Blockchain is an industry that heavily relies on “narratives.” By constructing narrative themes, it can guide market discussions, facilitate capital concentration, and attract relevant teams to build ecosystems within the same narrative framework, collectively writing a complete story. The narrative of PayFi was proposed by Lily Liu, chair of the Solana Foundation, who has centered almost all her keynote speeches over the past six months around PayFi, declaring it will be Solana’s sole focus going forward, demonstrating her immense determination.
During Token 2049, the first PayFi Summit, hosted by Solana, Huma, and Stellar, will take place in Singapore, which will be an important event in defining the connotation of PayFi. As an early practitioner of PayFi and RWA (Real World Assets), BSOS has previously collaborated with international ecosystem partners and has been invited to participate and speak. On the eve of the PayFi Summit, I am pleased to share my understanding of the PayFi narrative from the perspective of a front-line practitioner.
BSOS presents at the first PayFi Summit
What is PayFi?
PayFi refers to utilizing blockchain technology to provide the necessary financial services for real-world payment scenarios. Blockchain is inherently a peer-to-peer payment system that can achieve “directly transferring money to each other” in P2P payments. However, behind modern payment behaviors often lies a more complex process. Take credit cards, for instance; although they appear to be a payment tool, each transaction actually encompasses multiple financial operations such as short-term financing, advance payments, and cross-border remittances.
Another example is trade payments. The transportation of goods takes time, making immediate transactions impossible, so trade payments often involve performance guarantees (e.g., the payer transferring funds to an intermediary for safekeeping) and short-term financing.
As transaction behaviors evolve, “payments” often resemble an integration of multiple financial services. PayFi leverages the liquidity characteristics of blockchain (Money Movement) and the advantages of programmable money (Programmable Money) to provide liquidity solutions for complex payment processes in the real world, thereby improving payment efficiency and reducing costs.
Key Components of PayFi: Replacement of Payment Networks
PayFi is not about whether users pay with cryptocurrency, but rather about how “liquidity operates” during the payment process and “the payment network used.”
We illustrate this with two cases: one from Huma Finance and the other from Crypto.com’s VISA card. Traditional banks cannot provide 24/7 real-time cross-border remittance services, primarily due to limitations in their underlying payment networks. To achieve real-time crediting, many cross-border remittance fintech companies adopt an “A location receiving, B location paying” model, meaning they need to reserve capital positions in banks worldwide to support operations. This model presents significant challenges in terms of capital requirements and scaling.
Huma Finance is a lending protocol designed to provide short-term liquidity support specifically for cross-border remittance fintech companies. Once a fintech company completes receiving funds in location A, it can mobilize US dollar stablecoins through Huma Finance and immediately convert them into fiat currency in location B to pay the recipient. This way, fintech companies no longer need to establish huge capital reserves worldwide, as Huma Finance utilizes the blockchain’s “direct movement of funds” capability to flexibly address short-term liquidity needs, charging interest on these short-term loans to generate returns for on-chain liquidity providers (LPs).
From actual data, Huma Finance has provided short-term advances for a fintech company called Arf, achieving an on-chain transaction volume of $1.8 billion in just over a year. The issuer of the US dollar stablecoin USDC, Circle, has also published articles introducing this case. Huma Finance is a typical PayFi application that bypasses the cost and time limitations of traditional payment networks, achieving a substantial improvement in overall payment efficiency.
Another comparative example is Crypto.com’s widely recognized VISA debit card. Although users perceive payments as being made with their account’s cryptocurrency, transactions still rely on VISA and traditional payment networks, with no fundamental improvement in payment efficiency or cost (Crypto.com first converts the cryptocurrency into fiat currency at the time of the transaction and then forwards it to VISA to process it using the existing method). Therefore, I believe this model does not fall within the value scope of the PayFi narrative.
PayFi Application in Supply Chain Payment Scenarios
Another interesting case is the payment scenario within supply chains. Supply chains inherently face liquidity issues: when sellers deliver goods to buyers, buyers usually need to process the goods before they can be liquidated again. During this time, the liquidity of both parties is essentially locked in the goods. To cope with this time lag, buyers and sellers in the supply chain often adopt the convention of “payment terms combined with amounts” when determining transaction conditions. The “payment terms” decide who bears the liquidity gap before the goods are liquidated, while the “amount” implicitly subsidizes the time value of the payment terms. Regardless, one party always bears the short-term liquidity pressure.
