Settlement Processor

What is a Settlement Processor?

A Settlement Processor (SP) is an off-chain service responsible for validating, queuing, and batch-executing payment mandate settlements.

It acts as the "clearing house" of the payment system.

Architecture Overview

┌──────────────────────────────────────┐
│     Settlement Processor (AVS)       │
├──────────────────────────────────────┤
│                                      │
│  📥 Mandate Ingestion                │
│     Validate and enqueue mandates    │
│                                      │
│  🗃️ Payer Queues                     │
│     Payer A: [mandate_001, ...]     │
│     Payer B: [mandate_003, ...]     │
│                                      │
│  ⚙️ Settlement Engine                │
│     Build batch settlement tx        │
│                                      │
│  📤 On-chain Execution               │
│     Submit to smart contract         │
│                                      │
└──────────────────────────────────────┘

Settlement Process Flow

1. Enqueue Mandates

Payees submit verified payment mandates to the SP.

The SP performs:

• Signature verification
• Balance checking
• Duplicate detection

2. Maintain Payer Queues

The SP maintains a separate queue for each payer wallet, tracking:

• Current balance
• Queue balance (reserved for pending mandates)
• List of pending mandates

3. Batch Settlement

Within the settlement window, the SP:

• Collects mandates from multiple payers
• Builds batch settlement transactions
• Optimizes for gas efficiency

4. On-chain Execution

The SP calls the debit wallet smart contract to:

• Verify mandate signatures
• Check balances
• Execute transfers to payees

Extensible Settlement Mechanisms

The settlement mechanisms are extensible. Three examples are shown:

Debit Deferred Settlement (Default)

Settlement debits from payer's wallet, payee receives stablecoins immediately.

Payer Wallet → [Debit] → Payee Wallet

Credit Deferred Settlement

Payee extends credit to payer up to a limit, supporting scenarios like free trials.

Payer accumulates usage → Debit when limit exceeded

Result-Based Settlement

Payee can only settle after payer confirms service delivery.

Service completed → Payer approval → Execute settlement

Next Steps

• Payment Mandate - Understand payment authorization
• Debit Wallet - Learn about wallet mechanisms
• Embedded Payment - See how mandates are embedded in protocols