PayFi: A New Chapter in Web3 Payments

Recently, a highly anticipated industry conference was held in Hong Kong, where the chairman of a certain group will deliver a keynote speech on a new global payment network for compliant stablecoins. The attention of an important figure in the Web3 field towards payments is undoubtedly exciting. This not only indicates the vast potential of the Web3 payment industry but may also suggest that an explosion in Web3 payments is imminent.

The prospects are bright, but the challenges are numerous; this is the true reflection of PayFi at present.

Compliance and sophisticated risk management are necessary conditions that determine whether a project can have longevity. From a long-term perspective, we need to focus on the positive development of current regulatory compliance, as the path to compliance is gradually accelerating. For a PayFi project, in addition to innovative gameplay and strengthening risk management, selecting partners with compliant licenses is of utmost importance. Whether it is stablecoins or exchanges, once a synergy is formed, it undoubtedly leads to vast opportunities and great potential.

PayFi is a new concept, but it addresses an old problem

The efficiency of capital turnover is the core of the time value of money.

PayFi (Payment Finance) is a concept unique to the Web3 domain, initially proposed by the chairman of a certain foundation, defined as a new type of financial market built around the time value of money.

The time value of money means that money has different values at different time periods. In economic terms, this means that the increase in the value of money arises from the value appreciation brought about by the transfer of the right to use money/funds, without considering inflation factors. In simple terms, if you invest, manage, or lend 1 dollar today, at some point in the future, you will earn more money, and the amount you earn is directly determined by the turnover efficiency, cost, and returns of each turnover of that 1 dollar.

So why do we need Web3 for payment transformation? The conclusion is that the time value of money in Web2 has been significantly weakened, which is due to rising costs, decreasing returns, and a low level of convenience in accessing services.

PayFi is an innovative financial market based on blockchain technology, focused on payment and settlement scenarios, with the aim of improving capital turnover efficiency, cost, and revenue. It is worth noting that there are many scenarios that can enhance the time value of money, but PayFi focuses more on payment and settlement rather than financial transactions. Its main improvement in time value lies in shorter fund settlement times and faster turnover efficiency.

RWA demand may not be rigid, but PayFi is more urgent.

The Web3 industry has a widely recognized and enduring mainstream narrative, which is the key proposition of Mass Adoption. The RWA track is a key direction that has emerged under this narrative, and PayFi, from a broader perspective, belongs to the RWA track. Fundamentally, it is all about the interaction between the blockchain world and the real physical world, although the methods of interaction may differ.

The core definition of RWA is the on-chain representation of real-world assets, tokenizing physical real assets/NFTs to enable transactions on the chain, focusing on the trading of real assets on-chain and providing higher liquidity for these assets; PayFi focuses on the speed of transactions between real assets and fulfilling unmet financial needs through blockchain.

The demand for RWA is not necessarily rigid; to some extent, it provides more revenue/funding sources for the blockchain world. The demand for PayFi is completely rigid; to some extent, it provides more revenue/funding sources for the real world.

The development bottleneck of blockchain calls for new narratives with real scenarios, and PayFi has a very high ceiling.

From the perspective of the blockchain world, narrative exhaustion is an undeniable fact in the current blockchain ecosystem. The phenomenon of liquidity segmentation is almost intensifying, accompanied by a false prosperity of project data. After a project's Token Generation Event (TGE), most projects see a nearly straight-line decline in user data, along with a significant drop in token prices. This phenomenon, from a positive standpoint, showcases the rapid development of the blockchain world under the support of capital and gradual compliance. From a negative perspective, it reflects that many current projects lack real demand scenarios, with most being Ponzi schemes that have very weak self-sustaining capabilities. Without capital support, they are almost destined to "die in the light."

From the perspective of the real world, in an increasingly complex geopolitical environment, the ever-bulky international payment and settlement system not only faces the deep-rooted issue of inefficiency but is also plagued by questions regarding neutrality and equality. The exclusion of a certain country from a specific payment system is undoubtedly a precedent, but it is by no means the last case. Moreover, the oligopolization and inequality in finance are rampant, and what is worse is that this phenomenon continues to intensify.

It is hard to say that blockchain can perfectly solve the problems of the real world, and moreover, blockchain itself is facing developmental bottlenecks. However, it is at least one of the most likely paths at present. Whether it is the giants of Web2 or the top players of Web3, they undoubtedly do not want to miss the opportunity to bet on this track, such as certain well-known investment institutions. More importantly, for the giants' massive capital, they are less attracted by the short-term limited wealth effect and pay more attention to long-term incremental space. This is also the core reason why both RWA and PayFi can attract large amounts of capital.

The PayFi ecosystem is taking shape, from stablecoins to exchanges, compliance is the foundation of cooperation.

A broader ecosystem relies on compliant partners.

The PayFi track is about leveraging the massive real-world assets in the blockchain world. In this track landscape, if we simply analyze individual PayFi projects, it would undoubtedly be a case of missing the forest for the trees. What is more important is to see how to form a broader synergy in such a blockchain ecosystem to create a new financial paradigm.

PayFi connects the funding pool of the blockchain world with the financial needs of the off-chain world, and this linkage requires the integration of multiple forces.

The primary factor is that operations must be conducted in a relatively relaxed regulatory environment and in a crypto-friendly city. For example, certain cities are more suitable choices.

Secondly, the current main partners are still focused on large licensed institutions that require a comprehensive set of deposit and withdrawal, liquidity provision, and decentralized infrastructure compliance service solutions. In fact, from this perspective, this is also one of the obstacles to PayFi's high threshold and scale growth.

