Foreword

This week, the author comprehensively ran through the X402 process from Demo to application.

Since Coinbase initially released X402 in May 2024, I have been paying attention to this protocol. Subsequently, Coinbase launched a complete payment infrastructure and collaborated with several leading companies exploring the AI + payment track, including Google, Visa, Cloudflare, and institutions like the Ethereum Foundation and MetaMask (wallet), as can be seen from the proposal authors. Through ERC-3009 (enhanced token standard used by USDC) and ERC-8004 (on-chain reputation registration market), Coinbase has formed a fairly clear strategy for the AI + payment niche.

It can indeed be said that Coinbase is fully committed and skillfully exploring the payment track.

However, the world of Web3 has never lacked explosive points, nor imagination. Yet, many outrageous imaginations often confuse the audience and affect judgment.

This article aims to systematically analyze the chaotic hype, distinguishing between noise and shortcomings that need to be addressed.

What is X402?

First of all, X402 is very simple; it is a set of process specifications for network API interactions.

X402 is named after the 402 status code and is a stateless on-chain payment protocol. By adding the "x-payment" field to the HTTP request header and utilizing a new role called Facilitator, which is responsible for verification on-chain, the service provider can be informed, thus completing a one-time payment task.

In fact, the HTTP protocol defined 402 as a payment-related status code in its early development, but it has not been truly utilized for decades.

The specific content of x-payment can be customized; as long as the service provider believes its parameters can complete the user's payment, subsequent services can be provided.

The system itself is structurally universal, allowing any payment system to be integrated. However, since this protocol is released by Coinbase, a publicly traded exchange in the United States, it is naturally more coupled with the blockchain model.

The theoretical comparison of this protocol appears to be filled with generational advantages. Coinbase compares based on the following four points: average fees, certainty of time, refund capability, and TPS (transactions per second).

· In terms of numbers, there is a significant advantage in fees and certainty of time, both stemming from the inherent value of blockchain as a payment system.

· In terms of shortcomings, the refund capability is insufficient—on-chain transactions cannot be easily reversed, while traditional payment platforms like PayPal have dynamic TPS values, unlike the blockchain, which struggles with scalability.

Details are as follows:

Therefore, when we talk about X402, we must first understand: it is ultimately a payment system, not an asset issuance platform. The plethora of X402 assets that seem extravagant is merely meme logic; it may provide short-term amusement, but should not be taken seriously in the long term.

How does it work?

Mechanically, X402 adds an additional role, the Facilitator, to the traditional Client side (user, AI Agent, application, the party triggering the payment) and Server side (merchant, seller). This Facilitator helps merchants determine whether a payment is successful. In fact, this role is traditionally undertaken by various payment platforms in the financial sector.

The core point is: the user initiates an on-chain payment, while the Facilitator is responsible for confirming whether the payment is successful.

Coinbase's Payment Strategy

ERC-3009 Enhanced Token Standard

Payments are inherently a challenging track for C-end transformation, relying on dual-end adaptation, meaning the seller must provide services, and the buyer must be willing to use that payment method. Coinbase's strategy leverages Shopify (one of the largest e-commerce SaaS platforms globally) through Shopify's one-click plugin and SDK integration, allowing merchants to support USDC payment capabilities worldwide without needing to understand complex crypto processes.

Many people wonder why USDC is chosen instead of USDT. The reason is simple: currently, the only mainstream stablecoin that supports ERC-3009 is USDC.

ERC-3009 is an enhanced standard of the ERC-20 token protocol launched in September 2020, and it has become a key asset type for achieving a gas-free experience in this payment track, with a straightforward operational process.

Gas-Free Operation Process

1. User signs an offline message

The user uses a wallet (like MetaMask) to sign a TransferWithAuthorization type message off-chain, specifying the recipient, amount, valid time range, and a random nonce.

2. Any third party submits the transaction

Any address (usually a merchant, platform, or relayer) can carry the signed message to call the token contract that supports EIP-3009, triggering transferWithAuthorization() or receiveWithAuthorization() to achieve the actual on-chain transfer.

3. Contract verifies the signature and executes the transfer

The contract uses the EIP-712 signature format to verify the legality of the message, ensuring the nonce has not been used and is within the validAfter and validBefore time window, then completes the token transfer from 'from' to 'to'.

This mechanism is executed on the Ethereum mainnet by Circle's official USDC contract, with actual testing showing about 77,000 gas. The typical gas cost is around 45,000 to 50,000 gas, resulting in approximately a 40% increase in gas consumption.

