Compared to Ethereum’s fragmented dominance, Solana’s ecosystem may be smaller but far more nimble. After FTX’s collapse, Solana staged a strong comeback, fueled by its high performance, smart marketing, and a range of hardware products. Specifically, the high performance refers to the Firedancer upgrade, while the marketing is tied to Meme Season, and the hardware includes various Web3 phones. But even that is not enough. PayFi, introduced by Solana Foundation Chair Lily Liu, has also emerged as a trending topic. Though it may feel slightly outdated to cover a trend from July in October, the long-term direction is clear: the Web3 industry is gradually shifting toward off-chain solutions and real-world applications.

“Once upon a time, you had me, and I had you.”

This piece isn’t just an ode to Solana; it’s a composition seeking to explore the future of Web3.

The Unresolved Challenge of Crypto Wallets: PayFi’s Early Signal

Before defining PayFi as proposed by Lily Liu, let’s first look at Web3 wallets. Between 2022 and 2023, smart contract wallets, account abstraction (AA), and the traffic concerns of exchanges drove a new wave of Web3 wallets, marking their second peak period after the meme coin era of 2017-2021.

From the perspective of exchanges, wallets serve as the main entry point for users to interact with blockchain activities. Future user traffic will flow through these wallets, which even have the potential to replace centralized exchanges (CEX). Furthermore, as competition intensifies in the Ethereum Layer 2 space, wallets in the multi-chain era are expected to become the primary battleground for aggregating liquidity.

However, the wallet ecosystem in 2024 isn’t particularly eye-catching. OKX’s built-in Web3 wallet stands out as one of the best, but it still hasn’t become an independent product. One major reason is that while Web3 wallets attract traffic, they lack a closed-loop transaction system, meaning they can’t address the profitability problem. If users are charged transaction fees, they’ll simply switch to desktop products—why pay extra if it’s avoidable?

Looking at it from a more “path-dependent” angle, the problem with crypto wallets is their overemphasis on transaction functionality. This issue doesn’t contradict the profitability challenge mentioned earlier. The main feature of crypto wallets is to provide more diverse on-chain transaction capabilities, whether by integrating more blockchains or offering a dApp recommendation system based on a bidding mechanism.

That said, wallets do generate significant traffic, and DeFi on-chain gains or losses could be turned into off-chain spending opportunities. However, losses are also possible, depending on whether the base currency is ETH, stablecoins, or fiat.

A working payments system needs support from both merchants and users, but this is where the industry currently falls short. To illustrate, let’s look at a well-known entrepreneur, Trump. On September 19, 2024, Trump visited PubKey Bar in New York and treated his supporters by buying a $998 beer. He made the payment using Strike, and the merchant accepted it through Zaprite.

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In this scenario, the merchant and Trump are using different payment systems, something that would be almost unthinkable in the Web2 era. It’s like Trump paying with Alipay while the merchant accepts payment via WeChat Pay. However, in Web3, this is entirely possible because both parties are using the Bitcoin network as their settlement layer. Here’s a quick breakdown of how it works:

1. Trump initiates the payment via Strike, which triggers the Lightning Network to start the payment process. After the Bitcoin network confirms the transaction, the Lightning Network processes it.
2. On the merchant side, PubKey uses Zaprite to receive the payment. Zaprite confirms the transaction using the Lightning Network, and once the Bitcoin network verifies it, the transaction is completed.

In this setup, Zaprite only charges a $25 subscription fee. Other than that, the merchant only pays a small miner fee, and the rest of the revenue goes directly to them. For comparison, Visa, MasterCard, or American Express charge around 1.95%-2% in fees, while recent Bitcoin miner fees average around $1.46, with no additional fees for accepting Bitcoin.

Looking deeper, Web2 payments operate under a similar logic to Trump’s beer purchase, but they involve numerous intermediary steps, which is one of the main drawbacks of Web2. The advantage—and opportunity—for Web3 payments and PayFi lies in their streamlined process.

Now, let’s swap some concepts and products. Commonly used tools like Alipay, WeChat Pay, and PayPal are electronic wallets that target consumers (the C-side). Correspondingly, businesses (the B-side) rely on merchant acquiring systems. If a settlement network similar to the Lightning Network is built, we could create a simple P2B (person-to-business) interaction system. Typically, such a settlement network is made up of card organizations and payment protocols.

Using the diagram above as an example, Web2 payment systems are generally divided into P2P (person-to-person), P2B (person-to-business), and B2B (business-to-business) transactions. These cover payments between individuals, businesses, and even interbank transactions through systems like SWIFT, CIPS, or cross-border CBDC platforms like mBridge.

