Blockchain is an industry that relies heavily on “narrative”. By building a narrative theme, it can guide market discussions, promote capital concentration, and attract relevant teams to build an ecosystem under the same narrative framework and jointly write a complete story.
The narrative of PayFi was put forward by Lily Liu, Chairman of the Solana Foundation. In the past six months, almost all of her keynote speeches focused on PayFi, and she declared that PayFi will be Solana’s sole focus next, which shows its great determination.
During Token 2049, the first PayFi Summit hosted by Solana, Huma and Stellar will be held in Singapore, which will become an important event in defining the connotation of PayFi. As an early practitioner of PayFi and RWA, BSOS has worked with international ecological partners in the past and was therefore invited to participate and give speeches. On the eve of the PayFi Summit, I am happy to share my understanding of the PayFi narrative from the perspective of a front-line practitioner.
What is PayFi?
PayFi refers to the use of blockchain technology to provide required financial services for real-world payment scenarios.
Blockchain is originally a peer-to-peer payment system that can realize P2P payment of "directly transferring money to the other party". However, behind the payment behavior in modern society, there are often more complex processes. Take credit card as an example. Although it is a payment tool on the surface, each transaction actually implies a variety of financial operations such as short-term financing, advance payment, and cross-border remittance.
Another example is trade payment. The transportation of goods takes time and the transaction cannot be completed immediately. Therefore, trade payment often involves financial behaviors such as performance guarantees (such as the payer transferring funds to an intermediary institution for safekeeping) and short-term financing.
As transaction behavior evolves, "payment" in many cases is more like the integration of multiple financial services. PayFi takes advantage of the money movement characteristics and programmable money of the blockchain to provide liquidity solutions for complex payment processes in the real world, thereby improving payment efficiency and reducing costs.
PayFi key component: payment network (Payment Network) exchange
PayFi has nothing to do with whether users use cryptocurrency to pay, but with the "liquidity operation method" and "the payment network used" during the payment process. Below we use two cases to illustrate, one is Huma Finance and the other is Crypto.com VISA card.
Traditional banks are unable to provide 7x24 hours of instant cross-border remittance services, mainly due to limitations in the accounting methods of their underlying payment networks. In order to achieve instant payment, many financial technology companies (Fintech) that perform cross-border remittances adopt the method of "collecting at point A and paying at point B", which means that they need to reserve fund positions in banks around the world to support operations.
As you can imagine, this model poses huge challenges in terms of capital requirements and scaling the suite.
Huma Finance is a lending protocol designed to provide short-term liquidity support for Fintech companies in cross-border remittances. After the Fintech company completes the payment collection at location A, it can mobilize the US dollar stable currency through Huma Finance, and immediately convert it into legal currency at location B and pay it to the payee.
As a result, Fintech companies no longer need to establish huge capital reserves around the world. Huma Finance uses the "wherever you point" capital liquidity capability on the blockchain to flexibly solve short-term liquidity needs and borrow from these short-term loans. Collect interest and create income for the liquidity providers (LPs) on the chain.
Judging from actual data, Huma Finance provided short-term funding for Arf, a Fintech company. In just over a year, the transaction volume on the chain has reached 1.8 billion US dollars. Circle, the issuer of the U.S. dollar stablecoin USDC, also published a special article to introduce this case.
Huma Finance is a typical PayFi application that bypasses the cost and time constraints of traditional payment networks and achieves a leap-forward improvement in overall payment efficiency.
Another comparative example is the VISA debit card of Crypto.com, which is well-known in the crypto. Although users perceive that they are paying with cryptocurrency on their account when using this service, in fact, transactions still rely on VISA and traditional payment networks, and there is no substantial improvement in payment efficiency or cost (Crypto.com will When swiping the card, the cryptocurrency is first converted into legal currency, and then handed over to VISA for processing in the original way). Therefore, I think this model is not within the scope of value discussed by PayFi.
PayFi application for supply chain payment scenarios
Another interesting case is the collection and payment scenario in the supply chain. Supply chains inherently have liquidity problems: when a seller delivers goods to a buyer, the buyer usually needs to go through processing and manufacturing before the goods can be liquidated again. During this time, liquidity for both buyers and sellers is effectively locked into the commodity.