It can be said that this is one of the most cost-effective gas-free solutions available.

A typical counterexample is the previous gas-free transaction by MetaMask, which required two additional transactions, causing costs to surge threefold.

Compared to the AA model of ERC-4337, there are no early contract deployment costs for users, nor the wear and tear of cross-contract calls. Ultimately, the costs, when compared to gas-free implementations based on EIP-7702, also show slight advantages.

Refundable Payment Process

After eliminating gas fees, users can hold native coins without having to pay, but in terms of traditional payment logic regarding refunds, it is still insufficient, as on-chain transactions are inherently KYC-free.

Therefore, Coinbase has additionally designed a payment intermediary process, as shown in the diagram below:

The payment process has been modified to include an escrow module.

• First, the user authorizes a payment action through a signature;
• Funds move from the user's wallet into a custodial smart contract;
• The merchant captures (captures) this payment through the operator's service and ultimately withdraws it;
• If the authorization expires without execution, the user can proactively cancel the authorization and retrieve the funds.

This mechanism combines "delayed execution + mandatory authorization + revocable" on-chain payment control design, ensuring user safety while providing merchants with funding certainty.

The Operator acts as an intermediary service in the payment process, responsible for initiating gas payments and capturing the user's signed authorized transaction, but cannot modify the original intent, binding the payment object, amount limit, authorization validity period, etc., through hash signatures.

Private Key Custody Issues

This underlying technology relies on the recently popular TEE (Trusted Execution Environment) technology, with almost all exchange platforms launching their new TEE Wallets.

The structure of Coinbase's TEE Wallet is as follows:

This underlying technology is relatively complex; the core utilizes the feature of TEE where memory cannot be read externally, and the code running in TEE has a mechanism to verify its code version. Thus, running deterministic code in a data space that cannot be intervened brings a new private key custody security model.

Previously, the difficulty of user-local private key custody was due to the platform's inability to prove its innocence. Once a private key transaction is on-chain, there is no other basis (such as who the true initiator is) to prove whether it was a leak from the platform's custody or from the user themselves.

However, TEE can leverage open-source code audits for verification, similar to on-chain contracts, proving that there are no backdoors for leaking private keys.

In the context of the payment track, Coinbase offers two integration methods for merchants:

• Custodial Access (CDP SDK): Manage assets, generate transactions, etc., through Coinbase's Commerce account backend, where the underlying technology is TEE Wallet.
• Self-Custodial Wallet API v2 Access: Merchants can build their own account systems, manage keys, and integrate payment notifications, suitable for merchants with medium to high technical capabilities.

In summary, Coinbase has indeed thought through and prepared a complete service for both buyers and sellers.

How to Understand

From the release in May until the end of October, X402 suddenly became popular. Objectively speaking, it was the previously underestimated meme that saw a price increase of several times, bringing market attention.

To specifically assess its market heat, one can first scan the platform's statistics:

The image shows: from 10.17 to 11.01, 15 days of related transactions, total transaction volume, number of buyers, and number of sellers.

Data-wise, it is evident that there was a spike followed by a drop. In the face of a continuous decline in buyers, many voices believe this is a construction phase after early experiences, and we should wait for the next wave of explosion.

But will it really be like that? We need to systematically consider its pros and cons.

Shortcomings

First of all, the X402 system is not complex, which indicates that the past bottlenecks in promoting payment implementation are not technical in nature.

The current explosive point is more about the narrative logic of the future (preemptively positioning the integration of AI + Crypto as the most certain long-term narrative) that brings imagination.

Currently, some mainstream token issuance models in certain circles are reminiscent of the excitement during the inscription era. After all, once a payment is successfully recorded on-chain, users will receive a response indicating success. As for what the response entails, it depends on what the service provider wants to offer, such as sending a token, providing paid materials, or offering VIP services, etc. However, all these flashy elements do not fall under the responsibility of X402.

This means that the essence of payment has not changed. Although the 402 status code sounds impressive and powerful, what it returns is actually not important—it can return a 402, a 200 with a JSON, or anything else along with a bunch of data. Essentially, it is just an engineering encapsulation that adds a payment process.

Secondly, the currently hot point, which emphasizes the AI Agent payment experience, actually exceeds Coinbase's own expectations. Their previous strategy focused on cross-border e-commerce payment processes, which I believe is the more correct approach, including the ability to use on-chain payments at Token2049.