ISLE Finance is a lending protocol designed specifically for supply chain payment scenarios, incubated by BSOS and Outlier Ventures, and selected for the 2024 BNB Incubation Alliance (BIA). ISLE Finance provides enterprises with credit lines for global payments, addressing liquidity bottlenecks in the supply chain transaction process. In a transaction, if both parties choose to use ISLE Finance as the payment network, the ISLE Finance protocol functions like an on-chain card reader. The seller uploads an invoice to the ISLE Finance protocol, and as long as the buyer signs with their private key on-chain to indicate that the information is accurate and agrees to pay, the seller receives US dollar stablecoins (of course, the amount cannot exceed the buyer’s on-chain credit limit).
Ultimately, the buyer must repay this stablecoin to ISLE Finance before the agreed due date; the buyer may also negotiate a later repayment date within a certain range than initially scheduled. This way, the costs incurred by both parties regarding the time value of money can be effectively shared, benefiting from the liquidity injected by ISLE Finance, as illustrated below.
Time Value Model of Payments in ISLE Finance
Opportunities for PayFi: Solving Transaction Scenarios Caused by “Payment Time Lags”
The core opportunity of PayFi lies not in providing liquidity for “investment loans,” but in addressing liquidity issues caused by “payment time lags.” Compared to investment loans, payment loans are characterized by short cycles, high frequency, small individual amounts, and lower risks. These time lags may arise from bank remittance processing times, shipping times for goods, or liquidity gaps the buyer faces before their next income arrives, among others. Although these time lags typically only last a few days to weeks, they often cause significant pain points for users. The intersection of such liquidity demands with global payments is the optimal opportunity for PayFi to take effect.
Moreover, the potential of PayFi extends to future DePIN (Decentralized Physical Infrastructure Networks) ecosystems, supporting high-frequency, small-amount, globalized revenue-sharing, settlement, clearing, and payment needs between devices. With the liquidity support of PayFi, the continuous execution of automated transactions between devices can be ensured, maintaining the stable operation of DePIN, a service that traditional financial infrastructure cannot support.
From Asset Tokenization to PayFi: The Transition of the RWA Narrative
In the previous cycle, the main narrative of the RWA sector focused on asset tokenization. One successful case is Ondo Finance, whose tokenized US short-term treasury ETF exceeded $600 million in total value locked (TVL), becoming a highlight in the industry. However, asset tokenization often involves the management and legal regulations of off-chain assets, incurring massive operational costs. Without sufficient asset scale, it is challenging to realize significant benefits. Recently, we have observed that the narrative focus of asset tokenization is gradually shifting from grassroots blockchain initiatives to large institutions like BlackRock and Franklin Templeton.
The core idea of asset tokenization is to circulate physical assets on the blockchain, while PayFi’s vision is to combine blockchain liquidity with real-world payment behaviors. For LPs, it represents off-chain short-term debt, and thus is seen as part of the RWA narrative, but its potential scale may far exceed that of tokenized US treasuries (as shown below). According to a PayFi research report published by CGV Research in September this year, the market size of PayFi is even expected to reach 20 times that of the past DeFi market size. We believe PayFi will become an important narrative of RWA in this cycle.
Potential Scale of PayFi, Source: Huma Finance Blog
Having been deeply engaged in blockchain applications for many years, I have witnessed the initial ideals of practitioners—”the point-to-point payments of blockchain or Bitcoin will replace fiat payment systems”—with their naïve and romantic sentiments, evolve into today’s PayFi narrative, which emphasizes entering real payment scenarios. By profoundly understanding the operations of the real world and the inherent advantages of blockchain, we can pragmatically integrate different on-chain and off-chain roles, allowing more people to benefit from this technology.
Perhaps looking back years later, today’s thoughts may still seem overly idealistic, but at least we are paving a path toward possibilities for the future
The viewpoints presented in this article reflect diverse opinions and do not represent the stance of WEB3+
