You have a nice robust smart contract written for a specific use case on the Ethereum Platform, you crank the smart contract using (gas)Ether (native token) & now pay using native token for that platform (Ether), wait can't I get paid in Dollars?
Smart Contracts can only transact in their native token on-chain.
But you cannot pay the end user of the contract in FIAT currency, that has to be either off-chain, unless, the bank is on the chain in some form.
Moreover if the user wants instant payout of the settlement in FIAT vs holding on an exchange for a long term in crypto or simply store in their own cold storage or any wallet of choice....there has to be a third party mechanism to hep settle crypto to FIAT in the process somewhere
Image courtesy NullByte -Wonderhowto from their post "Cryptocurrency for the hackers"
This is a very common question for someone understanding the contract to settle process for Blockchain smart contracts
So here are some of the options to solution this use-case.
Can Smart contracts can make payments in normal FIAT currency ?
I often read Blockchain or smart contract examples denominated in fiat currencies, for example “Can a smart contract can pay out my insurance claim of $5500 directly to my bank account?
The way the architecture of Smart Contracts work, they can only make payments in Cryptocurrencies (BTC, ETH, etc), and other balances stored on blockchains, they are generally called coins or tokens. Bitcoin’s Smart Contracts can make BTC payments. Ethereum smart contracts can make ETH payments, or move around coin/token balances which are recorded on Ethereum.
Smart contracts cannot make payments denominated in FIAT currencies (GBP, SGD, USD, etc), because digital fiat currencies, in general, reside in banks and financial institutions and are central sources that hold our accounts, what is the reason?.....simply because and bank accounts are currently recorded on private ledgers – not distributed ledgers.
A Centralized Solution for Smart Contract Payment
We can replicate smart contract “automated payments” by allowing it to programatically trigger a key(payment request) on a distributed ledger, which is then detected by a separate system (centralized.
This manifest will have all the attribution necessary to create a bank payment message or SWIFT message, which is then fed to a software or some feed churner or a portal, which will deconstruct the manifest & then determine whether it is a valid payment or not, which then creates a ledger posting either a debit/credit in the relevant bank ledger. Thought it sounds like a familiar approach, it still isn't a great solution.
This is an Off-Chain solution where we are prototyping an end-point conversion or
A De-Centralized Solution for Smart Contract Payment
Smart contracts will only be able to make FIAT currency payments when some representation or avatar of fiat is put on the blockchain or distributed ledger, by an entity with the legal ability to do this, whether it’s a commercial bank or central bank or a payment or a Clearing house. Most banks these days are trying to get their representation of fiat currency on distributed ledger.
The banks are considered the problem, they are the central authority that's the reason for the birth of de-centralized Peer to Peer, the bank can play a very significant role in a different way on the decentralized ledger on the Blockchain if there is a willingless to be customer need & blockchain philosophy driven = TRUST
Frederick Munawa and a lot of other Blockchain analysts also say, "there is nothing wrong with the Off-Chain payment arrangement. Suitability would need to be based on the use-case in question. "
cant agree more
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