TLDR

• The concept of PayFi was introduced by Solana Foundation Chair Lily Liu during her keynote speech “The Rise of PayFi: Fulfilling the Vision of Cryptocurrency” at the 7th EthCC conference.
• The core of PayFi includes: 1. Emphasizing “instant settlement,” which holds particular value in speculative trading, and 2. Supporting a “Buy Now, Pay Never” model, opening new avenues for creator monetization, invoice financing, and payment risk management.
• PayFi’s key advantage in realizing its vision lies in leveraging Solana’s high performance to bridge the gap between the real world and blockchain, with regulation and scalability being the major challenges for widespread adoption.
• Lily Liu succinctly stated: “PayFi is about creating new financial markets around the time value of money. On-chain finance enables new financial primitives and product experiences that traditional or even Web2 finance cannot.”

1. What is PayFi?

Source: The 7th EthCC Conference

PayFi, short for Payment Finance, is a new concept introduced by Solana Foundation Chair Lily Liu at the EthCC conference in July 2024. It’s an innovative paradigm that integrates payments with finance, emphasizing “instant transactions” to enhance the efficiency of speculative trading and various financial operations. According to Lily Liu’s definition, PayFi is a programmable financial structure that enables new financial innovations on top of the settlement layer while autonomously handling payment transactions. Based on content from Elponcho, here’s a summary:

The Vision of PayFi: To create a programmable monetary system within an open financial system that gives users economic sovereignty and self-custody capabilities.

PayFi’s Use Cases: New technologies give rise to new markets. PayFi supports a “Buy Now, Pay Never” model, leveraging on-chain finance and instant settlement to allow profits generated on-chain to instantly cover immediate consumption needs. For instance, a user can invest $50 on-chain to earn interest, and the instant settlement and payment of that interest can be used to buy a “free” cup of coffee.

Additionally, PayFi can support creator monetization based on progress milestones (e.g., a YouTuber earning ad revenue as they reach 1 million views), offer invoice financing, manage payment risks, and develop global private credit pools on the Solana blockchain. Lily Liu believes that PayFi will surpass DeFi and lead the next financial trend.

Solana and PayFi: Lily Liu emphasized that Solana stands out in the blockchain space for its high performance, consistently showcasing fast transaction speeds and low costs, as well as its advantage in capital and talent liquidity. Clearly, Solana is a strong candidate for realizing the PayFi vision.

The Three Key Success Factors for Blockchain: Lily Liu identified three essential factors for blockchain success: fast, low-cost transactions, a broad user base, and a strong developer community. She stated that currently, Solana is the only ecosystem that fully possesses all three factors.

The Future of PayFi and Solana: In her conclusion, Lily Liu highlighted multiple financial application scenarios on the Solana platform, including supply chain finance, payday loans, credit cards, corporate credit, interbank repo markets, and insurance markets. These applications demonstrate the enormous potential of combining Solana with PayFi to disrupt traditional financial systems.

In her article “Understanding PayFi: Solana’s Next Big Narrative,” Lily Liu elaborates that the core of PayFi lies in the time value of money, and she illustrates this with three key examples:

1. Buy Now, Pay Never:
   Most people are familiar with “Buy Now, Pay Later,” but “Buy Now, Pay Never” works almost in reverse. The former optimizes cash flow through installment payments with some interest costs, while the latter allows funds to be invested in DeFi products, earning interest that can be used to pay for consumption without touching the principal.

For example, a user purchases a $5 coffee by depositing $50 into a lending product. Once the accumulated interest reaches $5, that interest is used to pay for the coffee, and the funds are unlocked and returned to the user’s account. This process relies on the automated execution of “programmable money.”

1. Creator Monetization:
   Many creators face cash flow issues during the content creation process. While creation requires time and money, returns are often delayed, potentially causing financial strain and impacting progress. In Lily Liu’s vision, PayFi can help creators monetize faster. For instance, if a video is expected to generate $10,000 in revenue but takes a month to materialize, the creator could use PayFi to immediately access $9,000 in cash, improving cash flow even if it means sacrificing some earnings.

2. Accounts Receivable:
   Accounts receivable are common in the financial relationships between businesses and their clients, referring to the money owed by clients to the business. Due to the existence of receivables, businesses may face cash flow issues. To address this, businesses typically pledge receivables to a financing company or sell them at a discount for immediate funds. PayFi aims to further simplify and optimize this process, accelerating settlement through blockchain, improving cash flow efficiency, and lowering barriers, enabling more businesses to leverage this supply chain finance tool to speed up capital flows.

2. How PayFi Integrates with DeFi: RWA as a Bridge to the New Narrative

Source: Coincu

The origin of blockchain technology dates back to Satoshi Nakamoto’s revolutionary whitepaper, Bitcoin: A Peer-to-Peer Electronic Cash System, published in 2008. It laid the foundation for a new era of decentralized payments, not only creating a new form of currency but also fundamentally changing the entrenched payment systems in traditional finance. PayFi leverages blockchain technology and smart contracts, using digital assets and decentralized finance (DeFi) tools to manage capital flows. Its core philosophy is to optimize the time value of money (TVM) and shorten settlement times through decentralized technology. Key operating principles include:

• Time Value of Money (TVM): PayFi emphasizes enhancing the time value of money, helping users increase the efficiency of their capital usage. For example, a user can deposit funds into a lending platform and use the interest generated to pay for daily expenses. For instance, when purchasing a $5 coffee, $50 can be locked in, and when the interest accumulates enough to cover the coffee, the principal remains untouched.
• Smart Contract Automation: Smart contracts are central to PayFi, allowing complex financial operations to be executed automatically based on pre-defined conditions, reducing intermediary involvement, speeding up transactions, and lowering costs.
• Tokenization of Real-World Assets (RWA): PayFi tokenizes real-world assets, such as real estate and receivables, facilitating cross-border payments and capital flows. This not only increases the liquidity of physical assets but also provides a new platform for global transactions.

