Author: Shigeru & Satou, CGV Research
introduction
PayFi, or Payment Finance, refers to an innovative technology and application model that combines payment functions with financial services in the field of blockchain and cryptocurrency.
The core of PayFi is the sending, receiving and settlement process of cryptocurrencies, rather than transaction behavior. This model not only covers the payment and trading of cryptocurrencies, but also includes a variety of financial activities such as lending, financial management, and cross-border payments. Through decentralized technology, PayFi makes financial activities faster and safer, and reduces friction and costs in the traditional financial system, thereby promoting seamless value transfer and financial inclusion on a global scale.
PayFi was first proposed by Lily Liu, Chairman of the Solana Foundation, at the EthCC conference in July 2024. In her view, PayFi represents a new way to build financial markets, creating financial primitives and product experiences around the Time Value of Money (TVM). These are difficult or impossible to achieve in traditional or even Web2 finance.
PayFi's vision is to use blockchain technology to innovate the payment system, achieve more efficient and low-cost transactions, provide a new financial experience, create more complex financial products and application scenarios, create an integrated value chain, and thus form a new financial cluster.
The CGV Research team believes that with the development of high-performance blockchain technology, the true value of PayFi will expand and scale rapidly in this environment. This expansion can accelerate the integration of payment and financial services, making cryptocurrencies more practical and efficient in daily transactions and more complex financial operations. In the future financial ecosystem, PayFi will become a key driving force.
PayFi: Inheriting and extending Bitcoin’s payment vision
The birth of Bitcoin stems from the concept of "decentralized payment" proposed by Satoshi Nakamoto in his revolutionary white paper "Bitcoin: A Peer-to-Peer Electronic Cash System". This concept not only introduced a new form of currency - Bitcoin, but more importantly, it envisioned a global payment system without intermediaries, which could bypass the limitations of traditional financial institutions and achieve more efficient and transparent value transfer. Satoshi Nakamoto's vision aims to completely reform the existing payment system and eliminate high fees, lengthy settlement times and financial exclusivity.
However, despite its success in spearheading the cryptocurrency revolution, Bitcoin has not fully fulfilled its original purpose as a medium of everyday payment, and is seen more as a store of value than a currency for daily transactions.
Over time, stablecoins have emerged to fill this gap. By mapping the value of fiat currencies onto blockchains, stablecoins build a bridge between cryptocurrencies and the real-world financial system, driving the first practical application scenario of blockchain payments. Since 2014, the growth of stablecoins has expanded exponentially, proving the strong market demand for blockchain payments. Stablecoins enable users to enjoy the transparency and decentralization benefits of blockchain technology while avoiding the risks of cryptocurrency price fluctuations. To date, stablecoins have supported approximately $2 trillion in payments per year, close to Visa's annual payment processing volume.
However, although stablecoins have promoted the development of blockchain payments, blockchain payments still face many challenges, such as poor user experience, transaction delays, high costs and compliance issues. These challenges limit the widespread application of blockchain payments as a mainstream payment medium.
The further expansion of the payment ecosystem depends in particular on the promotion of financial instruments and financing mechanisms. In the traditional financial system, tools such as credit cards, trade financing and cross-border payments have greatly promoted payment applications around the world by providing liquidity and financing options.
As an emerging industry, blockchain does not necessarily need to completely rebuild a market, but can provide more valuable products and solutions through blockchain technology based on the existing market. It is in this context that PayFi came into being.
By leveraging the high performance and low-cost transaction characteristics of advanced public chains, PayFi not only enables blockchain payment systems to surpass traditional financial mechanisms, but also creates a more liquid and adaptable global financial market. This evolution is both a return to the original intention of Bitcoin and a major innovation based on Bitcoin. Through PayFi, the blockchain payment system will truly unleash its potential and drive the global financial system towards a more efficient and inclusive future.
PayFi Core Concept: Time Value of Money (TVM)
“Time is more valuable than money. You can get more money, but you can’t get more time.”
Time Value of Money (TVM) is a core concept in finance that emphasizes the difference in the value of money at different points in time. The basic principle of TVM is that a sum of money is usually worth more now than the same amount of money in the future. This is because the money currently held can be used immediately for investment, thereby generating income, or for consumption, thereby bringing immediate utility.
Simply put, the important concept behind the time value of money is "opportunity cost". If the person holding the money does not use the money immediately, he will lose the potential investment opportunities and cannot obtain potential returns. Therefore, the current value of the money must reflect these forgone opportunities. For example:
- Loans and mortgages: In bank loans, the interest rate is calculated based on TVM. The interest paid by the borrower is actually compensation for the bank's use of the funds provided;
Investment evaluation: When evaluating an investment 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 a company conducts capital budgeting, it evaluates the future cash flows of different projects and calculates their present value through discounting to help management make the most favorable investment decisions, etc.
