CGV Research | The New Financial Cluster Revolution: Why the PayFi Market Size May Be 20 Times That of DeFi?

Authors: Shigeru & Satou, CGV Research

Introduction

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 lies in the processes of sending, receiving, and settling cryptocurrencies, rather than in transactional behavior. This model encompasses not only cryptocurrency payments and transactions but also various financial activities such as lending, wealth management, and cross-border payments. Through decentralized technology, PayFi enables financial activities to be faster, safer, and reduces friction and costs found in traditional financial systems, thereby promoting seamless value transfer and financial inclusion on a global scale.

The concept of PayFi was first introduced by Lily Liu, the chair of the Solana Foundation, at the EthCC conference in July 2024. In her view, PayFi represents a new way of constructing financial markets, creating financial primitives and product experiences 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 revolutionize payment systems, achieve more efficient and low-cost transactions, provide new financial experiences, create more complex financial products and application scenarios, and establish an integrated value chain, thereby forming new financial clusters.

The CGV Research team believes that as high-performance blockchain technology develops, 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 become a key driving force.

PayFi: Inheriting and Expanding Bitcoin's Payment Vision

The birth of Bitcoin originated 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 more importantly, envisioned a global payment system that bypasses the constraints of traditional financial institutions, enabling more efficient and transparent value transfer. Nakamoto's vision aimed to fundamentally reform the existing payment system, eliminating high fees, lengthy settlement times, and financial exclusion.

However, despite Bitcoin successfully leading the cryptocurrency revolution, its original intention as a medium for everyday payments has not been fully realized. Bitcoin is more often viewed as a store of value rather than a currency for daily transactions.

Over time, the emergence of stablecoins has filled this gap. Stablecoins map the value of fiat currencies onto the blockchain, bridging the gap between cryptocurrencies and the real-world financial system, thus driving the first practical application scenario for blockchain payments. Since 2014, the growth of stablecoins has expanded exponentially, demonstrating a strong market demand for blockchain payments. Stablecoins allow users to enjoy the transparency and decentralization benefits of blockchain technology while avoiding the risks associated with cryptocurrency price volatility. As of now, stablecoins have supported approximately $2 trillion in payments annually, nearing Visa's annual payment processing volume.

However, while stablecoins have driven the development of blockchain payments, blockchain payments still face 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 heavily on the promotion of financial tools and financing mechanisms. In traditional financial systems, tools such as credit cards, trade financing, and cross-border payments significantly facilitate global payment applications by providing liquidity and financing options.

As an emerging industry, blockchain does not necessarily need to completely rebuild a market but can provide more valuable products and solutions based on existing markets through blockchain technology. It is in this context that PayFi has emerged.

By leveraging the high performance and low-cost transaction characteristics of advanced public chains, PayFi not only allows 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 intention and a significant innovation based on Bitcoin. Through PayFi, blockchain payment systems will truly unleash their potential, driving the global financial system towards 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 difference in value of money at different points in time. The basic principle of TVM is that a sum of money today is usually worth more than the same amount in the future. This is because money held now can be invested immediately to generate returns or consumed to provide immediate utility.

Simply put, the important concept behind the time value of money is "opportunity cost." If a person holding money does not use it immediately, they miss out on potential investment opportunities and cannot earn potential returns. Therefore, the current value of money must reflect these foregone opportunities. For example:

------ Loans and Mortgages: In bank loans, interest rates are calculated based on TVM, and the interest paid by borrowers is essentially compensation for the right to use the funds provided by the bank;

------ Investment Evaluation: When evaluating 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 assess the future cash flows of different projects during capital budgeting and calculate their present value through discounting to help management make the most favorable investment decisions, etc.

PayFi utilizes blockchain technology to allow users to realize the time value of money on-chain in a highly efficient and low-cost manner; by leveraging smart contracts and decentralized platforms, PayFi enables users to manage and invest funds without intermediaries, maximizing the efficiency of fund utilization. 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 uses.

