Produced by: CGV Research
Author: Shigeru , Satou
Introduction
PayFi, short for Payment Finance, refers to an innovative technology and application model in the blockchain and cryptocurrency sector that integrates payment functions with financial services.
The essence of PayFi lies in its focus on the processes of sending, receiving, and settling cryptocurrencies, rather than mere transactional activities. This model encompasses not only cryptocurrency payments and trades but also extends to lending, wealth management, and cross-border payments among various financial activities. Utilizing decentralized technology, PayFi enables quicker, more secure financial activities while reducing the frictions and costs associated with traditional financial systems, thus promoting seamless value transfer and financial inclusivity on a global scale.
The concept of PayFi was first introduced by Lily Liu, Chair of the Solana Foundation, at the EthCC conference in July 2024. She views PayFi as a novel way of constructing financial markets, centered around the Time Value of Money (TVM) to create financial primitives and product experiences that are challenging, if not impossible, to achieve in traditional and even Web2 finance.
The vision of PayFi is to revolutionize payment systems using blockchain technology, enabling more efficient, low-cost transactions and offering a novel financial experience. This, in turn, facilitates the creation of more complex financial products and applications, constructing an integrated value chain that forms a new financial cluster.
The CGV Research team believes that with the advancement of high-performance blockchain technologies, the true value of PayFi will rapidly expand and scale within this ecosystem. This expansion will accelerate the integration of payment and financial services, enhancing the practicality and efficiency of cryptocurrencies in everyday transactions and more complex financial operations. In the future financial ecosystem, PayFi is poised to be a key driving force.
PayFi: Inheriting and Expanding Bitcoin’s Payment Vision
The inception of Bitcoin was marked by Satoshi Nakamoto's revolutionary white paper "Bitcoin: A Peer-to-Peer Electronic Cash System," which introduced the concept of decentralized payment. This idea not only introduced a new form of currency—Bitcoin—but more importantly, it envisioned a global payment system without intermediaries that could circumvent traditional financial institution constraints, facilitating more efficient and transparent value transfer. Nakamoto’s vision aimed to fundamentally reform the existing payment system by eliminating high transaction fees, lengthy settlement times, and financial exclusivity.
However, despite Bitcoin's success in leading the cryptocurrency revolution, its initial purpose as a daily payment medium was not fully realized. Bitcoin is often regarded more as a store of value rather than a currency for daily transactions.
Over time, the emergence of stablecoins filled this gap. By mapping the value of fiat currencies onto the blockchain, stablecoins bridged the gap between the cryptocurrency and the real-world financial systems, promoting the first practical application scenario for blockchain payments. Since 2014, the exponential growth of stablecoins has demonstrated a strong market demand for blockchain payments. Stablecoins allow users to enjoy the transparency and decentralization benefits of blockchain technology while avoiding the risks associated with cryptocurrency price volatility. To date, stablecoins support approximately $2 trillion in payments annually, nearing the annual payment processing volume of Visa.
However, while stablecoins have advanced blockchain payment capabilities, several challenges remain, such as poor user experience, transaction delays, high costs, and compliance issues. These challenges restrict the widespread adoption of blockchain payments as a mainstream payment medium.
The further expansion of the payment ecosystem, particularly relies on the promotion of financial instruments and financing mechanisms. In the traditional financial system, tools like credit cards, trade financing, and cross-border payments significantly facilitate global payment applications by providing liquidity and financing options.
As an emerging industry, blockchain does not necessarily need to completely rebuild a market but can offer more valuable products and solutions based on existing markets through blockchain technology. It is in this context that PayFi has emerged.
By leveraging the high performance and low-cost transaction characteristics of advanced public blockchains, PayFi not only promises to surpass traditional financial mechanisms but also aims to create a more liquid and adaptive global financial market. This evolution represents both a return to Bitcoin’s original intentions and a significant innovation built on Bitcoin’s foundation. Through PayFi, the blockchain payment system will truly unleash its potential, pushing the global financial system towards a more efficient and inclusive future.
Core Concept of PayFi: Time Value of Money (TVM)
"Time is more precious than money; you can get more money, but you cannot get more time."
The Time Value of Money (TVM) is a fundamental concept in finance, emphasizing the value difference of money at various points in time. The basic principle of TVM is that the value of money in the present is generally higher than that of an equal amount in the future. This is because money held now can be immediately invested to generate returns or used for consumption, providing instant utility.
Simply put, the important concept behind the time value of money is "opportunity cost." If the holder of money does not use it immediately, they lose the potential investment opportunity and the possible returns. Therefore, the present value of money must reflect these foregone opportunities. For example:
- Loans and Mortgages: In bank loans, interest rates are calculated based on TVM, where the interest paid by borrowers essentially compensates for the use of funds provided by the bank.