The reason this is a drawback is that the actual demand for AI Agents combined with payment flows has not yet arrived. An AI Agent may call an API to obtain data or other content, but with the addition of this payment logic, the entire process becomes very lengthy. However, I have also developed MCP and primarily used Agents to complete daily tasks. Users should honestly ask themselves, how reliable is AI in a long process?

Therefore, in scenarios where data needs to be purchased, I would prefer to integrate it into a low-frequency operation, transforming it into an extremely simplified process.

Moreover, the X402 payment process is actually not perfect. Why do we often find that many cross-border payments take 1-2 days for actual settlement? These poor experiences are not without reason; many underlying pitfalls ultimately shape the upstream forms. For instance, as a payment-oriented protocol, it completely overlooks the rigor of this product as a financial middleware.

When it comes to users, they are completely unaware of how it handles network fluctuations that lead to the actual processing of payment requests, nor do they see any binding relationship between API requests and transaction records. The current situation is that payment has been made, but the status of this payment is only valid for this one request, while all other context completely disappears.

Returning to the Web2 payment process, the absence of 402 is due to the need to handle many special situations. Payment does not solely rely on the Callback method (redirecting to a merchant-specified page after payment completion); it also includes periodic re-requests (if the callback is not executed, it will attempt to re-callback at different intervals such as 3 seconds, 5 seconds, 1 minute, etc., until successful, to prevent transaction loss).

Furthermore, while the Web3 world pursues efficiency and decentralization, this system is inherently KYC-free and unregulated, which seems to align with the principles of decentralization. However, merchants are not seeking decentralization; they merely desire a more convenient payment experience for users. But are they not afraid of being held accountable by local authorities?

The result is that if you truly use X402 for payments, would you dare to use it for large amounts? Would merchants dare to provide it? Would you dare to embed private key custody in AI?

Thus, X402 resembles QR code payments—unidirectional and simple—but requires additional support to be truly commercially viable. This is also the direction that Builders are currently striving for. For example, Cloudflare's solution adds a delayed payment feature and reverts to traditional credit card solutions to address this issue; similarly, Coinbase has integrated refundable contracts to resolve these problems.

Advantages

Objectively speaking, the payment track is indeed very difficult to promote because user habits and trust are hard to shift. This leads to each transition of payment platforms being driven by large-scale technological updates. Currently, AI payment is in its early stages, and cross-border payments have the opportunity for stablecoin compliance. This background is a sign of a significant change on the horizon.

Moreover, this time Coinbase has truly brought in many good allies. In the X402 chain, there is also ERC-8004, designed for the on-chain Agent reputation market, with representatives from Google, the Ethereum Foundation, MetaMask, and Coinbase itself, forming a significant strategic alliance.

Additionally, there are fewer tracks that VC institutions can understand nowadays (laughs), and payment is one of them.

As a typical winner-takes-all track with enormous future profits, it can be said that as long as a product is launched and the background is not too poor, it is relatively easy to gain VC support. Thus, we can see that many institutions have released research reports on X402 at the first opportunity; this story is easy to explain to LPs and stands firmly on the advantages of blockchain's payment capabilities.

Coinbase's CEO Brian Armstrong recently reiterated his support for X402 on Twitter, and leading exchanges have almost all become involved in this chaotic battle, where many disadvantages will gradually be resolved through the construction of formal entities.

At this moment, the Builders of X402 need to remain calm.

This is a rare opportunity for a new wave of consensus formation; we cannot all rush onto the launch platform.

In the Web3 market, launching is the final anthem, a stage for profit distribution, and a key to attracting early attention, but launching is merely a means, not an end.

Finally

Objectively, there are both advantages and disadvantages. From a trend perspective, I believe that the subsequent X402 will enter a period of dormancy, as it needs to wait for a better opportunity.

Because payment requires a lot of finesse, let us recall how Alipay developed in the merchant scene, only to be ambushed by WeChat Pay's red envelope during the New Year. Currently, X402's best opportunity lies in the cross-border payment scenario, as countless users have already encountered numerous difficulties when making payments with OpenAI.

Let the new payment system combine with the global payment demands of a popular product, leading more people to try the blockchain payment experience for the first time.

Until a leading platform once again triggers a TGE airdrop period, reigniting interest from the perspective of transaction mining, continuously breaking through cognitive barriers.

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