PayFi uses blockchain technology to allow users to realize the time value of funds on the chain in an extremely low-cost and efficient manner; by utilizing smart contracts and decentralized platforms, PayFi enables users to manage and invest without the need for intermediaries. funds to achieve maximum capital utilization efficiency. This new model not only significantly reduces transaction costs, but also shortens transaction times, allowing funds to quickly enter the market for reinvestment or other uses.
In addition, PayFi's infrastructure provides the possibility for 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, which will be expanded to more complex financial products and application scenarios, creating an integrated value chain and thus forming a new "financial cluster".
Bonding RWA + DeFi: Building a new financial cluster with PayFi at the core
In the financial system, real-world assets (RWA) and decentralized finance (DeFi) each have unique advantages, but also face their own challenges: RWA has a huge market size and stable value, but relatively low liquidity, and insufficient transparency and transaction efficiency; DeFi has an efficient trading mechanism and global liquidity, but mainly relies on encrypted assets and lacks direct connection with the real economy.
Different from some opinions in the industry, such as "PayFi is a subdivision of the RWA track", CGV research believes that RWA is part of the PayFi ecosystem. In addition to RWA, PayFi also involves a wider range of crypto assets, smart contract-driven financial services, and decentralized payment and settlement systems. Using DeFi to promote the introduction and application of RWA is an important part of PayFi's realization of its core functions.
RWA needs DeFi to improve liquidity and transaction efficiency, achieve fast, low-cost global financing through blockchain digitization and smart contracts, and enhance transaction transparency and security. At the same time, DeFi enriches asset categories by introducing RWA, reduces volatility risks, provides a stable source of income, and connects the real economy, promoting its practical application and development around the world.
Through PayFi, RWA and DeFi are no longer independently developed financial systems, but an organic whole that is interdependent and complementary, realizing the integration and innovation of real assets and on-chain financial services.
——Digitalization and chaining: Introducing RWA to the blockchain. The PayFi platform first digitizes RWA through smart contracts, enabling it to be represented and traded on the blockchain. This process ensures the transparency and security of the value and ownership of RWA on the chain. In this way, traditional RWA assets can be divided into small units, making it easier to trade and invest globally.
——Smart contracts and payment systems: enabling efficient transactions and settlements. Once RWAs are digitized, the PayFi platform uses smart contracts to automate the transaction and settlement processes. This not only speeds up transactions and reduces costs, but also ensures the transparency and security of transactions. In addition, PayFi’s on-chain payment system makes the transfer and payment of these assets simpler and more efficient, solving the settlement delays and high fees common in traditional finance.
——Liquidity pool and financing channels: Provide financial support for RWA. PayFi's liquidity pool provides sufficient financial support for RWA, enabling these assets to obtain financing from global investors. By using RWA as collateral, PayFi allows investors to participate in financing activities on the DeFi platform while 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: Enhance 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 blockchain ensures the security of transaction records. All of this enhances market trust and promotes the further integration of RWA and DeFi.
In the future, PayFi will play an increasingly important role in promoting global asset liquidity, reducing transaction costs and enhancing market transparency. In Lily Liu's view, PayFi introduces RWA and institutional finance into the on-chain liquidity pool, creates an integrated value chain, and constitutes a "new financial cluster", which may be the biggest theme in this cycle of the crypto market.
Why is PayFi happening on Solana?
Why did PayFi happen on Solana instead of other L1 public chains or L2 solutions? Lily Liu’s answer is: “Solana has three advantages: high-performance public chain, capital liquidity, and talent liquidity.” These advantages constitute a threshold that other competitors are difficult to cross at this stage.
First, high-performance public chain. Solana's core technical advantage lies in its unique Proof of History (PoH) consensus mechanism, which enables it to process more than 65,000 transactions per second (TPS), and the transaction confirmation time is usually around 400 milliseconds. This performance far exceeds Ethereum's 10-15 TPS and long confirmation time. Even L2 solutions on Ethereum, such as Optimistic Rollups, find it difficult to match Solana in terms of latency and throughput. Although Visa claims that its servers can handle up to 56,000 TPS, in actual use, Visa only processes an average of 1,700 transactions per second. In contrast, Solana is fully capable of meeting actual payment needs.
Second, capital liquidity. As of August 30, 2024, the total locked value (TVL) of the Solana ecosystem has exceeded $10 billion, and has attracted significant investments from top venture capital funds including Andreessen Horowitz (a16z), Polychain Capital, Alameda Research, etc. This capital liquidity provides strong financial support for the expansion of PayFi.
