Author: Web3Port Foundation

Web3 Payments

With the expansion of stablecoin volumes and the diversification of application scenarios, Web3 payments have become a popular track in the crypto market. Web3 payments encompass numerous business scenarios and categories, including stablecoins, wallets, asset custody, trading, payments, deposits and withdrawals, credit cards, etc. Traditional financial institutions and Web3 entrepreneurs have combined blockchain technology and cryptocurrencies to build many Web3 payment projects and use cases.

Concept:

Traditional Payments: Currency transactions conducted through traditional financial systems, typically involving centralized institutions such as banks, credit card companies, and payment processing companies (like PayPal, Visa, Mastercard, etc.). The payment process is verified, cleared, and settled by these financial institutions. Traditional payments include cash payments, bank transfers, credit card payments, debit card payments, electronic checks, and electronic wallets.

Web3 Payments: Web3 payments are a payment method based on blockchain and cryptocurrency technology, completing transactions through smart contracts, decentralized applications (DApps), and cryptocurrencies. Web3 payments do not rely on traditional financial institutions but instead facilitate value transfer directly between users through decentralized networks.

Traditional Payments VS Web3 Payments

Traditional Payments are a payment method based on an account system, where value transfer records are kept in the accounts of intermediary institutions (such as banks and third-party payment companies). Due to the large number of participants, the process of transferring funds is very cumbersome, and the friction costs are very high, resulting in higher costs.

Web3 Payments are based on blockchain network infrastructure, allowing cryptocurrencies to be transferred between senders and receivers, addressing issues such as high fees, low efficiency in cross-border transfers, and high costs in traditional payments.

Types of Web3 Payments

Specific scenarios of Web3 payments include consumers interacting on-chain with crypto assets, making payments to businesses/merchants, cross-border remittances, and crypto asset payments between enterprises. In summary, there are mainly two types of Web3 payments:

1. On Ramp & Off Ramp Payments, which refer to the exchange and payment between cryptocurrencies and fiat currencies. On-ramp refers to exchanging fiat currency for cryptocurrencies, while off-ramp refers to exchanging cryptocurrencies for fiat currency.
2. Cryptocurrency Payments, which include two types:

• On-chain native payments: Refers to transactions using cryptocurrencies in Web3 native scenarios, such as purchasing NFTs with cryptocurrencies, participating in LaunchPad projects, swapping between different cryptocurrencies, and on-chain transaction fees;
• Off-chain physical payments: Refers to directly using cryptocurrencies to purchase goods or services in the offline economy, such as paying for offline consumption orders and cross-border remittance transactions;

Web3 payments connect fiat currencies with cryptocurrencies through on-ramp and off-ramp payments, and through cryptocurrency payments (on-chain/off-chain payments), enabling the circulation of crypto assets in payment and consumption scenarios, thus constructing a complete payment ecosystem.

Business Models of Web3 Payments

Based on the demand and types of Web3 payment scenarios, common profit models for Web3 payment projects/companies include the following:

• Deposit and withdrawal fees: Users conducting deposit and withdrawal transactions between cryptocurrencies and fiat currencies through third-party payment institutions need to pay deposit and withdrawal fees. Generally, third-party payment institutions charge a fee of 0.6% of the transaction amount, which is ultimately borne by consumers/merchants, with profits shared among participants in the payment process (third-party payment institutions, aggregators, issuing banks, and international card organizations).
• Access service fees. This scenario involves aggregated payment and settlement networks, integrating existing third-party payment products into their product systems as one of the underlying payment channels to broaden the capacity for fund transfers and provide Web3 payment settlement services to merchants and institutions, charging access service fees in the process.
• Blockchain Gas network fees: When using Web3 payments, the final result of the payment needs to be confirmed and processed on-chain, generating blockchain network gas fees.
• Foreign exchange spreads. This only involves cross-border payment products, where a funding pool is created as a payment channel for transferring funds between different national currencies. When there are cross-currency transactions, it can bypass banks to directly exchange currencies for users, thus obtaining exchange spreads.

Among these, deposit and withdrawal fees and access service fees are one of the main profit models for Web3 payment projects/companies. These two profit models heavily rely on network effects (the phenomenon where the value of a product or service increases as the number of users grows). The more users and merchants using Web3 payments, the larger the transaction volume generated, leading to more revenue. At the same time, as the number of users increases and transaction volumes expand, the market share and influence of the Web3 payment network built by Web3 payment projects/companies also grow, further enhancing their brand and market influence.

