4Alpha Research: Grasping the Next New Narrative of Solana, Understanding PayFi in One Article

4Alpha Research Researcher: Friends who often attend meetings with Stitich and Cloris should have an impression of the term "PayFi." In fact, this is a staple topic for Solana Foundation Chair Lily Liu every time she attends a meeting. This article will focus on the concept of "PayFi" and related projects to help readers keep up with the latest narrative from Solana.

What is PayFi?

Lily Liu stated: "The motivation behind PayFi is to realize the initial vision of Bitcoin payments. PayFi is not DeFi, but rather creates new financial primitives around the time value of money."

The Vision of PayFi

The initial vision of Bitcoin payments that Lily Liu refers to is not simply a "peer-to-peer electronic financial system," but rather "Program Money, Open Financial System, Digital Property Rights, Self Custody, and Economic Sovereignty." The vision of PayFi is to establish a programmable currency system within 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 can also automatically execute complex financial operations based on predefined rules. In fact, smart contracts and DeFi are applications of programmable currency. However, the emphasis on PayFi being distinct from DeFi is because DeFi still revolves around financial and trading products, while PayFi aims to create products centered around goods and services; strictly speaking, PayFi belongs to the RWA track.

The Time Value of Money

When Lily Liu mentions PayFi, she always refers to three examples: "Buy Now Pay Never," "Creator Monetization," and "Account Receivable." Understanding these three examples can further clarify the concept of PayFi.

1) Buy Now Pay Never

Most people are already familiar with Buy Now Pay Later (installment payments), while Buy Now Pay Never is almost the complete opposite. Installment payments are a form of credit loan that exchanges a certain interest cost for better cash flow. Buy Now Pay Never, on the other hand, generates interest by depositing money into DeFi products and then uses the interest to make payments, sacrificing cash flow.

For example, if a user buys a $5 coffee, they would deposit $50 into a lending product and wait until the interest accumulates to $5 before paying for the coffee and unlocking the funds back into their account. All of this needs to be executed under automated rules, which requires the aforementioned "programmable currency."

2) Creator Monetization

This example assumes that many creators face cash flow difficulties. Creation itself requires time and financial investment, but often, due to various reasons, creators cannot immediately receive returns after completing their work. Thus, there can be a long wait for payment from the start of creation to receiving returns. If a creator's cash reserves are insufficient, they may not be able to continue creating during this period, leading to wasted time.

In Lily Liu's vision, PayFi can help creators solve this problem. For instance, if a video's revenue is $10,000 and it takes a month to receive, the creator can use PayFi to immediately cash out this income for $9,000, sacrificing some revenue for better cash flow.

3) Account Receivable

Accounts receivable is a very traditional concept, simply put, it refers to money owed to a company by its customers. Due to the existence of accounts receivable, companies sometimes face cash flow issues. To solve this problem, many accounts receivable financing companies have emerged, using a company's accounts receivable as collateral to borrow or directly discount to obtain cash immediately, thus maintaining stable cash flow and continuous growth, unaffected by the speed of customer payments. PayFi aims to further popularize and optimize this scenario. Although such services already exist in Web2, the overall capital turnover still relies on traditional payment systems, leading to slow settlements. Therefore, if blockchain can improve settlement speed and popularize this supply chain financial service while lowering barriers, it can enhance the overall capital turnover speed in the real world.

The Time Value of Money and the Potential of PayFi

In fact, the three cases above revolve around one point: "the time value of money," which means that due to opportunity costs, interest rates, and other factors, current money is more valuable than receiving the same value in the future. What PayFi aims to do is help users/customers maximize the time value of money. For example, Buy Now Pay Never utilizes the time value of money for payment, while creator monetization and accounts receivable leverage the time value of money to obtain immediate funds, which is closer to Buy Now Pay Later.

Overall, PayFi is not a new concept; the problems it seeks to solve already exist in traditional financial systems and have existing solutions. However, this does not mean that PayFi lacks value, as 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, to meet regulatory policies and their own risk control requirements, the evaluation and execution processes for collateral are difficult to simplify. On this basis, many small and medium-sized enterprises may find it challenging to secure financing due to complex and cumbersome processes, or even be unwilling to seek financing, thus failing to fully utilize the time value of money.

In the context of cross-border payments, the time value of money is even more evident, as cross-border payments rely heavily on established financial networks like correspondent banks and SWIFT, which cannot transfer funds in real-time between different countries. However, an increasing number of remittance companies can provide next-day or same-day settlements for their clients. To meet customer demands for some level of real-time service, these financial institutions must pre-allocate a certain amount of financial capital in various countries (similar to how Orbiter operates across different bridges), which is known as pre-financing accounts. According to a study by Arf, over $4 trillion was locked in pre-financing accounts globally in 2022, representing a significant waste of the time value of money for financial institutions.

