Article reprinted from: IOSG
Proof of Success for Web3 Payments
The rapid growth of stablecoin payments is reshaping global finance, with transaction volumes on par with major payment networks. However, this is just the beginning of a transformative financial era.
source: visaonchainanalytics
source: ycharts
Inefficiencies in traditional systems, such as cross-border payments, create immense opportunities for stablecoins:
“Cross-border payments often incur high transaction costs, exchange rate markups, and intermediary fees (and can take a long time to settle)... The market size for B2B cross-border payments is enormous... FXC Intelligence estimates that the total market size for B2B cross-border payments in 2023 is $39 trillion, expected to grow by 43% to $53 trillion by 2030.” - (The Future of Payments) by Andreessen Horowitz
Real-world adoption is already underway:
“With traditional payment channels being too difficult, slow, and costly, around 30 million active users now transfer $3.2 trillion in stablecoins every month.” - Sequoia Capital, (Partnering with Bridge: A Better Way to Transfer Funds)
The advantages of blockchain-based payment systems are clear:
“Unlike most traditional financial payment methods that take days to settle, blockchain rails can settle transactions almost instantly on a global scale... By eliminating various intermediaries and superior technological infrastructure, crypto-enabled payments can deliver costs significantly lower than existing products.” - (The Future of Payments) by Andreessen Horowitz
Traditional financial giants are taking notice:
“Industry giants, including Stripe, have launched new payment options for these assets, which are rapidly growing... Bridge is built on blockchain, operating 24/7, in almost every country—with costs just 10% of traditional forex rails.” - Sequoia Capital, (Partnering with Bridge: A Better Way to Transfer Funds)
PayFi: Smart Dollars
Not every dollar is equal. Some can access premium opportunities while others await depreciation.
PayFi integrates DeFi into payments, transforming every dollar into smart, autonomous funds. It converts idle funds into productive assets that can generate yields while maintaining liquidity.
Historically, only large capital holders could access premium financial opportunities.
Historically, access to premium financial opportunities has often been restricted to large capital holders due to high minimum investment requirements, exclusive access to private markets, and barriers to specialized financial instruments like hedge funds or private equity. PayFi democratizes this advantage, allowing even small amounts of capital to access competitive yields without sacrificing accessibility. Smart stablecoins can address the trifecta of time, risk, and liquidity dilemmas, such as allowing users to receive discounts for early bill payments.
Advantages of Web3 Payments
Web3 payments are like high-speed trains: efficiently, quickly, and reliably moving value globally. PayFi takes it a step further by adding an intelligent layer akin to automated logistics networks. It not only moves value swiftly but also provides several key features:
Smart Routing: Automatically guiding assets based on user-defined logic (smart contracts).
Aggregation Efficiency: Merging multiple transactions for better liquidity.
Dynamic Optimization: Redirecting during congestion or high network fees.
Programmable Finance: Automating payments based on complex conditions.
Asset Conversion: Swapping assets as needed during the journey.
PayFi is not just about transferring funds—it's about making funds smarter and more efficient. Almost all products leverage one or several of these features.
Addressing the 'cash problem'
While cash remains king due to its liquidity, autonomy, global offline acceptance, and privacy, it has a key drawback: depreciation. Inflation continuously erodes its value, forcing users to choose between liquidity and yield.
Traditional fintech applications like PayPal and Venmo offer yield products, but these solutions are fragmented, provide limited returns, and require users to actively transfer funds to specific accounts.
PayFi revolutionizes this space with seamless solutions. Whether in the form of stablecoins, loyalty points, or pending refunds, funds within the PayFi system can generate yield effortlessly, whether they are stored in wallets, payment channels, or shopping platforms. Users enjoy investment-like returns while keeping their funds instantly available.
This means:
No Idle Capital: Every dollar is continuously working.
Global Yields: Even non-cash assets can generate yields.
For instance, interest-bearing stablecoins demonstrate how PayFi integrates earning opportunities into everyday financial systems.
Opportunities
By harnessing the composability of blockchain, PayFi unlocks top financial opportunities for everyone, every asset, everywhere. Developers can build on existing protocols without starting from scratch, providing a seamless user experience.
Financial Products at Payment
User Profile/Needs: Targeting individuals or small to medium enterprises with stable income sources but tight cash flow. The goal is to provide flexible payment options, alleviate cash flow pressure, and reduce the risk of overdue payments.
Users benefit from tailored financial planning, cost reductions through exclusive discounts, and uninterrupted access to necessities and services even during tight cash flow.
Merchants benefit from reduced payment delays, faster reinvestment of funds into operations, and enhanced customer loyalty through flexible supply.
These products provide users and merchants with greater financial transaction flexibility and fairness. For example:
Early Payment Discounts: Users can enjoy small discounts for timely bill payments after receiving funds, incentivizing prompt payments.
Installment Payments and 'Buy Now, Pay Later': These options empower consumers to manage cash flow, making large purchases more affordable without requiring full upfront payment.
Merchant Accelerated Payments: Merchants can receive payments more quickly, and while they incur small fees, it can improve liquidity and smooth cash flow.
Some Web2 projects, such as Affirm, Afterpay, Klarna, and PayPal, offer installment payment solutions.
Embedded Yield Solutions
User Profile/Needs: Targeting individuals holding mainstream currencies with some idle funds, focusing on small-scale fund management. The product offers low-risk, high liquidity, convenience, and flexibility dollar yield solutions. Users wish to grow a small amount of capital effortlessly while maintaining strong liquidity for financial needs. Certain users have preferences for specific assets, like U.S. Treasury bonds or DeFi lending yields.
