PayFi, or Payment Finance, refers to an innovative technology and application model that combines payment functions with financial services in the blockchain and cryptocurrency space. The core of PayFi revolves around the processes of sending, receiving, and settling cryptocurrencies, rather than the trading behavior itself. This model encompasses not only cryptocurrency payments and transactions but also various financial activities such as lending, wealth management, and cross-border payments. By utilizing decentralized technology, PayFi makes financial activities faster and more secure, reducing friction and costs associated with traditional financial systems, thereby facilitating seamless value transfer and financial inclusion on a global scale. The concept of PayFi was first introduced by Lily Liu, chair of the Solana Foundation, at the EthCC conference in July 2024. She views PayFi as a new approach to constructing financial markets, creating financial primitives and product experiences centered around the Time Value of Money (TVM). These are difficult or impossible to achieve in traditional or even Web2 finance. The vision of PayFi is to leverage blockchain technology to innovate payment systems, enabling more efficient, low-cost transactions and providing new financial experiences, creating more complex financial products and applications, and forming an integrated value chain that results in a new financial cluster. The CGV Research team believes that with the development of high-performance blockchain technology, the true value of PayFi will rapidly expand and scale in this environment. This expansion can accelerate the integration of payment and financial services, making cryptocurrencies more practical and efficient in everyday transactions and more complex financial operations. In the future financial ecosystem, PayFi will be a key driving force.

PayFi: Inheriting and Extending Bitcoin’s Payment Vision

The birth of Bitcoin stems from Satoshi Nakamoto’s revolutionary white paper, “Bitcoin: A Peer-to-Peer Electronic Cash System,” which proposed the idea of “decentralized payments.” This concept not only introduced a new form of currency—Bitcoin—but also envisioned a global payment system that operates without intermediaries, bypassing the limitations of traditional financial institutions for more efficient and transparent value transfer. Nakamoto’s vision aimed to fundamentally reform the existing payment system, eliminating high transaction fees, lengthy settlement times, and financial exclusion. However, despite Bitcoin successfully leading the cryptocurrency revolution, its original intent as a medium for everyday payments has not been fully realized. Bitcoin is often seen more as a store of value rather than a currency for daily transactions. Over time, the emergence of stablecoins has filled this gap. By mapping the value of fiat currencies onto the blockchain, stablecoins bridge the gap between cryptocurrencies and the real-world financial system, facilitating the first practical use case for blockchain payments. Since 2014, the growth of stablecoins has expanded exponentially, demonstrating a strong market demand for blockchain payments. Stablecoins enable users to enjoy the transparency and decentralization benefits of blockchain technology while avoiding the risks associated with cryptocurrency price volatility. Currently, stablecoins support approximately $2 trillion in payments annually, nearing Visa’s annual payment processing volume. However, while stablecoins have advanced blockchain payment development, the sector still faces numerous challenges, such as poor user experience, transaction delays, high costs, and compliance issues. These challenges limit the widespread adoption of blockchain payments as a mainstream payment medium. The further expansion of the payment ecosystem relies significantly on the promotion of financial tools and financing mechanisms. In traditional financial systems, tools like credit cards, trade financing, and cross-border payments greatly facilitate global payment applications by providing liquidity and financing options. The blockchain, as an emerging industry, does not necessarily require a complete market reconstruction; rather, it can offer more valuable products and solutions built on existing markets through blockchain technology. It is in this context that PayFi emerges. By leveraging the high performance and low-cost transaction characteristics of advanced public chains, PayFi not only positions blockchain payment systems to potentially surpass traditional financial mechanisms but also creates a more liquid and adaptable global financial market. This evolution is both a return to Bitcoin’s original intent and a significant innovation built upon Bitcoin’s foundation. Through PayFi, blockchain payment systems will truly unleash their potential, propelling the global financial system toward a more efficient and inclusive future.

Core Concept of PayFi: Time Value of Money (TVM)

“Time is more valuable than money; you can get more money, but you cannot get more time.” The Time Value of Money (TVM) is a core concept in finance that emphasizes the differences in value of money at different points in time. The basic principle of TVM is that a sum of money today is typically worth more than the same amount in the future. This is because money held now can be invested to generate returns or consumed for immediate utility. In simple terms, the crucial idea behind the time value of money is “opportunity cost.” If someone holds funds without using them immediately, they forgo potential investment opportunities and the associated returns. Therefore, the current value of money must reflect these missed opportunities.