Participants in the Web3 Payment Track:

Participating Roles

• Cryptocurrency Exchanges: Exchanges generally conduct payment business by collaborating with centralized financial systems to issue credit cards. Coinbase, Binance, Crypto.com, etc., launched payment services around 2020, partnering with Mastercard or Visa to issue cryptocurrency credit cards, allowing users with crypto assets to use credit cards for consumption globally.
• Independent deposit and withdrawal payment institutions: Such as Moonpay, BitPay, Paypal, Stripe, Mastercard, etc., gradually opening up/integrating Web3 payment business and scenarios around their main business, including wallets, custody, payments, trading, and stablecoins, ultimately covering their entire ecosystem and forming a logical closed loop.
• Web3 Aggregated Payment Platforms and Web3 Banks: Connecting multiple independent deposit and withdrawal payment institution interfaces to form an aggregation platform, as well as providing multi-account banking services for Web3 users. For example, Alchemy Pay is a hybrid cryptocurrency payment gateway solution that supports bi-directional exchange and payment between fiat and crypto assets; Fiat24 creates an on-chain bank account for users, offering a series of Web3 banking services such as deposits and withdrawals, crypto consumption payments, savings, transfers, and currency exchange.
• Cryptocurrency Retail Terminals: Including cryptocurrency ATMs (leading project Bitcoin Depot) and offline convenience store retail terminal POS (typical project Pallapay).

According to research by Galaxy Ventures, participants in the Web3 payment track can be divided into four categories from a technology stack perspective:

Typical Projects and Case Studies:

• Alchemy Pay: A company providing cryptocurrency and fiat payment solutions aimed at connecting the traditional financial system with the decentralized finance (DeFi) world. Alchemy Pay offers merchants and consumers a hybrid payment gateway that allows them to transact using both cryptocurrencies and fiat currencies, simplifying the use and adoption of cryptocurrencies. It plans to expand its global crypto payment coverage and has obtained over 20 regulatory licenses worldwide, currently serving over 2 million users and supporting crypto payments in more than 180 countries and regions.
• Fiat24: A fintech company licensed by the Swiss Financial Market Supervisory Authority (FINMA), which launched a Web3 banking protocol driven by smart contracts, creating an on-chain bank account (IBAN+Card) for users, providing a series of Web3 banking services and crypto services such as deposits and withdrawals, crypto consumption payments, savings, transfers, and currency exchange.
• Helio: A platform focused on cryptocurrency payments and Web3, providing a suite of tools for receiving, processing, and managing cryptocurrency payments. It is a leading Web3 payment platform on Solana, with over 450,000 unique active wallets and 6,000 merchants. With its Solana Pay plugin, millions of Shopify merchants can now settle payments in cryptocurrencies and can instantly convert USDY into other stablecoins like USDC, EURC, and PYUSD.
• Moonpay: A global cryptocurrency payment infrastructure provider that allows users to purchase cryptocurrencies using credit cards, debit cards, bank transfers, and more. Moonpay is currently a leading project for cryptocurrency deposits and withdrawals, with over 20 million registered users, supporting crypto payments in over 160 countries and regions, and facilitating exchanges between over 80 cryptocurrencies and more than 30 fiat currencies, holding payment business licenses in most jurisdictions, having processed over 6 billion transactions.
• BitPay: A cryptocurrency payment processing company founded in 2011, dedicated to helping merchants and individuals use Bitcoin and other cryptocurrencies for payments and transactions. BitPay provides a range of services that enable merchants to accept cryptocurrency payments and convert these payments into fiat currency, making it easier for users to use cryptocurrencies for everyday consumption. Currently, BitPay enables merchants to accept payments from customers in 229 countries using 16 different cryptocurrencies, having processed over 10 million transactions with a total value exceeding $5 billion.
• Coinify: A provider of cryptocurrency trading and payment processing services. Coinify's payment solutions allow merchants to let their customers pay with 10 supported cryptocurrencies while receiving payments in their chosen fiat currency. The company operates in over 180 countries and serves more than 45,000 merchants.
• CoinPayments: Founded in 2013, it is one of the world's leading cryptocurrency payment service providers. The company serves over 100,000 merchants from more than 190 countries/regions. CoinPayments' payment solutions enable merchants to accept payments in over 175 cryptocurrencies. The company also provides many tools for merchants, including shopping cart plugins, payment buttons, APIs, invoice generators, and sales tools. As of October 2022, the company has processed cryptocurrency payments worth over $10 billion.
• PayPal: Launched the stablecoin "PayPal USD" (PYUSD) pegged to the US dollar in August 2023, using PYUSD as a bridge for exchanges between fiat and cryptocurrencies for transfers, payments, and other services.
• MetaMask: MetaMask itself does not provide direct fiat exchange functions, but through integration with third-party services (like MoonPay, Wyre, Transak, etc.), users can easily convert between fiat and cryptocurrencies (deposit and withdrawal operations). Currently, the MetaMask Portfolio DApp has aggregated functions such as Sell, Buy, Stake, Dashboard, Bridge, and Swap, helping users conveniently manage assets and achieve unified on-chain asset operations.

