4Alpha Research Researcher: Stitich, Cloris Friends who often attend meetings should be familiar with the term PayFi. In fact, this is exactly the topic of Lily Lius speech at every meeting. This article will focus on the introduction of the PayFi concept and related projects to help readers keep up with Solanas latest narrative. Note: Any projects mentioned in this article are for research purposes only and do not represent any recommendations.
What is PayFi?
Lily Liu said: PayFi is motivated by the original vision of Bitcoin payments. PayFi is not DeFi, but creates new financial primitives around the time value of currency, etc.
PayFi’s Vision
The initial vision of Bitcoin payment that Lily Liu refers to is not a simple peer-to-peer electronic financial system, but Program Money, Open Financial System, Digital Property rights, Self Custody and economic sovereignty. PayFis vision is to establish a programmable currency system in an open financial system that can provide users with economic sovereignty and self-custody capabilities.
Programmable currency refers to digital currency that can not only be used for traditional transaction payments, but also can automatically perform complex financial operations based on preset rules. In fact, smart contracts and DeFi are an application of programmable currency. However, the reason why we emphasize that PayFi is not DeFi is because DeFi is still based on products centered around finance and transactions, while PayFi is trying to build products centered around goods and services. Strictly speaking, PayFi belongs to the RWA track.
Time Value of Money
When Lily Liu mentions PayFi, she always mentions three examples: Buy Now Pay Never, Creator Monetization and Account Receivable. Understanding these three examples can help you further understand PayFi.
1) Buy Now Pay Never
Most people are already very familiar with Buy Now Pay Later, but Buy Now Pay Never is almost the opposite of installment payment. Installment payment is a kind of credit loan, which incurs a certain interest cost in exchange for better cash flow. Buy Now Pay Never, on the other hand, deposits money into DeFi products, earns interest through lending, and then uses the interest to make payments, sacrificing cash flow.
For example, if a user buys a $5 coffee, he will deposit $50 into a loan product and lock it there. When the interest is enough to pay for $5, the coffee will be paid and the money will be unlocked and returned to the users account. All of this needs to be executed under automatic rules, which requires the programmable currency mentioned earlier.
2) Creator Monetization
This example assumes that many creators will encounter cash flow difficulties. Creation itself requires time and financial investment, but after the creation is completed, there is often no immediate return for various reasons. Therefore, the creator will have to wait a long time from the beginning of creation to the return. If the creators cash reserves are insufficient, he may not be able to continue creating during this period, and time will be wasted.
In Lily Lius vision, PayFi can help creators solve this problem. For example, if the income of a video is 10,000 US dollars, it takes a month to arrive in the account. The creator can use PayFi to immediately discount this income to 9,000 US dollars, sacrificing a certain amount of income in exchange for better cash flow.
3) Account Receivable
Accounts receivable is a very traditional concept. Simply put, it is the money owed by customers to the company. Due to the existence of accounts receivable, companies sometimes run into cash flow problems. In order to solve this problem, many accounts receivable financing companies have emerged, using the companys accounts receivable as collateral for loans or directly selling them at a discount, so that companies can get cash immediately, thereby always maintaining a stable cash flow and continuous growth, regardless of the speed at which customers pay.
PayFi hopes to further popularize and optimize this scenario. Although the above services already exist in Web2, the overall capital turnover still relies on the traditional payment system, which leads to slow settlement. Therefore, if the settlement speed can be improved through blockchain, and the service objects of this supply chain finance can be popularized and the threshold can be lowered, the capital turnover speed of the entire real world can be improved.
The time value of money and the potential of PayFi
In fact, the above three cases all revolve around one point: time value of money, that is, due to factors such as opportunity cost and interest rate, the current money is more valuable than the money of equal value received in the future. What PayFi needs to do is to help users/customers maximize the time value of money. For example, Buy Now Pay Never is paid with the time value of money, and creators monetization and accounts receivable are paid by paying the time value of money to get the money now, which is closer to Buy Now Pay Later.
Overall, PayFi is not a new concept. The problems it aims to solve are already existing in the traditional financial system and have solutions. But this does not mean that PayFi has no value, because traditional solutions are still not good enough.
Taking corporate financing as an example, accounts receivable is a form of corporate financing. In actual production, from the perspective of financial institutions, in order to meet policy supervision and their own risk control requirements, it is difficult to simplify the mortgage assessment and execution process. On this basis, for many small and medium-sized enterprises, it is easy to have financing difficulties due to the complexity and cumbersomeness of the process, or even be unwilling to raise funds, and unable to fully utilize the time value of money.
In the cross-border payment scenario, the monetary value of time is more obvious, because cross-border payments rely more on long-standing financial networks such as correspondent banks and SWIFT, but they cannot transfer funds between different countries in real time, and more and more customer system remittance companies can achieve next-day settlement or same-day settlement for them. In order to meet customer needs and provide a certain degree of real-time performance, these financial institutions must reserve a certain amount of financial capital in various countries in advance (just like Orbiter crosses chains between different bridges). This is a pre-funding account. According to a study conducted by Arf, more than 4 trillion US dollars will be locked in pre-funding accounts worldwide in 2022, which is a huge waste of the time value of money for financial institutions.