For example:
— Loans and Mortgages: In bank loans, interest rates are calculated based on TVM; the interest paid by borrowers compensates the bank for the use of its funds.
— Investment Evaluation: When assessing investments such as stocks, bonds, or real estate, investors consider the present value of future returns to determine the attractiveness of the investment.
— Capital Budgeting: Companies evaluate future cash flows of different projects during capital budgeting and calculate their present values through discounting to help management make the most beneficial investment decisions.

PayFi leverages blockchain technology to allow users to realize the time value of money on-chain at a very low cost and with high efficiency. By utilizing smart contracts and decentralized platforms, PayFi enables users to manage and invest their funds without intermediaries, maximizing 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 purposes. Furthermore, the infrastructure of PayFi facilitates 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. This will extend to more sophisticated financial products and application scenarios, creating an integrated value chain that forms a new “financial cluster.”

Integrating RWA + DeFi: Building a New Financial Cluster Centered on PayFi

In the financial system, Real-World Assets (RWA) and Decentralized Finance (DeFi) each possess unique advantages but also face distinct challenges: RWA has a substantial market size and stable value but relatively low liquidity, as well as insufficient transparency and trading efficiency. DeFi, on the other hand, offers efficient trading mechanisms and global liquidity but primarily relies on crypto assets, lacking a direct connection to the real economy. Contrary to some industry views that categorize PayFi as a niche direction within the RWA track, CGV Research believes that RWA is part of the PayFi ecosystem. Beyond RWA, PayFi also encompasses a broader range of crypto assets, smart contract-driven financial services, and decentralized payment and settlement systems. The introduction and application of RWA, facilitated by DeFi, are essential components for PayFi to achieve its core functionalities. RWA needs DeFi to enhance liquidity and trading efficiency, enabling rapid, low-cost global financing through the digitization of assets and smart contracts, while improving transaction transparency and security. Simultaneously, DeFi enriches the asset classes by incorporating RWA, reducing volatility risk, providing stable income sources, and connecting to the real economy, thus promoting its practical application and development on a global scale.

Through PayFi, RWA and DeFi are no longer independent financial systems, but rather interdependent and complementary organic wholes, achieving the integration and innovation of real assets and on-chain financial services.
— Digitization and On-Chain Integration: Introducing RWA to Blockchain. The PayFi platform first digitizes RWA through smart contracts, allowing them to be represented and traded on the blockchain. This process ensures the transparency and security of RWA’s value and ownership on-chain. In this way, traditional RWA assets can be fragmented into smaller units, facilitating global trading and investment.
— Smart Contracts and Payment Systems: Enabling Efficient Transactions and Settlements. Once RWA is digitized, the PayFi platform utilizes smart contracts to automate trading and settlement processes. This not only accelerates transaction speed and reduces costs but also ensures transaction transparency and security. Additionally, PayFi’s on-chain payment system simplifies and enhances the transfer and payment of these assets, addressing common issues in traditional finance, such as settlement delays and high fees.
— Liquidity Pools and Financing Channels: Providing Financial Support for RWA. PayFi’s liquidity pools offer ample financial support for RWA, enabling these assets to attract funding from global investors. By using RWA as collateral, PayFi allows investors to participate in financing activities on DeFi platforms while providing a stable source of funding for RWA. This model not only increases the liquidity of RWA but also offers DeFi investors diversified investment opportunities.
— Risk Management and Transparency: Enhancing Market Trust. Through blockchain technology, PayFi ensures the transparency and verifiability of all RWA transactions, reducing information asymmetry and operational risks. The automated execution of smart contracts minimizes the risk of human intervention, while the immutability of the blockchain guarantees the security of transaction records. All of these factors enhance market trust, fostering further integration of RWA and DeFi. In the future, PayFi will play an increasingly important role in enhancing global asset liquidity, reducing transaction costs, and improving market transparency. According to Lily Liu, PayFi integrates RWA and institutional finance into on-chain liquidity pools, creating an integrated value chain that forms a “new financial cluster,” which may be the largest theme in this cycle of the crypto market.

Why is PayFi Emerging on Solana?