It’s worth noting, however, that payments mainly occur between individuals and businesses, and between businesses themselves. We include P2P and interbank transactions here to make it easier to compare with Web3 payment behaviors, because in Web3, payments are primarily between individuals. Bitcoin, for example, is a peer-to-peer electronic cash system.

Compared to Web2 payment systems, Web3 payment systems appear much simpler. However, this theoretical simplicity does not hide the fragmented nature of the ecosystem. One clear distinction is that traditional payment systems have many banks but only a few card organizations, which results in strong network effects. Web3, on the other hand, takes the opposite approach—there are many public chains and Layer 2 networks, but the primary assets are limited, mostly dollar-backed stablecoins like USDT and USDC, with only a handful of dominant products.

Even with the most optimistic estimates, there are only around 30,000 merchants worldwide that accept Bitcoin. While some major brands, like Starbucks, do accept it in certain regions, its overall acceptance still pales in comparison to traditional card networks or electronic wallets.

Merchants that accept Binance Pay or Solana Pay are mostly limited to online platforms, such as travel OTAs like Travala. Expanding to the scale of card networks, with hundreds of millions of merchants, is still a distant goal.

We’ll go into more detail about payment systems in the next sections. Now, it’s time to introduce the concept of PayFi.

The PayFi Stack: Where DeFi, RWA, and Payments Meet

We began by discussing payments before introducing PayFi because the two differ significantly. PayFi, in essence, is more like a combination of DeFi, stablecoins, and a payment system, with little overlap with traditional Web2 payments, as previously noted.

Here’s a brief explanation from Lily Liu. PayFi works by harnessing the time value of money (TVM). For example, generating profits through DeFi is one way TVM operates. The challenge, however, is that this often requires time—for instance, staking tokens to earn rewards typically involves a lock-up period. But as long as you hold tokens, there’s potential for value growth. In past practices, after gaining profits, users would reinvest them in DeFi, continuing the cycle to explore further profit opportunities.

Now, these returns can be redirected for other purposes, such as using anticipated earnings for immediate consumption. Here’s a simple example:

1. Alice invests 100 USDC in a financial product with a 5% annual interest rate (APR). After one year, she will receive $105 in total.
2. Bob runs a watermelon stand. To boost sales, he allows Alice to use her investment certificate to enjoy $5 worth of watermelon. After a year, Bob can redeem her investment for the $5.

This example is very straightforward—perhaps overly so, as it leaves questions unanswered, such as how Alice and Bob ensure the agreement is honored, or what happens if Alice’s returns fall short. But setting those issues aside, Alice gets to enjoy her watermelon for free, while Bob secures a $5 receivable.

A year later, a major bull market hits. Bob receives a flood of $5 payments and decides to expand into corporate supplies. After searching for clients, he sees Evergrande is looking for a watermelon supplier with a $5 million order. Bob is thrilled, but Evergrande gives him a commercial paper instead of cash. With his experience working with Alice, Bob gladly accepts the paper, agreeing to exchange it for cash in a year. If Evergrande can’t pay, the collateral will be real estate.

After six months, Bob decides to enter the stock market and needs to cash out the commercial paper. PwC rates Evergrande’s paper as AAA-quality assets. Banks, financial institutions, and even individuals are eager to buy, knowing Evergrande’s real estate is a valuable asset with great potential for appreciation.

Bob successfully sells the paper for $5.01 million. The bank gets the commercial paper, Evergrande benefits from delayed payment, and Bob enjoys his stock market profits. Everyone wins, with a bright future ahead. (In reality, commercial paper is usually sold at a discount and incurs fees; this example simplifies the process. Before Evergrande’s debt crisis, its commercial paper was already trading at a 7-8% discount to face value.)

Another meaning of TVM is the monetization of non-circulating assets. Even the non-circulating assets themselves can be currencies or their equivalents. There are certain similarities with the logic of re-pledge. For details, please refer toTriangular Debt or Mild Inflation: An Alternative Perspective of RestakingOne sentence.

In the context of Web3, the monetization of non-circulating assets can only be DeFi, so PayFi is a natural extension of DeFi. It just extracts part of the previous on-chain Lego and puts it into the off-chain to improve life.

The relationship between PayFi and Payments is that payment is the easiest and most convenient way to meet the needs of off-chain funds.PayFi and RWA overlap with each other, but traditional RWA emphasizes “on-chain”. For example, the so-called tokenization process requires securities, gold or real estate to be tokenized first to meet the needs of on-chain circulation. It is possible that many of the more familiar alliance chains in China do this, such as blockchain electronic invoices, or Gongxinbao, etc.