Therefore, PayFi still has huge potential value to be discovered, just as the tram is still a car, but it has completed the revolution of cars. Even if PayFi may be old wine in a new bottle, the core element is still to observe whether it can optimize the original system through the means of blockchain, realize the user experience that cannot be obtained under the old system and technology stack, and thus realize the revolution.
What are the projects worth paying attention to in the PayFi field?
Currently, there are not many projects focusing on the concept of PayFi. PayFi is still a very early concept. Next, we will focus on introducing several PayFi-related projects to help readers further understand the progress of the PayFi track.
Huma
Huma is one of the most popular PayFi concept protocols. As of August 16, 2024, the platform has provided nearly $890 million in payment financing with a default rate of 0%.
Huma currently has two versions, V1 and V2. V1 is a lending protocol for businesses and individuals that allows users to borrow using future income (RWA) as collateral. Huma V2 adds the function of accounts receivable acquisition based on V1.
On Huma, there are currently multiple pools for different purposes and with different partners, but Huma is still a long way from the decentralized, barrier-free, and identity-free financial products expected by the blockchain vision. When the author tried to borrow funds from Huma or provide funds for Huma, he found that he encountered obstacles such as not being able to find an entrance, requiring KYC, and having certain usage thresholds, which was daunting.
Arf
Arf is a cross-border payment network project that provides licensed financial institutions with unsecured, short-term, USDC-based working capital lines of credit, allowing these institutions to smoothly make cross-border payments without the need for additional collateral or depositing funds in prepaid accounts.
For example, if Arfs European customers want to remit funds to partners in Africa, they only need to remit the funds to Arfs local bank account, and Arf will convert USDC into local legal tender for the African partner currency and settle it on the same day. After the transaction is completed, Arfs customers can deposit funds into Arfs account through Wire, SWIFT, etc. Arf will immediately convert these deposits into USDC to ensure that the funds are available at any time.
Arf completed a $13 million seed round of financing in 2022. So far, Arfs services are still aimed at enterprises, and you need to fill out an application form to become its customer. In April this year, Arf announced a merger with Huma. Currently, 70% of the nearly 900 million payment financing on the Huma platform comes from Arf. The combination of the two may give full play to Arfs liquidity advantages and Humas platform advantages.
Credix Finance
Credix is also a B2B credit agreement in the Solana ecosystem. Its product logic is very similar to Huma. There are investment pools for specific types on the Credix platform. Institutional investors who have passed KYC certification can provide credit by adding liquidity to the pool. Currently, Credixs services are mainly concentrated in Latin America, such as accounts receivable factoring.
Compared to Huma, Credix has higher requirements for investors and supports a narrower range of businesses. Therefore, the amount of loans Credix has lent so far is relatively small compared to Huma and Arf. In addition, Credix has also launched a feature called CrediPay, which is a Buy Now Pay Later service for enterprises.
NX Finance
The last one to be introduced is NX Finance. NX is a yield layer protocol on Solana, which provides users with leverage or point farming strategies for interest-bearing assets within the Solana ecosystem. The corresponding two types of strategies on NX Finance are called Fulcram strategy and Gold mining strategy. Currently, NX Finance is still in a relatively early stage, and the platform TVL is around 14M.
Pivot Strategy: This strategy allows users to leverage high-quality interest-earning assets (currently supports JLP). Lenders obtain interest income paid by borrowers by depositing USDC; borrowers need to use high-quality assets (JLP) supported by the collateral strategy to borrow. At the same time, NX Finance will use part of the loan to purchase JLP to increase JLP holdings. In other words, borrowers do not get USDC, but the return on JLP after leverage.
Strictly speaking, NX Finance is different from the above projects and is not a PayFi project. It is more like a Crypto Native lending protocol. However, from a broader perspective, the lending protocol itself is a full utilization of the time value of money and is an indispensable part of achieving Buy Now Pay Never. The ultimate measure of whether a project is PayFi depends on whether the services it provides will eventually involve the real production and consumption needs of customers, rather than a financial lever that simply makes money. To link and integrate these real off-chain needs, the project party needs to do a lot of work, such as applying for licenses.
PayFi Summary
Overall, PayFi is still in a very early stage, and many projects claiming to be PayFi have not yet been launched. But at present, PayFi is a subdivision of the RWA track, and it is still mainly iterating around the two needs of accounts receivable factoring and cross-border payments for Web2.
In addition, PayFi is still some distance away from the openness in its vision, because most of the projects that have launched products still have strict KYC and user geographical restrictions; but even so, we have seen that some PayFi projects, such as Huma, have accumulated a certain amount of data to show the existence of demand for their products. As a track far away from on-chain users and exchange users, can PayFi create more innovative products around the time value of currency and other attributes of currency, and even accommodate more physical asset categories and improve the liquidity of physical assets? These issues are worthy of investors long-term attention.
Reference
https://x.com/gizmothegizzer/status/1815787976225419745
https://blog.huma.finance/payfi-the-new-frontier-of-rwa
https://medium.com/hashkey-capital-insights/rwa-tokenized-credit-pt-1-market-opportunities-for-on-chain-private-credit-trade-finance-381076772e6d
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