Why is PayFi developing on Solana rather than on other L1 public chains or L2 solutions? Lily Liu provides the answer: “Solana has three major advantages: high-performance public chain, capital liquidity, and talent mobility.” These advantages create barriers that competitors find difficult to overcome at this stage.
Firstly, High-Performance Public Chain. Solana’s core technological advantage lies in its unique Proof of History (PoH) consensus mechanism, allowing it to process over 65,000 transactions per second (TPS), with transaction confirmation times typically around 400 milliseconds. This performance far exceeds Ethereum’s 10-15 TPS and longer confirmation times, and even Ethereum’s L2 solutions, such as Optimistic Rollups, struggle to match Solana in terms of latency and throughput. While Visa claims its servers can handle up to 56,000 TPS, in practice, Visa averages only 1,700 transactions per second. By comparison, Solana fully meets real payment needs.
Secondly, Capital Liquidity. As of August 30, 2024, the total value locked (TVL) in the Solana ecosystem has exceeded $10 billion, attracting significant investments from top venture capital firms such as Andreessen Horowitz (a16z), Polychain Capital, and Alameda Research. This capital liquidity provides strong financial support for the expansion of PayFi.
Lastly, Talent Mobility. The Solana Foundation actively promotes the development of the developer community, organizing over 500 hackathons and global developer education programs. As of 2024, there are over 5,000 active developers within the Solana ecosystem, making it one of the fastest-growing blockchain developer communities worldwide. This robust talent pool supports the development of various innovative projects and continues to attract new technical and financial talent, laying a solid foundation for the growth of PayFi. PayFi leverages programmable payments to bridge the traditional world with the blockchain world, making the on-chain scaling of credit finance possible through smart contracts. Solana’s advantages not only support the development of PayFi but also position it with strong competitiveness in the future global payments and financial markets.

For instance, PayPal chose Solana as the new public chain for PYUSD payments, primarily valuing Solana’s rapid settlement capabilities, low transaction costs, and robust developer ecosystem. Solana’s token expansion features, including confidential transfers, transfer hooks, and memo fields, provide the necessary flexibility and commercial viability for PYUSD. As PayPal stated, “These features are essential. If we want PYUSD to function in a broader commercial context, we must provide them to merchants.” Currently, Solana has become the primary platform for PYUSD, holding a 64% market share, while Ethereum accounts for only 36%. Additionally, as early as September 2023, Visa expanded its USDC settlement functionality from Ethereum to Solana.

Application Scenarios and Typical Projects of PayFi

The essence of PayFi lies in leveraging advanced cryptographic technology to reshape and upgrade the traditional financial system. Therefore, it is necessary and feasible to rework all financial scenarios using PayFi.

1. Cross-Border Payments and Trade
   The traditional challenges of cross-border payments primarily stem from the isolation issues within centralized sovereign currency systems. Due to factors such as foreign exchange controls and capital flow restrictions imposed by national monetary policies, cross-border payments have always been plagued by cumbersome processes, long durations, and high costs. Initially, many believed that cryptocurrency payments could serve as an excellent solution to replace traditional cross-border payments. However, enterprise-level solutions still have significant shortcomings. Currently, the cross-border payment industry heavily relies on prepaid funds to achieve same-day settlements. At present, more than $4 trillion in prepaid fund accounts is trapped, representing a substantial and hidden cost for financial institutions and the global payments industry. PayFi can optimize this situation by leveraging traditional credit finance to facilitate cryptocurrency services.

Comparison between the current cross-border payment model and Arf’s improved model (from: Arf)

Arf (@arf_one): The world’s first regulated and transparent short-term liquidity solution designed to support cross-border payments, headquartered in Switzerland. Arf eliminates the capital-intensive business model prevalent in the cross-border payments industry by providing licensed currency service businesses and financial institutions with digital asset-based working capital and settlement services, as well as local entry and exit capabilities. Arf offers a unified liquidity network for cross-border payments and trade, removing the need for prefunding and providing 24/7 transparent compliance services. As of now, Arf’s on-chain transaction volume has recently exceeded $1.6 billion, with no defaults, making it one of the fastest-growing stablecoin use cases.

1. Supply Chain Finance
   Supply chain finance integrates financial services with supply chain management, based on trade relationships and transactions within the supply chain. By controlling and managing the flow of information, logistics, and funds within the supply chain, it provides systematic financial products and services to upstream and downstream enterprises. Traditional supply chain finance is hindered by cumbersome contracts and legal work, making automated assessments difficult and resulting in slow financing processes that severely impact the cash flow of small and medium-sized enterprises. PayFi significantly simplifies processes like accounts receivable purchasing, alleviating the challenges of enterprise financing.

Global businesses are denied $2.5 trillion in annual trade finance needs due to the limitations of traditional financial institutions (from: Isle Finance)

Isle Finance (@isle_finance): The first project to provide an RWA PayFi network for supply chain payments, introducing real-time Web3 liquidity into supply chain finance while offering competitive yields of A-grade quality to liquidity providers. Isle combines supply chain payments with real-time settlement and liquidity management through blockchain technology, enabling supply chain participants to process payments and settlements more swiftly and improve capital utilization efficiency. Additionally, on-chain liquidity providers can anchor their payment stability to high-credit buyers and share advance payment discounts offered by suppliers with those buyers. Isle’s primary clients include high-net-worth individuals (HNWIs), crypto-native users, DAO treasuries, asset managers, and family offices, while allowing ordinary users to stake ISLE tokens to earn liquidity mining rewards.

