The paymaster has long played a key role in receiving, holding and disbursing funds in the world of traditional finance, so we shouldn’t be surprised that it’s now assuming similar responsibilities in the world of decentralized finance and cryptocurrency too.
A number of Layer-2 networks, such as Prom, and crypto wallets like Kana Labs, have recently added paymaster capabilities to their offerings in an effort to simplify the way complex crypto transactions are performed. It’s a welcome development that could go some way towards streamlining the problematic process of inter-blockchain commerce.
In traditional finance, a paymaster is a neutral individual appointed by a government, buyer, seller, investor or lender to receive, hold and disburse funds, fees, salaries, remuneration or fees when certain contractual obligations are met. For example, in the oil and gas industry, where large commissions are frequently paid, it’s common for the entities involved to appoint a neutral third party to handle the incoming and outgoing funds in complex contractual agreements.
What are crypto paymasters?
In crypto, the paymaster is a relatively new concept that was enabled by the Ethereum Improvement Proposal EIP-4337, which was an update to the Ethereum blockchain designed to simplify transaction experiences for users. Paymasters are smart contracts that power “sponsored transactions,” which is a feature that allows users to transact on a blockchain without paying gas fees in the native token of that platform. Instead, the gas fee is either paid by the dApp or service the user is interacting with, or else it’s covered by a third party (such as a wallet or Layer-2 network), which effectively sponsors transactions for the user.
The crypto paymaster is essentially invisible to the end user but dramatically simplifies the transaction process. It’s the key ingredient that allows a third party to sponsor a blockchain transaction. In doing so, dApps and services that were previously complicated for new users become much simpler to interact with, which can hopefully onboard more users.
The paymaster can be likened to a bank or payment service provider in traditional finance, which pays users fees when they perform a transaction using its platform.
Why does crypto need paymasters?
Paymasters are especially useful in crypto because existing blockchain infrastructures are poorly designed and confusing to many new users. Using Ethereum as an example, whenever someone performs a transaction on that network, they are required to pay gas fees (transaction fees) in ETH, the platform’s native currency. That’s a simple enough concept when using ETH itself as the currency, but it becomes complicated when using one of the many hundreds of alternative crypto tokens that also live on Ethereum, such as USDC, USDT, LINK, MATIC, UNI, and DAI.
For instance, if someone is buying a cup of coffee using USDT, they might be charged 2 USDT for the coffee itself, but in addition to that, they must also pay a gas fee in ETH tokens, which unnecessarily complicates things. If the user doesn’t have enough ETH to pay the fees, their transaction won’t be processed and they won’t be able to pay for the coffee.
It gets even more complicated in the case of multi-chain transactions, which are common in DeFi. If someone is conducting a cross-chain swap between Ethereum and Solana for instance, they might have to pay separate gas fees in both ETH and SOL. In either case, if the user doesn’t have enough ETH or SOL, the entire transaction fails.
In a real-world example, say someone is trying to send a remittance from the U.S. to Ghana. It would be like asking them to pay the transaction fee in Euros, when the currencies involved are the U.S. dollar and the Ghanaian cedi. It really doesn’t make sense. What’s more, it’s tiresome, inefficient, incurs additional costs, and for some people it’s just too complicated to understand. It’s believed that these complications have dissuaded a large number of people from using blockchain.
It would make much better sense if the user were able to pay in the same cryptocurrency as the one they’re transacting with, and this is what crypto paymasters do.
Pioneering the paymaster
Paymasters simplify the complex gas fee issues in crypto by allowing a dApp or Layer-2 network to handle things on behalf of the user. For instance, a crypto wallet that supports EIP-4337, such as Ambire Wallet, allows users to pay for things in USDC while also paying their gas fees in USDC. The Ethereum network will still ultimately receive its fees in ETH, but all of the complexity involved is abstracted away from the user.
One of the most innovative crypto paymasters is Prom, the modular ZkEVM Layer-2 network that supports multichain interoperability for both EVM and non-EVM blockchains. Prom enables blockchain interoperability by submitting a proof-of-transaction to the networks involved, as well as the chosen settlement chain, creating a bridge between various blockchains. It’s quite unique among L2s in that it uses novel zkSNARKs to reduce transaction costs compared to most alternatives, which use more inefficient Optimistic Rollups.
Prom is laser-focused on enabling the Account Abstraction features of EIP-4337, and its implementation of Paymasters is designed to allow users to pay their gas fees in any token they choose. By keeping things simple, Prom aims to reduce the hurdles for new users and boost blockchain adoption. It covers all transaction types and supports a vast number of blockchains to create a more inclusive digital ecosystem.
The multichain capabilities of Prom are what really sets it apart in terms of other paymasters, because this allows it to sponsor gas fees for even the most complex, cross-chain transactions.
Paymaster plus
The most significant single advantage of using a paymaster is that users no longer have to worry about having enough crypto in their wallet to pay for gas fees. For those who regularly use USDT or USDC to make payments, it has always been necessary to ensure they have enough ETH to cover each transaction, and that means regularly topping up their wallet. With paymasters, this is no longer required.
The result is that transactions are much simpler, but there are other advantages too, as paymasters also make gas fee costs easier to predict. Paymasters can be used to set limits on transaction costs, and they can also help to reduce fees in times of heavy network congestion, for example by paying these costs upfront.
They also pave the way for newcomers to explore the more complex aspects of the Web3 ecosystem, such as NFTs, blockchain games and DeFi, without needing to buy and hold numerous different cryptocurrencies.
Streamlined crypto commerce
With paymasters, a new generation of crypto wallets and L2 networks are dramatically simplifying the way crypto payments work, building bridges between different blockchains to facilitate much easier commerce. They make it easier for crypto users to start using unfamiliar tokens to make regular payments, without any of the complexity that was previously involved.
The ability to sponsor transactions and pay gas fees in any token looks to be a game-changer for inter-blockchain transactions especially, and its implementation by L2s like Prom is sure to have a positive impact on the overall Web3 ecosystem.
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