- Investment Assessment: When evaluating investments such as stocks, bonds, or real estate, investors consider the present value of future earnings to determine the attractiveness of the investment.
- Capital Budgeting: When conducting capital budgeting, companies evaluate the future cash flows of different projects and calculate their present value through discounting, aiding management in making the most advantageous investment decisions, among other things.
PayFi, through blockchain technology, allows users to realize the time value of money on the chain in an extremely cost-effective and efficient manner. By leveraging smart contracts and decentralized platforms, PayFi enables users to manage and invest funds without intermediaries, thus maximizing the efficiency of fund utilization. This new model not only significantly reduces transaction costs but also shortens transaction times, allowing funds to quickly re-enter the market for reinvestment or other purposes.
Furthermore, PayFi's infrastructure enables the development of more complex on-chain financial products, such as on-chain credit markets, installment payment systems, and automated investment strategies based on smart contracts. These innovations are expected to expand into more complex financial products and application scenarios, creating an integrated value chain and forming a new "financial cluster."
Gluing RWA + DeFi: Building a New Financial Cluster Centered on PayFi
In the financial system, Real-World Assets (RWA) and Decentralized Finance (DeFi) each possess unique advantages and face their own challenges: RWA has a vast market size and stable value but relatively low liquidity, and lacks transparency and transaction efficiency; DeFi boasts efficient transaction mechanisms and global liquidity, but primarily relies on cryptographic assets, lacking a direct connection to the real economy.
Contrary to some industry perspectives that suggest "PayFi is a sub-category within the RWA track," CGV Research believes that RWA is a part of the PayFi ecosystem. Beyond RWA, PayFi also encompasses a broader range of cryptographic assets, smart contract-driven financial services, and decentralized payment and settlement systems. The introduction and application of RWA through DeFi are crucial components of realizing PayFi's core functionalities.
RWA requires DeFi to enhance liquidity and transaction efficiency, through digitalization and smart contracts on the blockchain for rapid, low-cost global financing, and to increase transparency and security of transactions. Simultaneously, DeFi enriches its asset categories by incorporating RWA, reducing volatility risks, providing stable sources of income, and connecting to the real economy, promoting its practical application and development globally.
Through PayFi, RWA and DeFi are no longer independently developing financial systems but are interdependent and complementary wholes, achieving the integration and innovation of real assets with on-chain financial services.
- Digitalization and On-Chain Integration: Bringing RWA onto the blockchain. The PayFi platform first digitizes RWA through smart contracts, enabling representation and trading on the blockchain. This process ensures the transparency and security of RWA's value and ownership on-chain. In this way, traditional RWA can be fragmented into smaller units, facilitating global trading and investment.
- Smart Contracts and Payment Systems: Enabling efficient transactions and settlements. Once RWA is digitized, the PayFi platform uses smart contracts to automate the trading and settlement processes. This not only speeds up transactions and reduces costs but also ensures the transparency and security of transactions. Moreover, PayFi's on-chain payment system simplifies the transfer and payment of these assets, addressing common issues of settlement delays and high fees in traditional finance.
- Liquidity Pools and Financing Channels: Providing financial support for RWA. PayFi's liquidity pools offer ample funding for RWA, enabling these assets to receive financing from global investors. By using RWA as collateral, PayFi allows investors to participate in financing activities on DeFi platforms, providing a stable source of funds for RWA. This model not only increases the liquidity of RWA but also brings diversified investment opportunities to DeFi investors.
- Risk Management and Transparency: Enhancing market trust. Through blockchain technology, PayFi ensures the transparency and verifiability of all RWA transactions, reducing information asymmetry and operational risks. The automatic execution of smart contracts reduces the risk of human intervention, while the immutability of the blockchain ensures the security of transaction records. All these enhance market trust, promoting further integration of RWA and DeFi.
In the future, PayFi will play an increasingly important role in enhancing global asset liquidity, reducing transaction costs, and enhancing market transparency. In Lily Liu's view, PayFi’s integration of RWA and institutional finance into on-chain liquidity pools, creating an integrated value chain, constitutes a "new financial cluster" and may be the biggest theme in the cryptocurrency market this cycle.
Why Is PayFi Flourishing on Solana?
Why does PayFi happen on Solana rather than on other Layer 1 (L1) blockchains or Layer 2 (L2) solutions? Lily Liu's answer highlights Solana’s three key advantages: high-performance blockchain capabilities, capital liquidity, and talent mobility, which together form a competitive edge that is difficult for rivals to surpass at this stage.