Taking a certain region as an example, there are not many entities with a certain capital strength that can provide a compliant regulatory framework in terms of infrastructure, deposits and withdrawals, liquidity including KYC, etc., and only a few licensed regulatory institutions. The benefit of cooperating with such compliant institutions lies in the breadth and depth of their collaboration and the reduction in the difficulty of coordination, which is more conducive to the rapid establishment of projects and the expansion of visibility. Otherwise, it is necessary to find different partners at different stages, which, to some extent, increases the operational costs of the project.

The prototype of the track has emerged, and the future is worth looking forward to.

RWA is a major hotspot in this cycle, but the concept of PayFi was only proposed in July of this year. It gained widespread attention following a leading project that raised $38 million in September, and in less than three months, it has become a highly sought-after and closely watched new concept and narrative in the industry, backed by top venture capital firms, compliant exchanges, and public chain funds.

At this year's Token2049 in a certain region, the PayFi Summit event also focused on showcasing 12 projects from the PayFi track along with the corresponding underlying modular stack technology, aiming to further lower the barriers to project development.

From a compliance perspective, the payment business currently has different regulatory frameworks in different regions, such as specific licenses in certain areas, which are regulatory frameworks that projects must consider when entering the payment sector.

Overall, the current scale and popularity of the track cannot be considered mainstream; however, against the backdrop of a lack of new narratives in the industry, the high level of attention given by the industry indirectly proves the recognition of this direction. At least under the current level of influence, the prototype of the track has already taken shape, and the future still holds promise.

The three major challenges of PayFi: compliance is the foundation of development, risk control is the guarantee of development, and lowering the threshold is the lever for development.

Looking ahead, the most pressing challenge for the development of PayFi is regulatory compliance, followed by how to manage processes to connect all scenarios from on-chain to off-chain, which involves the following main challenges.

Challenge 1: Compliance Management of the Entire Chain. From a risk perspective, if on-chain compliance risks spread to off-chain, it could deal a fatal blow to the project. Therefore, using compliant stablecoins is just the first step; in the long run, current stablecoins are all pegged to the US dollar, and during large-scale promotion, they may face foreign exchange control risks between countries, as recently, a certain country also plans to introduce related regulations. In addition, compliance in the capital inflow and outflow stages, as well as in the liquidity provision stage, plays a decisive role in the success or failure of the project.

Challenge 2: The Difficulty of Managing Technological and Security Risks as well as Credit Risks Increases. If the business model occurs purely on-chain, the technological risks are relatively concentrated. The business model of PayFi determines that its technological risks exist not only from on-chain hacker attacks but also from offline risks such as performance witness. In addition, whether based on accounts receivable or trade, a large amount of cross-validation of online and offline data is required, and without on-site offline research, this actually places higher demands on its credit risk management capabilities.

Challenge 3: The entry threshold for users remains high. From the current PayFi project perspective, considering regulatory compliance factors, the KYC and investment thresholds for users are not very suitable for the majority of retail investors. They are more appropriate for institutions/high net worth individuals. However, from a business logic standpoint, institutional business is easier to develop and the model is relatively simple. However, assuming large-scale promotion in the future, the user threshold will still be one of the barriers.

Suggestions and Prospects: Focus on Compliance, Collaborate with Multiple Parties, Innovate Play Methods, and There is Great Potential

From the perspective of PayFi's development, it is currently still at the stage of solving one-way financing solutions, which is to find financing in the blockchain world for real physical scenarios. If it goes further, it can develop into an integrated business of payment and financing, or it can be said to be a comprehensive form of PayFi + DeFi + RWA. On one hand, it expands the sources of funds while increasing the yield sources of on-chain DeFi or exchange wealth management products; on the other hand, it also seeks breakthrough solutions for the enormous financial turnover demands of offline assets.

The current PayFi fund pool does not directly originate from DeFi and exchanges; it is more from the self-established fund pools of the projects themselves. However, for underlying assets, the source of funds is irrelevant under compliant funds, especially considering the current market's liquidity segmentation situation. Collaboration with DeFi protocols and compliant exchanges can be considered to fully integrate the liquidity of the blockchain world. On one hand, this allows for the design of products with various funding risk attributes and terms; on the other hand, it can achieve integrated payment financing. In other words, by leveraging the high efficiency of blockchain payment settlement and combining it with on-chain earnings, seamless payment financing integration can be realized. Essentially, the earnings users obtain through LP can be used as collateral to instantly receive credit advances from the PayFi platform, which can be directly used for offline consumption.

In addition, for centralized compliant exchanges and DeFi protocols, there is an effective way to retain user funds. One possible scenario is: for example, User A deposits and withdraws funds through a certain exchange, and after investing in BTC and earning returns, they can use BTC or compliant stablecoins like USDC to invest in the exchange's wealth management products, which have underlying assets from PayFi's financing projects to earn stable returns. These returns can also be directly used for offline payments through PayFi.

In summary, from the perspective of PayFi's own development, there are many ways to integrate with the blockchain world. The time value of currency can be fully utilized through the efficiency of blockchain for innovation, and the shortened time not only improves turnover efficiency but also facilitates the formation of products that integrate payment, financing, and settlement.

According to incomplete statistics, the entire payment industry has a market of over $40 trillion, just from credit cards, trade financing, and cross-border payments combined, while current PayFi is only expanding into the long-tail market that traditional finance has overlooked.

In the increasingly regulated blockchain world, just in terms of PayFi, this scale is roughly estimated to exceed one trillion. In the foreseeable future, if the barriers to deposits and withdrawals are removed, online and offline integration deepens, and compliance accelerates.