Moreover, the infrastructure of PayFi provides the possibility for developing more complex on-chain financial products, such as on-chain credit markets, installment payment systems, and smart contract-based automated investment strategies, which will extend to more complex financial products and application scenarios, creating an integrated value chain and forming new "financial clusters."

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

In the financial system, real-world assets (RWA) and decentralized finance (DeFi) each have unique advantages but also face their own challenges: RWA has a massive market scale and stable value but relatively low liquidity, transparency, and trading efficiency; DeFi has efficient trading mechanisms and global liquidity but primarily relies on crypto assets, lacking direct connections to the real economy.

Contrary to some industry views that "PayFi is a sub-direction belonging to the RWA track," CGV Research believes that RWA is part of the PayFi ecosystem. In addition to RWA, PayFi also involves a broader range of crypto assets, smart contract-driven financial services, and decentralized payment and settlement systems. The introduction and application of RWA driven by DeFi is an important component for PayFi to realize its core functions.

RWA needs DeFi to enhance liquidity and trading efficiency, achieving rapid, low-cost global financing through the digitization of assets and smart contracts on the blockchain, while enhancing transaction transparency and security. At the same time, DeFi enriches asset classes by introducing RWA, reducing volatility risks, providing stable sources of income, and connecting with the real economy to promote its practical application and development globally.

Through PayFi, RWA and DeFi are no longer independently developing financial systems but are interdependent and complementary organic wholes, achieving the integration and innovation of real assets and on-chain financial services.

------ Digitization and On-Chain: Bringing RWA onto the 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 divided into smaller units, facilitating trading and investment globally.

------ Smart Contracts and Payment Systems: Achieving efficient trading and settlement. Once RWA is digitized, the PayFi platform uses smart contracts to automate trading and settlement processes. This not only speeds up transaction times and reduces costs but also ensures the transparency and security of transactions. Additionally, PayFi's on-chain payment system simplifies and enhances the transfer and payment of these assets, addressing common issues of settlement delays and high fees in traditional finance.

------ Liquidity Pools and Financing Channels: Providing funding support for RWA. PayFi's liquidity pools provide ample funding support for RWA, enabling these assets to obtain financing from global investors. By using RWA as collateral, PayFi allows investors to participate in financing activities on DeFi platforms while providing stable funding sources for RWA. This model not only increases the liquidity of RWA but also offers diverse investment opportunities for DeFi investors.

------ 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 automatic execution of smart contracts minimizes the risk of human intervention, while the immutability of the blockchain ensures the security of transaction records. All of this enhances market trust and promotes further integration of RWA and DeFi.

In the future, PayFi will play an increasingly important role in promoting global asset liquidity, reducing transaction costs, and enhancing market transparency. In Lily Liu's view, PayFi will integrate RWA and institutional finance into on-chain liquidity pools, creating an integrated value chain that constitutes a "new financial cluster," which may be the biggest theme in this cycle of the cryptocurrency market.

Why is PayFi Happening on Solana?

Why is PayFi happening on Solana rather than on other L1 public chains or L2 solutions? Lily Liu's answer is: "Solana has three major advantages: high-performance public chain, capital liquidity, and talent mobility." These advantages create barriers that other competitors find difficult to cross at this stage.

First, high-performance public chain. Solana's core technological advantage lies in its unique Proof of History (PoH) consensus mechanism, enabling 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. Although Visa claims its servers can handle up to 56,000 TPS, in practice, Visa processes an average of only 1,700 transactions per second. In comparison, Solana is fully capable of meeting actual payment needs.

Second, 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.

Finally, 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 in the world. This strong talent pool supports the development of various innovative projects and continues to attract new technical and financial talent to the ecosystem, laying a solid foundation for the growth of PayFi.

PayFi connects the traditional world with the blockchain world through programmable payments, making the on-chain scaling of credit finance possible through smart contracts. Solana's advantages not only support the development of PayFi but also give it a strong competitive edge in the future global payment and financial markets.