Finally, talent mobility. The Solana Foundation actively promotes the construction of the developer community and has organized more than 500 hackathons and developer education programs around the world. As of 2024, there are more than 5,000 active developers in the Solana ecosystem, making it one of the fastest growing blockchain developer communities in the world. The strong talent pool supports the development of various innovative projects and continues to attract new technical and financial talents to join the ecosystem, laying a solid foundation for the development of PayFi.
PayFi uses programmable payments to connect the traditional world and the blockchain world, and through smart contracts, it makes it possible to scale credit finance on the chain. Solana's advantages not only support the development of PayFi, but also make it highly competitive in the future global payment and financial markets.
Taking PYUSD as an example, PayPal chose Solana as the new public chain for PYUSD payments, mainly focusing on Solana's fast settlement capabilities, low transaction fees, and strong developer ecosystem. Solana's token extension features, including confidential transfers, transfer pegs, and memo fields, provide PYUSD with the necessary flexibility and commercial practicality.
As PayPal put it: “These features are not optional. If you want PYUSD to play a role in the wider commercial sector, you must provide it to merchants.” Today, Solana has become the main platform for PYUSD, accounting for 64% of the market share, while Ethereum only accounts for 36%. In addition, as early as September 2023, Visa has expanded the settlement function of USDC from Ethereum to Solana.
PayFi's application scenarios and typical projects
The essence of PayFi is to use advanced encryption technology to reshape and upgrade the traditional financial system. Therefore, all financial scenarios can and need to be redone with PayFi.
1. Cross-border payments and trade
The main difficulty of traditional cross-border payments lies in the isolation problem in the centralized sovereign currency system. Due to the influence of national monetary policies such as foreign exchange controls and capital circulation, cross-border payments always have the problems of cumbersome processes, long time consumption and high costs. Initially, everyone believed that cryptocurrency payments to replace traditional cross-border payments was an excellent solution, but the enterprise-oriented solution still has many shortcomings.
Today, the cross-border payment industry still relies heavily on prepaid funds to achieve same-day settlement. Currently, more than $4 trillion is locked up in prepaid fund accounts, which is a huge and hidden cost for financial institutions and the global payment industry. PayFi can optimize this and leverage crypto services with traditional credit finance.
Comparison between the current cross-border payment model and the Arf improved model
（from: Arf）
Arf (@arf_one): The world's first regulated, transparent short-term liquidity solution designed to support cross-border payments. Headquartered in Switzerland. Eliminates the capital-intensive business model of the cross-border payments industry by providing licensed money service businesses and financial institutions with digital asset-based working capital and settlement services, as well as local entry and exit capabilities. Arf provides a unified liquidity network for cross-border payments and trade, eliminating prefunding requirements and providing 24x7 transparent and compliant services. As of now, Arf's on-chain transaction volume recently exceeded $1.6 billion without any defaults, becoming one of the fastest growing stablecoin use cases.
2. Supply Chain Finance
Supply chain finance combines financial services with supply chain management. It is based on trade relations and transactions in the supply chain. It provides systematic financial products and services to upstream and downstream enterprises in the supply chain through the control and management of supply chain information flow, logistics, and capital flow. Traditional supply chain finance is subject to cumbersome contracts and legal work, and it is difficult to automate evaluation. The financing process is slow, which seriously affects the financing turnover of small and medium-sized enterprises. PayFi has greatly simplified the process of accounts receivable acquisition and other businesses, alleviating the problem of corporate financing difficulties.
Global businesses are denied $2.5 trillion in annual trade finance needs due to limitations of traditional financial institutions
（from: Isle Finance）
Isle Finance (@isle_finance): The first project to provide RWA PayFi network for supply chain payments, introducing instant Web3 liquidity to supply chain finance and providing competitive returns with Grade A quality to liquidity providers. Through Isle, supply chain payments are combined with real-time settlement and liquidity management of blockchain technology, enabling supply chain participants to process payments and settlements more quickly and improve capital utilization efficiency; at the same time, on-chain liquidity providers can anchor the payment stability of high-credit buyers and share with buyers the early payment discounts provided by suppliers, etc. Isle's main customers include: high net worth individuals (HNWIs), crypto native users, DAO inventories, asset managers and family offices, etc., and allow ordinary users to pledge ISLE tokens to obtain liquidity mining rewards.
3. Consumer finance
PayFi, which is aimed at C-end users, may be a point of greater interest to users. It mainly occurs in the field of consumer finance. This is also the part that Lily Liu emphasized in her sharing of PayFi, "Buy Now, Pay Never". Users can cover current expenses by promising future income, and the mandatory part will be implemented by smart contracts on the chain. In consumer finance, the key to PayFi is that service providers that connect to the merchant network play an acceptance role in the middle, so that consumers can obtain sufficiently diverse consumption scenarios.