Web3 Payment Regulatory Compliance

Regarding regulatory compliance for the Web3 payment track, it is primarily necessary to meet licensing, qualifications, and permission compliance requirements before projects can conduct Web3 payment business under the stipulated standards.

Different countries and regions have varying regulatory requirements for Web3 payment businesses, so Web3 payment track projects wishing to operate in certain countries and regions need to apply for the corresponding licenses.

PayFi Track Concept and Its Business Scenarios, Case Studies

PayFi Concept

Lily Liu, chair of the Solana Foundation, introduced the concept of PayFi at the Hong Kong Web3 Carnival:

The motivation behind PayFi is to realize the initial vision of Bitcoin payments. PayFi is not DeFi, but a new financial market built around the time value of money, which can achieve new financial paradigms and product experiences that traditional finance cannot realize.

PayFi can be understood as the fusion of DeFi and Web3 payments, focusing on helping users maximize the time value of money. PayFi is applicable in scenarios such as Web3 transactions, off-chain consumption, retail environments, creator monetization, accounts receivable, payment processing, and private credit pools, creating a new paradigm of on-chain finance through the interoperability, programmability, and composability of blockchain.

PayFi Market Prospects:

Since 2015, stablecoins have seen exponential growth, providing effective payment and settlement solutions for the $2 trillion crypto market. Currently, the overall market value of stablecoins has surpassed $171B, with Tether USDT's market cap growing from over $83B in 2022 to its current $117.9B, an increase of 42%, indicating a surge in demand for stablecoins in the crypto market.

Stablecoins, in addition to serving as a unit of account in cryptocurrency trading, are gradually making strides in traditional payment tracks and cross-border financial trade, changing the global payment landscape. The PayFi market, which combines stablecoins and Web3 payments, will further expand the demand scenarios for stablecoins, providing funding support for on-chain and off-chain payment applications.

PayFi can:

• Bring trillions of offline traditional payment volumes on-chain, better optimizing the time value of money.
• Provide sustainable risk-adjusted yields: single-digit to double-digit returns.
• Rapidly scale with extremely low systemic risk, enhancing asset liquidity.
• Offer more efficient and richer new financial paradigm applications leveraging the convenience of smart contracts.

PayFi Business Scenarios and Case Studies:

1. Innovative Web3 Payment Business Integrating DeFi:

Combining on-chain DeFi finance and instant settlement capabilities, allowing users to use real-time earnings generated from on-chain DeFi finance to pay for off-chain instant consumption expenses.

Case Study: Buy Now Pay Later: A user deposits $50 in an on-chain DeFi protocol to earn $5.5 in interest, which can be used for instant settlement and payment to buy a cup of coffee (for free).

2. Web3 Banking:

Combining Web3 and Web2 banking services to provide users with digital banking services.

Case Study: Fiat24 is a blockchain-based financial services platform dedicated to providing users with decentralized digital banking services. Fiat24 establishes Swiss bank accounts (Cash Account) for users who pass KYC, integrating Web3 payment services, enabling currency acceptance and Web3 payments; on the other hand, Fiat24's Swiss bank accounts are directly connected to the Swiss National Bank, European Central Bank, and VISA/Mastercard payment networks, allowing for traditional banking services such as fiat currency savings, currency exchange, and merchant settlements.

3. RWA Finance:

Bringing offline RWA assets on-chain to capture the time value of assets, providing crypto users with more asset investment categories and returns.

Case Study: Ondo Finance is an RWA tokenization protocol for US Treasury bonds, aiming to provide institutional-level financial products and services for everyone. Ondo Finance tokenizes low-risk, stable-yield, scalable fund products (such as US Treasury bonds, money market funds, etc.), providing on-chain investors with a way to earn yields with stablecoins. It has launched USDY (USD Yield Token) for non-US users, which is the world's first permissionless, yield-generating tokenized note backed by US Treasury bonds. USDY can be used for various use cases, including lending, cash management, and payments, while also earning yields. USDY has made breakthroughs in Web3 payments, allowing users and merchants to now make payments or settlements using yield-generating assets, meaning merchants can earn interest on balances by accepting USDY as a settlement method. An increasing number of projects are beginning to use USDY to promote wider adoption of crypto payments.