PayFi transforms idle assets into income-generating capital. Compared to traditional ‘yield’ products, PayFi's embedded yield solutions can work seamlessly across various asset types and products, such as loyalty points in online stores, pending refunds, or gift cards.
Common yield solutions in the market include embedded farm modules in wallets, yield-bearing stablecoins, and flexible yield products on centralized exchanges (CEX). Yields primarily come from DeFi lending, protocol airdrops, delta-neutral strategies, and U.S. bonds.
On-chain embedded yield solutions are superior to fintech and traditional banking solutions to some extent, primarily due to liquidity management constraints from the custodial nature of traditional systems.
Embedded yield solutions enhance transparency and capital efficiency by enabling user self-custody and autonomous liquidity management. For example, Revolut held $13 billion in deposits last year but could only provide 3% interest due to liquidity constraints. Moving such systems on-chain would allow users to directly control their funds, allocating them to liquidity pools or other yield opportunities to maximize returns without the constraints of centralized management.
For users and institutions, this enhances access to loan and credit products that differ from traditional finance.
Payments are a complex process where we can do a lot of work on financing at each step, thereby improving capital efficiency.
PayFi applications typically rely on third-party integrations, making this space competitive. However, PayFi can stand out by focusing on three core advantages:
User Attraction: Building a moat through high transaction volumes and frequency.
Orchestrating Complexity: Simplifying fragmented payment processes for users.
Feature Richness: Offering functionalities that traditional Web2 systems lack.
Other considerations include:
The efficiency gains they bring
Their role in the payment process and potential market size
In terms of regulation and risk management
PayFi Pillars
Infrastructure: Huma
Huma builds everything from scratch, introducing the PayFi stack.
Transaction Layer: Handling payment processing and settlement
Currency Layer: Managing stablecoins and digital assets
Custody Layer: Ensuring secure storage of assets
Financing Layer: Providing loan and credit services
Compliance Layer: Maintaining regulatory compliance
Application Layer: Providing user-facing services
What sets Huma apart is its focus on short-term financing within the payments and supply chain domain. The platform enables real-time credit assessment and automatic underwriting through smart contracts, making immediate financing decisions for payment transactions possible.
Other Web3 RWA financing platforms include Centrifuge (the first RWA project) and Ondo.
Web2-like Participants: SWIFT, Visa, Mastercard
Payments: Fun
Fun.xyz launches Checkout, a multifunctional tool designed to simplify any on-chain action by allowing users to complete transactions at the point of purchase using any asset. Checkout aggregates diverse payment options, enhancing user experience and maximizing dApp conversion rates.
Liquidity Aggregator: Integrating funds from EVM wallets, Solana wallets, centralized exchanges, and credit cards to enable cross-chain payments.
Routing Engine: Executing complex, batch on-chain actions while ensuring transaction certainty and price optimization.
Checkout SDK: A lightweight integration that improves application conversion rates by adapting to users' preferred payment methods.
The advantage of Fun.xyz lies in eliminating common barriers in Web3 transactions, enabling users to perform on-chain actions more easily without the hassle of asset conversions or fund transfers.
Other participants include Aeon, which provides a one-stop checkout experience in the Telegram Mini App.
Embedded Yields: Morpho
Morpho is a modular lending protocol. It offers different isolated high-yield pools for potential investors. Its magic lies in its modular approach. It integrates into many asset management protocols, like Brahama and Infinex, to provide savings yields.
We are looking for more embedded yield products. Wallets or any products involving capital custody can be integrated with just a few lines of code. This way, interest can be earned regardless of where the funds are.
Web3 Card: Offramp
Offramp provides dollar-based products for stablecoin holders, offering up to 5% USD yield, a stablecoin-backed crypto card, and ACH and wire payment reception. It functions like a new type of bank, providing banking accounts, payment, and savings capabilities.
This is a mature field with numerous card issuers, KYC providers, and upstream/downstream products. Different card issuers vary in terms of regulation, fees, and payment support (such as physical cards, Apple Pay). Some participants include Rain and Immersive, the latter being a major member of the Mastercard network.
However, these are often prepaid debit cards that require users to deposit funds before use, unlike traditional credit cards. With credit cards, users can leverage interest generated from DeFi protocols to pay off credit debt, though the cost can accumulate as interest is paid over time.
For DeFi protocols, crypto credit cards are a valuable asset as they enable users to seamlessly access their funds for daily spending without having to withdraw from the protocol.
In and Out: Bridge
Bridge simplifies global payments through stablecoin-based solutions, enabling businesses to move, store, and manage funds at internet speed. With its Orchestration APIs, Bridge eliminates compliance and regulatory complexities, allowing seamless integration of stablecoin payments with just a few lines of code. Bridge supports USD, EUR, and major stablecoins like USDC and USDT, with reserves invested in U.S. Treasury bonds, offering over 5% yield opportunities.
Through the bridging issuance APIs, companies can issue their own stablecoins, expanding into global markets by providing USD and EUR accounts, as well as international money transfer options.
Vision
PayFi, as a transformative solution, effectively addresses the 'impossible triangle' in traditional finance: yield, liquidity, and risk. In traditional finance, investors often face a trade-off: achieving high yields typically requires sacrificing liquidity or accepting higher risk, while maintaining liquidity and safety usually means accepting lower returns. This triangle has long constrained financial opportunities, especially for small capital investors.
PayFi breaks this pattern by leveraging blockchain and DeFi. By integrating payment infrastructure with DeFi capabilities, PayFi transforms every dollar into smart, autonomous capital that can automatically seek out yield-generating opportunities. With blockchain's rapid settlement, dollars can maintain liquidity while offering decent yields.