Therefore, PayFi still has enormous potential value to be explored. Just as electric vehicles have revolutionized the automobile industry, even if PayFi may be an old concept in a new bottle, the core element remains whether it can optimize the existing system through blockchain technology to achieve user experiences that were unattainable under the old systems and tech stacks, thus realizing a revolution.

What Projects in the PayFi Space Are Worth Watching?

Currently, there are not many projects focusing on the "PayFi" concept. PayFi is still a very early concept. The following will introduce several PayFi-related projects to help readers further understand the progress in the PayFi track.

Huma

Huma is currently one of the hottest 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 aimed at businesses and individuals, allowing users to use future income (RWA) as collateral for loans. Huma V2 builds on V1 by adding accounts receivable purchasing functionality.

On Huma, there are currently multiple pools targeting different purposes and collaborating with various partners. However, Huma is still some distance from the decentralized, barrier-free, and identity-unrestricted financial products envisioned by blockchain. The author encountered obstacles such as difficulty finding entry points, KYC requirements, and certain usage barriers when attempting to borrow funds from or provide funds to Huma, which can be discouraging.

Arf

Arf is a cross-border payment network project that provides licensed financial institutions with unsecured, short-term, USDC-based operating credit lines, allowing these institutions to conduct cross-border payments smoothly without additional collateral or depositing funds into prepayment accounts.

For example, if an Arf client in Europe wants to remit funds to a partner in Africa, the client only needs to deposit the funds into Arf's local bank account. Arf will then convert USDC into the local currency for the African partner and settle the transaction on the same day. After the transaction is completed, Arf's clients can deposit funds into Arf's account via Wire, SWIFT, etc., and Arf will immediately convert these deposits into USDC to ensure funds are always available. Arf completed a $13 million seed round of financing in 2022. So far, Arf's services are still targeted at businesses, and potential clients need to fill out an application form. In April of this year, Arf announced a merger with Huma. Currently, nearly $900 million in payment financing on the Huma platform comes from Arf, and the combination may fully leverage Arf's liquidity advantages and Huma's platform strengths.

Credix Finance

Credix is also a B2B credit protocol in the Solana ecosystem. Its product logic is very similar to Huma, with specific investment pools available on the Credix platform. KYC-certified institutional investors can provide credit by adding liquidity to these pools. Currently, Credix's services are mainly focused on Latin America, such as accounts receivable factoring.

Compared to Huma, Credix has higher requirements for investors and a narrower range of supported business types. Therefore, the amount lent by Credix is relatively less than that of Huma and Arf. Additionally, Credix has launched a feature called Credi Pay, which is a "Buy Now Pay Later" service aimed at businesses.

NX Finance

Finally, we introduce NX Finance, which is a yield layer protocol on Solana that provides users with leverage or yield farming strategies for income-generating assets within the Solana ecosystem. The corresponding two types of strategies on NX Finance are called Fulcram strategy and Gold mining strategy, and NX Finance is still in a relatively early stage, with a platform TVL of around $14 million.

Fulcram strategy: This strategy allows users to leverage high-quality income-generating assets (currently supporting JLP). Lenders earn interest income paid by borrowers by depositing USDC. Borrowers need to collateralize high-quality assets (JLP) supported by the strategy to borrow. At the same time, NX Finance uses part of the borrowed funds to purchase JLP to increase JLP holdings. In other words, borrowers receive leveraged returns on JLP rather than USDC. Strictly speaking, NX Finance is different from the aforementioned projects and is not a PayFi project; it is more like a crypto-native lending protocol. However, from a broader perspective, lending protocols themselves are a full utilization of the time value of money and are essential for achieving Buy Now Pay Never. Ultimately, whether a project qualifies as PayFi depends on whether the services it provides will involve real production and consumption needs of customers, rather than being purely financial leverage for profit. Linking and integrating these real-world off-chain needs requires significant effort from the project team, such as obtaining licenses.

Conclusion

Overall, PayFi is still in an extremely early stage. Many projects claiming to be PayFi have not yet launched, but currently, PayFi is a sub-direction within the RWA track, mainly iterating around the needs of accounts receivable factoring and cross-border payments targeting Web2.

Moreover, regarding the envisioned "openness," PayFi is still some distance away, as most projects that have launched still have strict KYC and user geographic restrictions. Nevertheless, we see some PayFi projects, such as Huma, already accumulating data indicating the existence of product demand. As a track that is far from both on-chain users and exchange users, whether PayFi can create more innovative products around the time value of money and other attributes of money, or even accommodate more categories of physical assets to improve the liquidity of physical assets, are all issues that deserve long-term attention from investors.

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