4. Payment Financing:

Using DeFi lending funds to address financing needs in real-world payment transaction scenarios, achieving on-chain settlement of payment financing returns.

Case Study: Huma Finance is a PayFi network that allows businesses and individuals to borrow against future income by connecting them with global on-chain investors, providing financing and liquidity support for global payments. Specific use cases include cross-border payment financing, digital asset credit cards, RWA instant settlements, trade financing, and DePIN financing.

5. PayFi Cryptocurrency Payment Network:

Utilizing Web3 payments and blockchain DID identities to build a cryptocurrency payment network that adapts to offline payment scenarios.

Case Study: PolyFlow is a modular decentralized cryptocurrency asset operation protocol aimed at constructing a PayFi cryptocurrency payment network. Through a modular design, it has launched two key components: Payment ID (PID) and Payment Liquidity Pool (PLP), which can abstractly separate the information flow and capital flow of payment transactions to extract value. PID is a digital identity system used for KYC identification, identity verification, compliance access, and data rights confirmation, while PLP manages and settles funds through smart contracts. Polyflow incentivizes merchants and liquidity providers by providing nearly risk-free DeFi yields for payment transactions. This model not only opens up new revenue streams but also encourages broader stakeholder participation in the DeFi ecosystem, promoting the development and adoption of crypto payments.

6. Consumer Crypto Payment Applications:

Utilizing on-chain credit and Web3 payments to transform traditional consumption scenarios.

Case Study: Blackbird is a Web3-based dining loyalty platform focused on the restaurant industry, building on-chain payments and loyalty programs through Blackbird Pay (on-chain credit card) and $FLY (on-chain consumption points), leveraging payment business as a growth lever to drive the development of the entire ecosystem. Currently, 40,056 wallets hold 125,571 Blackbird restaurant membership cards (NFTs), and 142 restaurants have generated check-in activities.

7. Stream Payments:

Stream payments are an emerging payment method that allows for the continuous, real-time transfer of value (usually currency or cryptocurrency) from the payer to the payee over a period of time, rather than completing the entire payment in one lump sum. Stream payments are primarily suitable for billing for ongoing services or disbursing salaries, such as hourly work, pay-per-use internet services, content subscriptions or consumption, ongoing contracts, and lease payments. In the future, stream payments will have a profound impact on value flows, working capital management, IoT payments, and even the valuation models of large companies.

Case Studies:

• Sablier is a token distribution protocol that allows for the creation of token streams using the Sablier protocol, handling the distribution of token ownership, payroll, airdrops, grants, etc., with recipients able to track and withdraw streamed funds at any time. This payment method enables users to make continuous real-time payments on a per-second basis, achieving seamless, frictionless transactions and enhancing financial flexibility for users, businesses, and other entities. Sablier uses the passage of time itself as a trust constraint mechanism, unlocking previously inaccessible business opportunities.
• Zebec is a decentralized infrastructure network aimed at creating a future where real-world value flows freely and seamlessly, enabling individuals, businesses, investors, and teams to access funds and tokens instantly; providing immediate financial control and fostering a more inclusive and accessible financial environment. Zebec's integrated products include RWA payments (real-time payroll and cross-border remittances), on-chain payment infrastructure (Zebec Cards), and connected DePIN (PoS retail devices, providing convenient, instant, and integrated cryptocurrency payment processing solutions for merchants and consumers).

Web3Port Foundation is a cryptocurrency fund focused on the blockchain and Web3 ecosystem, dedicated to promoting the widespread adoption of Web3 technology through strategic investments and incubation of innovative startups and projects. Recently, it has researched the Web3 payment track and PayFi track, studying the concepts, payment types, and typical cases of Web3 payments/PayFi to understand the overall situation of the track and assist in business investment decisions. The content is for industry learning and exchange purposes only and does not constitute any investment reference.

Reference Articles:

1. Web3 Payment Comprehensive Report: Industry Giants' Full-Scale Attack, Expected to Change the Existing Crypto Market Landscape

https://mp.weixin.qq.com/s/oWec4gDu8Hqk86aLs3K9Qw

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https://mp.weixin.qq.com/s/gzr9q9kM3j-R0ec7sCb3NQ

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