Taking PYUSD as an example, PayPal chose Solana as the new public chain for PYUSD payments, primarily valuing Solana's fast settlement capabilities, low transaction fees, and robust developer ecosystem. Solana's token expansion features, including confidential transfers, transfer hooks, and memo fields, provide the necessary flexibility and commercial practicality for PYUSD.

As PayPal stated, "These features are not optional. If we want PYUSD to play a role in a broader commercial context, we must provide it to merchants." Today, Solana has become the primary platform for PYUSD, capturing 64% of the market share, while Ethereum holds only 36%. Additionally, as early as September 2023, Visa expanded the settlement functionality of USDC from Ethereum to Solana.

Application Scenarios and Typical Projects of PayFi

The essence of PayFi is to reshape and upgrade the traditional financial system using advanced encryption technology, so all financial scenarios can and need to be redone with PayFi.

1. Cross-Border Payments and Trade

The main challenge of traditional cross-border payments lies in the isolation issues within centralized sovereign currency systems. Due to foreign exchange controls and capital flow restrictions influenced by national monetary policies, cross-border payments have always faced cumbersome processes, long durations, and high costs. Initially, it was believed that cryptocurrency payments could be an excellent solution to replace traditional cross-border payments, but solutions aimed at enterprises still have many shortcomings.

Today, the cross-border payment industry still heavily relies on pre-funded capital to achieve same-day settlements. Currently, over $4 trillion of funds are trapped in pre-funded accounts, representing a huge and hidden cost for financial institutions and the global payment industry. PayFi can optimize this by leveraging traditional credit finance to activate crypto services.

Current cross-border payment model compared to Arf's improved model

(from: Arf)

Arf (@arf_one): The world's first regulated, transparent short-term liquidity solution aimed at supporting cross-border payments. Headquartered in Switzerland, Arf eliminates the capital-intensive business model in the cross-border payment industry by providing licensed money service businesses and financial institutions with digital asset-based operating capital and settlement services, as well as local entry and exit capabilities. Arf offers a unified liquidity network for cross-border payments and trade, eliminating the need for prefunding and providing 24x7 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.

2. Supply Chain Finance

Supply chain finance combines financial services with supply chain management, providing systematic financial products and services to upstream and downstream enterprises in the supply chain based on trade relationships and transactions within the supply chain. Traditional supply chain finance is constrained by cumbersome contracts and legal work, making automated assessments difficult, resulting in slow financing processes that severely impact the cash flow of small and medium-sized enterprises. PayFi significantly simplifies processes such as accounts receivable purchases, alleviating the financing difficulties faced by enterprises.

Global enterprises face $2.5 trillion in trade finance demand rejected annually 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, bringing instant Web3 liquidity into supply chain finance and offering competitive returns of A-grade quality to liquidity providers. Through Isle, supply chain payments are combined with real-time settlement and liquidity management enabled by blockchain technology, allowing supply chain participants to process payments and settlements more quickly and improve fund utilization efficiency; at the same time, on-chain liquidity providers can anchor the payment stability of high-credit buyers and share early payment discounts offered by suppliers with buyers. Isle's main clients include high-net-worth individuals (HNWIs), crypto-native users, DAO inventories, asset managers, and family offices, and it allows ordinary users to stake ISLE tokens to earn liquidity mining rewards.

3. Consumer Finance

PayFi aimed at C-end users may be the aspect that users are more interested in, primarily occurring in the consumer finance sector, which is also a part that Lily Liu emphasized in her PayFi sharing, "Buy Now, Pay Never." Users can cover current expenditures by committing future earnings, with the enforced portion implemented by smart contracts on-chain. In consumer finance, the key to PayFi is to enable service providers in the merchant network to act as acceptors in the middle, allowing consumers to access a sufficiently diverse range of consumption scenarios.