Firstly, high-performance blockchain. Solana’s core technological advantage is its unique Proof of History (PoH) consensus mechanism, which enables it to process over 65,000 transactions per second (TPS) with an average confirmation time of around 400 milliseconds. This performance far exceeds Ethereum’s 10-15 TPS and longer confirmation times, and even L2 solutions on Ethereum, like Optimistic Rollups, struggle to match Solana in terms of latency and throughput. Although Visa claims its servers can handle up to 56,000 TPS, in practice, Visa averages only 1,700 transactions per second. By comparison, Solana is fully capable of meeting the actual payment demands.
Secondly, capital liquidity. As of August 30, 2024, the total value locked (TVL) in the Solana ecosystem has surpassed $10 billion, attracting significant investments from top venture capital funds including Andreessen Horowitz (a16z), Polychain Capital, and Alameda Research. This capital liquidity provides strong financial support for the expansion of PayFi.
Lastly, talent mobility. The Solana Foundation actively promotes the development of its developer community, organizing over 500 hackathons and global developer education programs. By 2024, there are more than 5,000 active developers within the Solana ecosystem, making it one of the fastest-growing blockchain developer communities in the world. This robust talent pool supports the development of various innovative projects and continues to attract new technology and financial talent to the ecosystem, laying a solid foundation for the development of PayFi.
PayFi leverages programmable payments to bridge the traditional and blockchain worlds, making it possible to scale credit finance on-chain through smart contracts. Solana's advantages not only support the development of PayFi but also position it strongly for future competition in the global payment and financial markets.
For instance, PayPal chose Solana as the new public blockchain for PYUSD payments, primarily valuing Solana's rapid settlement capabilities, low transaction fees, and robust developer ecosystem. Solana's token extension features, including confidential transfers, transfer hooks, and memo fields, provide the necessary flexibility and commercial utility for PYUSD.
As PayPal states, "These features are not just nice to have. If we want PYUSD to play a role in a broader range of commercial domains, they must be provided to merchants." Today, Solana has become the main platform for PYUSD, holding a 64% market share, while Ethereum holds only 36%. Moreover, as early as September 2023, Visa had already expanded USDC settlement functions from Ethereum to Solana.
Application Scenarios and Typical Projects of PayFi
The essence of PayFi is to reshape and upgrade the traditional financial system using advanced cryptographic technology, making it necessary to reimagine all financial scenarios with PayFi.
Cross-border Payments and Trade
Traditional cross-border payments face challenges due to the segregated nature of centralized sovereign currency systems, affected by foreign exchange controls and national monetary policies, leading to cumbersome processes, long transaction times, and high costs. Initially, cryptocurrency payments were seen as an excellent solution for traditional cross-border payments, but enterprise-focused solutions still have many shortcomings.
Today, the cross-border payment industry still heavily relies on prefunded accounts to achieve same-day settlements. Currently, over $4 trillion is locked in prefunded accounts, representing a significant hidden cost for financial institutions and the global payment industry. PayFi can optimize this by leveraging traditional credit finance to enable cryptographic services.
Arf（@arf_one）: The world's first regulated, transparent short-term liquidity solution for supporting cross-border payments, based in Switzerland. By providing operational capital and settlement services based on digital assets, along with local entry and exit capabilities for licensed money service businesses and financial institutions, Arf eliminates the capital-intensive business model institutions in the cross-border payment industry. Arf provides a unified liquidity network for cross-border payments and trade, eliminating the need for prefunding and offering 24x7 transparent and compliant services. As of now, Arf's on-chain transaction volume has recently exceeded $1.6 billion with no defaults, becoming one of the fastest-growing stablecoin use cases.
Supply Chain Finance
Supply chain finance combines financial services with supply chain management, based on trade relationships and transactions within the supply chain. It involves managing and controlling the flow of information, logistics, and funds to provide systemic financial products and services to upstream and downstream enterprises. Traditional supply chain finance is hindered by complex contracts and legal work, and the financing process is slow and automated evaluation is difficult, significantly affecting the financing turnover of small and medium-sized enterprises. PayFi greatly simplifies the process of purchasing accounts receivable and other services, easing the financing difficulties of businesses.
Isle Finance(@isle_finance)：the first project to offer an RWA PayFi network for supply chain payments, introduces real-time Web3 liquidity into supply chain finance, providing liquidity providers with competitive, high-grade returns. By combining supply chain payments with blockchain technology for real-time settlement and liquidity management, Isle enables supply chain participants to process payments and settlements more swiftly, improving capital efficiency. Meanwhile, on-chain liquidity providers can anchor to the payment stability of high-credit buyers and share in early payment discounts offered by suppliers. Isle's main clients include high-net-worth individuals (HNWIs), crypto-native users, DAO treasuries, asset managers, and family offices. The platform also allows regular users to stake ISLE tokens to earn liquidity mining rewards.