PayFi Stack is an open stack of compliant payment financing solutions
（from: Huma Finance）
Huma Finance (@humafinance): Huma Finance pioneered the PayFi Stack in the industry, an open stack designed to build compliant payment financing solutions, and advocated industry leaders to optimize solutions to meet the unique needs of PayFi. The initial stack includes the following layers: transactions, currencies, custody, financing, compliance, and applications. Taking the financing layer as an example, it includes: from credit ratings, underwriting to RWA oracles, etc. As a representative project of the financing layer, Huma focuses on short-term financing commonly seen in the payment field. As of August 26, 2024, Huma (single-caliber statistics) has a total financing payment amount of more than 280M and a default rate of 0.
CrediPay (@Credix_finance): Helps businesses increase sales and improve cash flow efficiency through seamless and risk-free credit services. Sellers offer buyers flexible payment terms at attractive prices and receive advance payments. We manage and protect our customers from any credit and fraud risks, allowing them to focus only on what matters most: increasing sales and profitability. Currently Credix's services are mainly focused on Latin America, such as accounts receivable factoring.
Opportunities and challenges of PayFi
Market growth space
The core goal of PayFi is to introduce the time value of money onto the chain and reconstruct the financial system in a more programmable, sub-custodial, and decentralized way. With the rapid increase in the number of stablecoins around the world and the continuous improvement of cryptocurrency infrastructure, PayFi is expected to become an important force in transforming traditional finance.
According to Statista, the total global digital payment transaction volume is expected to reach approximately $9.46 trillion in 2023, and this figure is expected to continue to grow, possibly reaching $14 trillion by 2027. At the same time, data from mordorintelligence shows that the DeFi market size is estimated to be $46.61 billion in 2024 and is expected to reach $78.47 billion by 2029, with a predicted compound annual growth rate of 10.98%.
The CGV Research team's calculations show that if PayFi can account for 10% of the total global digital payment transactions (conservative estimate), by 2030, the PayFi market size (estimated to be US$1.8 trillion) will be 20 times the DeFi market size (US$87 billion). This means that PayFi has huge market potential and is expected to occupy an important position in the global digital payment field.
Regulatory and compliance challenges
As the issuance of stablecoins continues to increase globally, the attitudes of central banks towards stablecoins have gradually become more relaxed. In a broad sense, stablecoins anchored to the fiat currency standard can be regarded as a digital extension of the fiat currency. The payment business that PayFi mainly involves uses stablecoins as a medium, which is actually still subject to the supervision of the sovereign currency system.
On the one hand, current PayFi projects focus on compliance, usually only licensed institutions are allowed to participate, and individual users need to go through strict KYC processes and reviews. On the other hand, a large number of PayFi projects tend to expand their business in third world countries, where local regulations are usually not sound enough and regulatory barriers are low, so compliance risks are relatively small.
Technical and security risks
After years of DeFi development, although security issues have not been completely eliminated, a large number of security vulnerabilities have been identified, and after rigorous audits, the security of on-chain PayFi is basically equivalent to that of traditional DeFi.
However, the technical challenges mainly exist in the off-chain part. Since PayFi requires a large amount of access to real-world assets, ensuring the enforcement of off-chain logic remains an unresolved problem. The current solution is usually to handle the alignment of on-chain and off-chain through an intermediary entity, but this solution still needs further improvement.
Conclusion
PayFi, as a new wave of payment finance, is reshaping the global financial ecosystem with its unique charm. It not only inherits Bitcoin's payment vision, but also brings the efficiency and inclusiveness of financial services to a new level through the innovation of blockchain technology. With the support of high-performance public chains such as Solana, the market size of PayFi is expected to achieve exponential growth and become the main driving force of the future financial market.
As Lily Liu foresaw, PayFi closely combines RWA and DeFi, builds an integrated value chain, and forms a new financial cluster. This revolutionary innovation will drive the global financial system towards a more efficient and inclusive direction.
About CGV
CGV (Cryptogram Venture) is a crypto investment institution headquartered in Tokyo, Japan. Since 2017, its funds and predecessor funds have participated in the investment of more than 200 projects, including the investment and incubation of licensed Japanese yen stablecoin JPYW. At the same time, CGV FoF is a limited partner of several world-renowned crypto funds. Since 2022, CGV has successfully held two Japan Web3 Hackathons (TWSH), which have been jointly supported by institutions and experts such as the Ministry of Education, Culture, Sports, Science and Technology of Japan, Keio University, and NTT Docomo. Currently, CGV has branches in Hong Kong, Singapore, New York, Toronto and other places. In addition, CGV is one of the founding members of the Bitcoin Tokyo Club in Tokyo, Japan.
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