In order to cope with this time difference, buyers and sellers in the supply chain usually adopt the practice of "combining the payment period with the amount" when determining transaction conditions. The "payment period" determines who will bear the liquidity gap before the goods are realized, while the "amount" implies a subsidy for the time value of the payment period. In any case, one party has to bear the short-term liquidity pressure.
ISLE Finance is a lending protocol designed specifically for supply chain payment scenarios. It was incubated by BSOS and Outlier Ventures and was selected into the 2024 BNB Incubation Alliance (BIA). ISLE Finance provides enterprises with credit lines for global payments and solves the problem of liquidity jams in supply chain transactions.
In a transaction, if the buyer and seller choose to use ISLE Finance as the payment network, the ISLE Finance protocol is like a credit card machine on the chain . The seller needs to upload the invoice to the ISLE Finance protocol. As long as the buyer signs with the private key, the The chain indicates that if the information is correct and the payment is agreed, the seller can receive the USD stablecoin (of course, the amount cannot exceed the buyer's on-chain credit limit).
Ultimately, the buyer needs to repay the stable currency to ISLE Finance before the agreed maturity date; the buyer can also agree with the agreement to a later date than the original payment time within a certain range. In this way, the costs paid by both parties for the time value of money can be effectively shared and benefit from the liquidity injected by ISLE Finance, as shown below.
ISLE Finance time value model for receipts and payments
PayFi’s Opportunities: Solve the “Payment Time Difference” Transaction Scenario
The core opportunity of PayFi is not to provide liquidity for "investment borrowing", but to solve the liquidity problem caused by "payment time difference". Compared with investment borrowing, payment borrowing is characterized by short cycle, high frequency, small single amount and low risk .
This time difference may come from bank transfer processing time, product shipping time, or the buyer's funding gap before the next income arrives, etc. Although these time differences are usually only days to weeks, they often cause significant pain points for users. The intersection of this type of liquidity demand and global payments is the best opportunity for PayFi to play a role.
In addition, PayFi's potential also extends to the future DePIN (Decentralized Physical Infrastructure Networks) ecosystem, supporting high-frequency, small-amount, global profit sharing, splitting, settlement and payment needs among devices. With PayFi's liquidity support, automatic transactions between devices can be ensured to continue and the stable operation of DePIN can be maintained. This is a service that traditional financial infrastructure cannot support.
From Asset Tokenization to PayFi: The Shifting RWA Narrative
In the last cycle, the main narrative of the RWA (Real World Assets) track focused on asset tokenization (Tokenization). One of the successful cases is Ondo Finance, whose total locked-up volume (TVL) of its tokenized U.S. short-term Treasury bond ETF exceeded US$600 million, becoming an industry highlight.
However, asset tokenization mostly involves the management and legal regulations of off-chain assets, and the operating costs are huge. Without sufficient asset scale, it is difficult to achieve significant benefits. Recently we have observed that the narrative protagonist of asset tokenization has gradually shifted from grassroots blockchain to large institutions like BlackRock and Franklin Templeton.
The core concept of asset tokenization is to put physical assets on the blockchain for circulation; while PayFi’s vision is to combine the liquidity of the blockchain with real-world payment behavior, which for LPs is short-term off-chain. Claims, therefore, are also considered part of the RWA narrative, but their potential scale could be far greater than the tokenization of U.S. Treasuries (as shown below).
According to the PayFi special research report published by CGV Research in September this year, the market size of PayFi is even expected to reach 20 times the size of the past DeFi market. We believe PayFi will be an important narrative for RWA in this cycle.
The potential scale of PayFi, source: Huma Finance Blog
Having been deeply involved in blockchain applications for many years, I have witnessed the naive and romantic sentiments of practitioners’ initial ideal—“Blockchain or Bitcoin’s point-to-point payment will replace the fiat currency payment system”. Nowadays, PayFi’s narrative emphasizes entering into real-life payment scenarios. Through a deep understanding of how the real world operates and the advantages of blockchain, pragmatically integrating with different roles on and off the chain, more people can enjoy the benefits of this technology.
Perhaps looking back many years from now, today’s ideas may still seem too idealistic, but at least we are paving a path toward possibility for the future.