Open stack of compliance payment financing solutions of PayFi Stack

(from: Huma Finance)

Huma Finance (@humafinance): The industry-first proposal of PayFi Stack, an open stack aimed at building compliant payment financing solutions, advocating for industry leaders to optimize solutions to meet the unique needs of PayFi. The initial stack includes the following layers: transaction, currency, custody, financing, compliance, and application. For example, the financing layer includes credit ratings, underwriting, and oracles for RWA. As a representative project of the financing layer, Huma focuses on common short-term financing in the payment sector. As of August 26, 2024, Huma's total financing payment amount exceeded $280 million, with a default rate of 0.

CrediPay (@Credix_finance): Helping businesses increase sales and improve cash flow efficiency through seamless and risk-free credit services. Sellers offer flexible payment terms to buyers at very attractive prices and collect prepayments. We manage and protect clients from any credit and fraud risks, allowing them to focus solely on what matters most: increasing sales and profitability. Currently, Credix's services are primarily focused in Latin America, such as accounts receivable factoring.

Opportunities and Challenges of PayFi

Market Growth Potential

The core goal of PayFi is to bring the time value of money on-chain and reconstruct the financial system in a more programmable, sub-custodial, and decentralized manner. With the rapid increase in the number of global stablecoins and the continuous improvement of cryptocurrency infrastructure, PayFi is expected to become an important force in transforming traditional finance.

According to Statista, the total global digital payment transaction volume is expected to reach approximately $9.46 trillion in 2023, and this figure is expected to continue growing, potentially reaching $14 trillion by 2027. Meanwhile, data from mordorintelligence indicates that the DeFi market size is estimated to be $46.61 billion in 2024, projected to reach $78.47 billion by 2029, with a forecasted compound annual growth rate of 10.98%.

The CGV Research team's calculations indicate that if PayFi can capture 10% of the total global digital payment transaction volume (a conservative estimate), by 2030, the PayFi market size (estimated at $1.8 trillion) will be 20 times that of the DeFi market size ($87 billion). This suggests that PayFi has enormous market potential and is poised to occupy an important position in the global digital payment space.

Regulatory and Compliance Challenges

As the issuance of global stablecoins continues to increase, central banks around the world are gradually softening their attitudes towards stablecoins. Broadly speaking, fiat-backed stablecoins can be viewed as digital extensions of fiat currencies. The payment business primarily involved in PayFi, mediated by stablecoins, is 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 business into third-world countries, where local regulations are often less robust, and regulatory barriers are lower, thus posing relatively smaller compliance risks.

Technical and Security Risks

After years of DeFi development, while security issues have not been completely eliminated, a large number of security vulnerabilities have been identified, and after rigorous audits, the security of on-chain PayFi is now fundamentally equivalent to that of traditional DeFi.

However, technical challenges mainly exist in the off-chain portion. Since PayFi requires extensive integration with real-world assets, ensuring the enforcement of off-chain logic remains a problem to be solved. Current solutions typically involve an intermediary entity to handle the alignment between on-chain and off-chain, but this solution still needs further refinement.

Conclusion

PayFi, as a new wave of payment finance, is reshaping the global financial ecosystem with its unique charm. It not only inherits Bitcoin's payment vision but also enhances the efficiency and inclusiveness of financial services to new heights through innovations in blockchain technology. With the support of high-performance public chains like Solana, the market size of PayFi is expected to achieve exponential growth, becoming a major driving force 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 drive the global financial system towards a more efficient and inclusive direction.

｜About CGV

CGV (Cryptogram Venture) is a crypto investment institution headquartered in Tokyo, Japan. Since 2017, its funds and predecessor funds have cumulatively participated in investments in over 200 projects, including investments in the licensed yen stablecoin JPYW. At the same time, CGV FoF is a limited partner in several globally renowned crypto funds. Since 2022, CGV has successfully held two Japan Web3 hackathons (TWSH), receiving joint support from institutions and experts such as the Japanese Ministry of Education, Keio University, and NTT Docomo. Currently, CGV has branches in Hong Kong, Singapore, New York, Toronto, and other locations. In addition, CGV is also one of the founding members of the Bitcoin Tokyo Club located in Tokyo, Japan.

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