1. Consumer Finance
   PayFi aimed at end-users (B2C) may capture users’ interest, primarily occurring in the consumer finance sector, which Lily Liu emphasized in her PayFi presentation with the concept “Buy Now, Pay Never.” Users can cover current expenses by committing future earnings, with enforcement facilitated by on-chain smart contracts. In consumer finance, the key to PayFi lies in enabling service providers within the merchant network to act as guarantors, ensuring that consumers have access to a diverse range of spending scenarios.

PayFi Stack An open stack of compliant payment financing solutions (from: Huma Finance)

Huma Finance (@humafinance): Huma Finance has pioneered the PayFi Stack, an open framework aimed at building compliant payment financing solutions while encouraging industry leaders to optimize solutions tailored to the unique needs of PayFi. The initial stack includes the following layers: transaction, currency, custody, financing, compliance, and application. For instance, the financing layer encompasses elements such as credit ratings, underwriting, and oracles for RWA. As a representative project in the financing layer, Huma focuses on common short-term financing in the payment sector, having reached over $280 million in total financing payments with a default rate of 0 as of August 26, 2024.

CrediPay (@Credix_finance): CrediPay helps businesses increase sales and improve cash flow efficiency through seamless, risk-free credit services. Sellers offer buyers flexible payment terms at attractive prices while collecting advance payments. We manage and protect clients from credit and fraud risks, allowing them to focus on what matters most: increasing sales and profitability. Currently, CrediPay’s services are primarily concentrated in Latin America, including accounts receivable factoring.

PayFi’s Opportunities and Challenges

1. Market Growth Potential
   The core goal of PayFi is to introduce the time value of money onto the blockchain and to reconstruct the financial system in a more programmable, sub-custodial, and decentralized manner. With the rapid increase in global stablecoin issuance and the continuous improvement of cryptocurrency infrastructure, PayFi is poised to become a significant force in transforming traditional finance. According to Statista, the total global digital payment transaction value is expected to reach approximately $9.46 trillion in 2023, and this figure is projected to continue growing, potentially reaching $14 trillion by 2027. Meanwhile, Mordor Intelligence estimates that the DeFi market size will be $46.61 billion in 2024, reaching $78.47 billion by 2029, with a forecasted compound annual growth rate (CAGR) of 10.98%. CGV Research estimates that if PayFi captures 10% of the global digital payment transaction value (a conservative estimate), by 2030, the PayFi market size (estimated at $1.8 trillion) will be 20 times larger than the DeFi market size ($87 billion). This indicates that PayFi has significant market potential and is likely to play a major role in the global digital payments landscape.
2. Regulatory and Compliance Challenges
   As the issuance of stablecoins continues to grow, central banks around the world are becoming more accommodating toward them. Broadly speaking, fiat-pegged stablecoins can be seen as digital extensions of fiat currencies. PayFi primarily involves payment operations mediated by stablecoins, which are still subject to the regulations of sovereign currency systems. On one hand, current PayFi projects emphasize compliance, typically allowing only licensed institutions to participate, while individual users must undergo strict KYC processes and reviews. On the other hand, many PayFi projects tend to expand their operations into developing countries where local regulations are often less robust, resulting in relatively lower compliance risks.
3. Technical and Security Risks
   Despite years of DeFi development, security issues have not been completely eradicated, although numerous vulnerabilities have been identified. After rigorous audits, the security of on-chain PayFi is now essentially on par with that of traditional DeFi. However, technical challenges primarily exist in the off-chain segment. PayFi requires extensive integration with real-world assets, making the enforcement of off-chain logic a pressing issue. Current solutions typically involve a mediator entity to align on-chain and off-chain activities, but this approach still needs refinement.

Conclusion

As a new wave in payment finance, PayFi is reshaping the global financial ecosystem with its unique appeal. It not only inherits Bitcoin’s vision for payments but also elevates the efficiency and inclusivity of financial services through blockchain innovations. With the support of high-performance public chains like Solana, PayFi’s market scale is expected to grow exponentially, becoming a key driver in the future financial market. As Lily Liu envisions, PayFi closely integrates RWA and DeFi, constructing an integrated value chain and forming a new financial cluster. This revolutionary innovation will propel the global financial system toward greater efficiency and inclusivity.

Disclaimer：

1. This article is reprinted from [CGV FOF]. All copyrights belong to the original author [Shigeru Satou]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
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