitted when the Payment Services Act (PSA) were in force in 2019 is a testimony that Singapore is a popular destination for these companies.

Electronic money, also known as e-money, is a digital medium of exchange that is represented on an electronic device, such as a smartphone or a prepaid card. E-money offers several benefits, including increased security, convenience, and fast transaction speeds. It has greatly reduced the role of cash in many countries and is expected to replace entirely in the future.

Understanding the Singapore payment license regime

Under the Payment Services Act (PSA) licensing framework, companies are being regulated based on the activities they operate in, and there are seven regulated activities under the Act.

Depending on the applicant’s business plan, they could be regulated for one or more activities under the Act. The seven activities are sufficient to regulate and encourage innovation among the fintech companies. Let’s take a closer look at how each individual license activity helps companies to innovate within the regulated regime in Singapore.

Activity A: Account issuance service

GRAB: Super app for non-bank financial services

Interestingly, MAS does not require licensees to pay any application fees for this licensed activity, but this does not mean that it is not useful to get this activity.

This activity is particularly useful for B2C companies, and one of them would be GRAB. In the GRAB app, users can top-up fiat into their e-wallets in the app as stored value in order to make purchases for GRAB-enabled merchants and services. With this e-wallet, it allows users the convenience of topping up Fiat and using them to pay for goods and services with the click of a button.

Activity B and C: Domestic and cross-border money transfer services

Transfer Wise: Transferring funds anywhere, anytime

These activities are the most common activities that most payment companies will be using as part of their businesses. In short, these activities simply mean how your company transfers funds (i.e. Fiat) to other entities.

If it is within Singapore (e.g. transferring of funds to a local supplier in Singapore) and if the fund transfer is outside of Singapore, it would likely fall under cross-border money transfer service.

A quick check on the Monetary Authority of Singapore (MAS) website, you can see that cross-border money transfer activity is the most licensed activity among the rest, which is rightfully so given the nature of payment companies being globally focused.

Transfer Wise, an international payment company, is an example of how they have both domestic and cross-border money transfer services to allow their users to transfer funds locally and to other countries.

Activity D: Merchant acquisition service-empowering merchants to grow their business

Merchant acquisition is the most familiar with local merchants and one of the most frequently used activities by local merchants. The POS machines that you see at shopping malls that allow merchants to receive payment via credit cards are a good example of the use of merchant acquisition.

Activity E: Issuance of e-money

StraitsX: Project Orchid

During the recent Singapore FinTech Festival (SFF), StraitsX, for Project Orchid, launched a purpose-bound e-money where participants could download the e-money voucher at the exhibition to redeem it at participating partners.

Such a use case would require the entity to have the license to conduct account issuance and issuance of e-money activities. Below is the flow of wrapped xSGD offered by Xfers under Project Orchid during this year’s SFF.

Apart from StraitsX, Grab and Temasek, other supporting partners include ADDX, AltLayer, Automata, Coinbase Wallet, dtcpay, Fomopay, Sequence, TripleA, Trust Wallet and VISA.

Activity F: Digital payment tokens

dtcpay: Digital asset services

When the Payment Services Act (PSA) was launched in 2019, it created an international buzz because of this particular activity that will be licensed under the Act. Digital Payment Tokens (DPTs) or commonly known as cryptocurrency, made Singapore one of the pioneers in regulating cryptocurrency at that time.

It is worthwhile to note that this activity is also one of the most sought-after since only 11 entities have obtained this licensed activity (as of December 2022), with many applicants still waiting or having already withdrawn their license applications.

Other than the usual crypto exchanges in the likes of Independent Reserves, Coinhako, there are also stablecoins issuers such as Circle and Paxos as well as crypto payment players like Digital Treasures Centre that have thus far received this licensed activity from MAS.

Crypto payment company like dtcpay empowers merchants to accept crypto as payment and assist them in converting it into fiat for settlement. It allows merchants to open up to new customer segments, such as crypto natives, to grow their businesses. Such an innovative use case is one of the key competitive advantages of having this licensed activity.

Finding the right strategic partner for sustainable growth

Having a responsible business in a regulated country, especially one that is well respected internationally, like Singapore, helps build trust and confidence among its customers and investors. This helps them to grow in a sustainable manner.

Many fintech companies might have products that could disrupt industries but are lacking in compliance and regulatory experience. And that’s where they could partner with experienced licensed entities such as dtcpay to work on growing the products while ensuring that they meet the regulatory requirements.

Such strategic partnership also helps to uplift the industry as a whole to become a more responsible and sustainable business model. Interestingly, dtcpay is one of the two companies (as of December 2022) that have obtained the six activities listed above, giving dtcpay and its partners the competitive advantage to scale and launch new products quickly in Singapore.

If you are looking for a strategic partner in Singapore, dtcpay can provide the expertise and experience to assist you in building your presence in Singapore.

Consumers in the SEA already demonstrate a high willingness to use mobile payments and exceed the global average when self-reporting their participation in mobile banking activities. For example, more than half of them have paid a bill or checked their bank account balance on their mobile phone.

There has also been a leap in the adoption of alternative payment methods in Southeast Asia since the recent pandemic. In a recent report by BCG, 30% of Southeast Asian consumers have reduced their use of traditional payment methods, in an attempt to reduce physical contact. In addition, digital payments in Asia are forecast to exceed US$350 billion by 2026 according to Seamless Asia. 

Electronic money, also known as e-money, is a digital medium of exchange that is represented on an electronic device, such as a smartphone or a prepaid card. E-money offers several benefits, including increased security, convenience, and fast transaction speeds. It has greatly reduced the role of cash in many countries and is expected to replace entirely in the future.

Benefits of e-money

Security

E-money is considered more secure than cash because it cannot be lost, and it is less vulnerable to theft. Encryption technology, customer authentication technologies, and regulatory standards ensure that e-money remains secure on the web. Service providers are also required to comply with KYC, anti-fraud, anti-risk, and AML regulations to prevent theft of identity and other cybercrimes.

Convenience

Paying online has become the domain of electronic money– and it has for good reasons. Choosing prepayment via bank transfer as the payment method for online shopping ends in trips to banking branches or your bank’s often convoluted online banking platform. For payment on an online platform, you simply choose your e-wallet as the payment option and buy with just 1 click. It’s literally like opening your wallet and handing over cash, except digitally.

Fast Transactions

In addition, e-money offers fast transaction speeds, with transactions at points of sale or in online shops occurring instantly. Online transfers between payers’ and payees’ accounts are considerably faster than wire transfers, taking only minutes instead of several days.

dtcpay Launched eSGD Pilot Program 

dtcpay, a licensed and regulated payment solutions provider, has recently launched an e-money pilot program.

The purpose of this e-money pilot program is to provide a secure and convenient payment option for merchants and their customers. With the increasing demand for cashless transactions, e-money has become an essential part of the payment landscape. dtcpay aims to simplify the payment process for merchants and customers alike, providing a seamless experience for all parties involved. 

By participating in this pilot program, merchants can offer their customers a range of benefits such as faster and more secure transactions, reduced costs, and enhanced convenience. dtcpay’s e-money solution is designed to help merchants to grow their business by providing efficient and reliable alternative payment solutions.

This program is designed for selected merchants who wish to participate in the e-money payment system. Merchants who are interested in joining this program can reach out to dtcpay for further information. 

dtcpay’s e-money pilot program is a significant step forward in the evolution of payment solutions. It represents an exciting opportunity for merchants to embrace the digital economy and reap the benefits of a modern payment system.