PayFi can hardly be said to be a subset of RWA. A considerable part of PayFi’s behavior is “off-chain”. As for whether there are links on the chain, it is not the focus of the concept of PayFi, but its behavior needs to involve interaction with off-chain links.

However, there is no need to get entangled. Among many concepts of Web3, there is a lack of large-scale products and user groups. They are more about speculating on concepts and selling coins. Roughly divided, products involving PayFi / Payments and RWA can be classified in the following chronological order. Division:

• Old era: Ripple, BTC (Lightning Network, BTCFi, WBTC), Stellar
• 2022 RWA Concept Three Musketeers: Ondo/Centrifuge/Goldfinch
• New Era-2024 PayFi: Huma (already established, becoming popular in 2024), Arf

Another aspect of TVM (time value of money) involves monetizing illiquid assets—assets that are not easily transferable can themselves become a form of currency or its equivalent. This concept shares similarities with re-staking. For a deeper understanding, you can refer to the article Triangular Debt or Moderate Inflation: An Alternative View on Restaking.

In the Web3 landscape, the monetization of illiquid assets happens through DeFi, making PayFi a natural extension of it. PayFi essentially takes part of the liquidity that used to be locked on-chain and channels it into off-chain applications to enhance everyday life.

The connection between PayFi and Payments is that payments provide the easiest and quickest way to bring funds off-chain. PayFi and RWA (real-world assets) intersect, though traditional RWA focuses more on bringing assets “on-chain.” For example, in tokenization, securities, gold, or real estate are tokenized to enable circulation on-chain. Many consortium blockchains, familiar in domestic contexts, are working on this, like blockchain-based electronic invoices or platforms like GXChain.

It’s hard to categorize PayFi as a subset of RWA. Much of PayFi’s activity involves moving assets “off-chain,” and whether there’s an on-chain element isn’t central to its concept. What’s important is that PayFi deals with interactions between on-chain and off-chain systems.

But there’s no need to overthink this. Many Web3 concepts lack large-scale products or a strong user base; often, it’s more about hyping ideas and selling tokens. Broadly speaking, products related to PayFi, Payments, and RWA can be divided by the following timeline:

• Old Era: Ripple, Bitcoin (Lightning Network, BTCFi, WBTC), Stellar
• 2022 RWA “Three Pioneers”: Ondo, Centrifuge, Goldfinch
• New Era – 2024 PayFi: Huma (founded earlier but surged in 2024), Arf

Looking at the development timeline of these products, it’s fair to say that PayFi is essentially an evolution of RWA. In traditional narratives, especially when it comes to the business model of using on-chain funds to lend to off-chain real-world entities, this is exactly what PayFi represents in 2024—what was referred to as RWA in 2022.

In fact, we could even argue that PayFi today is built around three main components: the lending side of RWA, Ripple’s cross-border settlements, and stablecoin-based off-chain consumption. At its core, it’s really just a combination of these elements.

It’s fair to say that Web3’s software and hardware infrastructure is built upon the material and conceptual foundations of Web2, and Web3 PayFi is no exception. In fact, its similarities to traditional Payments are greater than its differences. Lending products, meanwhile, are primarily viewed from the perspective of capital flow. If off-chain products can generate more returns, those returns can also be redirected into payment transactions.

Being misunderstood is often the destiny of the communicator. Whether Lily Liu would agree with this interpretation, I can’t say. But in my view, this is the most logical way to frame it: as long as on-chain profits are used for off-chain consumption, it aligns with the PayFi concept. Therefore, the market’s future focus will likely center on Web3 Payments, RWA loans, and stablecoins, which can all be part of a continuous cycle.

For instance, an RWA company takes out a loan denominated in US dollars. Individuals, through DeFi protocols, participate in the RWA on-chain lending pool. After evaluation, the RWA lending protocol provides loans to real-world companies. Once receivables are collected, LPs receive a profit share, and they can cash out using a Mastercard U card. The merchant supports Binance Pay, completing the perfect closed loop.

History is made by the pioneers, not the ones who summarize it. Defining PayFi is less important than finding ways to realize tangible, off-chain profits beyond DeFi’s on-chain competition. The demand from billions of people in the real world will inject fresh liquidity into the on-chain ecosystem and support higher-leveraged valuations. Whoever manages to unlock this will ultimately define the market.

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