Consumer Finance
PayFi for end-consumers, which may be of more interest to users, primarily occurs in the consumer finance sector. This was a focus emphasized by Lily Liu in her PayFi discussions, "Buy Now, Pay Never." Users can cover current expenses by pledging future earnings, with enforcement facilitated by on-chain smart contracts. In consumer finance, the key to PayFi is connecting the merchant network's service providers who act as acceptors, enabling consumers to access a sufficiently diverse range of consumption scenarios.
Huma Finance (@humafinance): A pioneer in proposing the PayFi Stack, an open stack designed to build compliant payment financing solutions and advocating industry leaders to optimize solutions to meet the unique needs of PayFi. The initial stack includes the following layers: transactions, currency, custody, financing, compliance, and applications. For example, the financing layer includes credit rating, underwriting, and RWA oracles. As a representative project in the financing layer, Huma focuses on common short-term financing in the payment field. As of August 26, 2024, Huma has financed a total of over $280 million, with a default rate of 0%.
CrediPay (@Credix_finance): Helps businesses increase sales volumes and improve cash flow efficiency through seamless and risk-free credit services. Sellers offer flexible payment terms to buyers at attractive prices and charge prepayments. We manage and protect customers from any credit and fraud risks, allowing them to focus on what matters most: increasing sales volume and profitability. Currently, CrediPay's services are mainly focused in Latin America, such as accounts receivable factoring.
Opportunities and Challenges of PayFi
Market Growth Potential
The primary aim of PayFi is to bring the time value of money onto the blockchain and restructure the financial system in a more programmable, sub-custodial, and decentralized manner. With the rapid increase in the number of global stablecoins and continuous improvements in cryptocurrency infrastructure, PayFi is poised to be a significant force in transforming traditional finance.
According to data from Statista, The total volume of global digital payment transactions in 2023 is expected to reach approximately $9.46 trillion, with projections to continue growing to about $14 trillion by 2027. Additionally, data from Mordor Intelligence estimates that the DeFi market size will be $46.61 billion in 2024, expected to reach $78.47 billion by 2029, with a forecasted compound annual growth rate of 10.98%.
Calculations by the CGV Research team suggest that if PayFi can capture 10% of the global digital payment transaction volume (a conservative estimate) by 2030, the PayFi market size (projected at $1.8 trillion) could be 20 times that of the DeFi market size ($87 billion). This indicates that PayFi has tremendous market potential and is likely to play a significant role in the global digital payment sector.
Regulatory and Compliance Challenges
As the issuance of global stablecoins continues to increase, central banks are gradually easing their stance on stablecoins. Broadly speaking, fiat-pegged stablecoins can be seen as a digital extension of fiat currency. PayFi, mainly involving payment services mediated by stablecoins, is still subject to the regulatory framework of the sovereign currency system.
On one hand, current PayFi projects emphasize compliance, typically allowing only licensed institutions to participate, while individual users must undergo strict KYC procedures and scrutiny. On the other hand, many PayFi projects tend to expand business in third-world countries, where local regulations are often less robust and regulatory barriers lower, thereby posing relatively smaller compliance risks.
Technological and Security Risks
Despite years of DeFi development and many security vulnerabilities being identified and audited, security issues have not been completely eradicated. However, the security of on-chain PayFi has essentially reached parity with traditional DeFi's security after stringent audits.
The main technical challenges lie in the off-chain segment. Since PayFi requires extensive integration with real-world assets, ensuring the enforcement of off-chain logic remains an unresolved issue. The current solution often involves an intermediary entity to manage the alignment between on-chain and off-chain operations, but this solution still requires further refinement.
Conclusion
PayFi, as a new wave in payment finance, is reshaping the global financial ecosystem with its unique charm. It not only inherits Bitcoin's payment vision but also elevates the efficiency and inclusiveness of financial services to new heights through blockchain technology innovations. Supported by high-performance blockchains like Solana, the market size of PayFi is expected to grow exponentially, becoming a major driving force in the future financial market.
As Lily Liu envisioned, PayFi tightly integrates RWA and DeFi, constructing an integrated value chain and forming a new financial cluster. This revolutionary innovation is poised to drive the global financial system towards greater efficiency and inclusiveness.
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About Cryptogram Venture (CGV):
CGV (Cryptogram Venture) is a crypto investment institution headquartered in Tokyo, Japan. Since 2017, its fund and predecessor funds have participated in investing in over 200 projects, including the incubation of the licensed Japanese yen stablecoin JPYW. CGV is also a limited partner in several globally renowned crypto funds. Since 2022, CGV has successfully hosted two editions of the Japan Web3 Hackathon (TWSH), supported by Japan's Ministry of Education, Culture, Sports, Science and Technology, Keio University, NTT Docomo, and other institutions and experts. CGV has branches in Hong Kong, Singapore, New York, Toronto, and other locations. Additionally, CGV is a founding member of the Bitcoin Tokyo Club.
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