As the crypto ecosystem’s demand for sustainable value assets increases, RWAs have naturally become a hot option. Over the past two years, tokenized treasury bonds yielding 4–5% have become the preferred on-chain capital asset, with total value rapidly rising to $2 billion. With inflation concerns and central bank signals of rate cuts, treasury bond yields are falling, pushing capital to seek other high-yield, low-risk assets. This presents an opportunity for PayFi to emerge within the RWA sector.

Typical PayFi use cases include:

1. Cross-border Payment Financing: Arf transforms traditional cross-border payments by providing on-chain liquidity solutions for financial institutions, supporting 24/7 instant, transparent, and low-cost USDC-based settlements, eliminating the need for pre-funded global accounts. Cross-border payment financing offers high capital efficiency and scalability.
2. Enterprise Cards Backed by Digital Assets: Rain provides liquidity for corporate card settlements backed by USDC for Web3 teams. Companies stake funds in a vault, with credit limits set in the vault, and after each settlement cycle, the company card’s balance is automatically repaid through on-chain asset clearing, reshaping expense management.
3. Trade Finance: BSOS combines enterprise resource planning (ERP) platforms with on-chain liquidity to create RWAs in the supply chain, offering short-term financing options to meet business capital needs.

Real-World Assets (RWA) can include:

1. Instant RWA Settlement: Even highly liquid assets like treasury bonds or tokenized funds usually require 2–4 days for settlement as the underlying assets must be cleared before redemption. Through on-chain liquidity pools, these assets can offer 24/7 real-time subscription and redemption, ensuring fast and transparent transactions.
2. DePIN Financing: With the rapid expansion of the DePIN ecosystem, many projects are based on sharing large infrastructure costs and redistributing future value. For example, TLay provides critical trust infrastructure to accelerate DePIN adoption; Peaq customizes L1 for DePIN, enabling machines to efficiently trade with each other or interact with humans, supporting the development of the machine economy.

At the same time, the rise of stablecoins has become a bridge between fiat currencies and blockchain, driving the emergence of real-world payment scenarios. Since 2014, stablecoins have grown exponentially, demonstrating the increasing demand for blockchain innovation in the payment sector. Today, stablecoins support approximately $20 billion in organic payments annually, nearing Visa’s annual payment processing volume. Despite the crypto ecosystem overcoming challenges such as poor user experience, significant delays, high transaction costs, and compliance issues to unlock the potential of stablecoins, there is still room for further development. A historical review of payment systems reveals the crucial role of financing mechanisms in their evolution. For example:

• Credit Cards: Contributing $16 trillion annually to merchant payments, demonstrating how financing drives widespread adoption and practicality.
• Trade Finance: Providing $10 trillion annually for B2B payments, underscoring financing’s critical role in global commerce.
• Cross-border Payments: Supporting global remittances and settlements with $4 trillion in pre-funded capital. Today, 1 in 6 households worldwide relies on remittances for livelihood.

Without payment financing, global liquidity would be significantly constrained. Similarly, without financing mechanisms, the utility and adoption of native internet currencies would be hindered. PayFi was born to address these limitations. Solana Foundation Chair Lily Liu articulated PayFi’s vision clearly: “PayFi is about creating new financial markets around the time value of money. On-chain finance enables new financial primitives and product experiences that traditional or even Web2 finance cannot offer.”

3. Reflections on PayFi

Source: Solana Official Website

When it comes to creating narratives in the crypto market, Solana has always been at the forefront, constantly stimulating market activity with various new stories. PayFi’s greatest advantage lies in returning to blockchain’s inherent ability to disrupt traditional finance, leveraging decentralization and security to reduce fraud risk, improve transaction integrity, and eliminate intermediaries in traditional financial payment processing by compiling the entire transaction process on-chain. This lowers the barrier for users to participate in finance and positions PayFi as a bridge linking RWAs and DeFi to the real world from a narrative perspective.

Despite PayFi’s potential to support the large-scale adoption of blockchain, it still faces challenges that may limit its widespread adoption. The primary concern is regulatory issues, as global financial institutions have yet to fully understand or create legal frameworks for blockchain operations. The first hurdle in connecting to the real world is legality. Another obstacle is scalability; blockchain networks can experience congestion during peak times, impacting transaction speed and cost, and the block production speed between different chains can be difficult to synchronize. Market acceptance might also be lacking — businesses and users’ current acceptance of new technologies remains low, with blockchain still carrying the stigma of “crypto fear.” For blockchain to fully bridge the gap with the real world, continuous optimization of its reach across different fields and breaking down silos is still needed.

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