The new era of PayFi: Solana leads the future of blockchain payments and on-chain finance

Author: Ac-Core, researcher at YBB Capital

Conclusion

• Lily Liu, Chairman of the Solana Foundation, introduced the concept of PayFi in her keynote speech "The Rise of PayFi: Realizing the Vision of Cryptocurrency" at the 7th EthCC Conference.

• The core of PayFi includes: 1. Emphasis on "instant settlement", which has special value in speculative transactions; 2. Supporting the "buy now, pay later" model, opening up new ways for creator monetization, invoice financing, and payment risk management.

• The key advantage of PayFi in realizing its vision lies in leveraging Solana's high performance to bridge the gap between the real world and the blockchain, while regulation and scalability are the main challenges for widespread adoption.

• Lily Liu succinctly stated: "PayFi aims to create a new financial market around the time value of money. On-chain finance realizes new financial primitives and product experiences that traditional finance and even Web2 finance cannot achieve."

1. What is PayFi?

Source: The 7th EthCC Conference

PayFi is the abbreviation of Payment Finance, a new concept proposed by Lily Liu, Chairman of the Solana Foundation, at the EthCC conference in July 2024. It is an innovative paradigm that combines payment with finance, emphasizing "instant transactions" to improve the efficiency of speculative transactions and various financial operations. According to Lily Liu's definition, PayFi is a programmable financial structure that enables new financial innovations on top of the settlement layer while autonomously processing payment transactions. According to Elponcho, here is the summary:

PayFi's Vision:Create a programmable monetary system within an open financial system to provide users with economic sovereignty and self-custody capabilities.

PayFi's Use Cases:New technologies give birth to new markets. PayFi supports the "buy now, pay never" model, leveraging on-chain finance and instant settlement so that profits generated on the chain can immediately meet immediate consumption needs. For example, a user can invest $50 on the chain to earn interest, and the instant settlement and payment of that interest can be used to buy a "free" cup of coffee.

In addition, PayFi can also support creators to monetize based on progress milestones (for example, a YouTuber can earn advertising revenue after reaching 1 million views), provide invoice financing, manage payment risks, and develop a global private credit pool on the Solana blockchain. Lily Liu believes that PayFi will surpass DeFi and lead the next financial trend.

Solana and PayFi: Lily Liu emphasized that Solana stands out in the blockchain field for its high performance, consistent demonstration of fast transaction speeds and low costs, and its advantages in capital and talent liquidity. Obviously, Solana is a strong candidate to realize PayFi's vision.

Three key factors for blockchain success: Lily Liu pointed out the three key factors for blockchain success: fast and low-cost transactions, a broad user base, and a strong developer community. She said that Solana is currently the only ecosystem that fully possesses these three factors.

PayFi and the Future of Solana: Lily Liu highlighted the various financial application scenarios on the Solana platform in her summary, including supply chain finance, payday loans, credit cards, corporate credit, interbank repo markets, and insurance markets. These applications demonstrate the huge potential of combining Solana with PayFi to subvert the traditional financial system.

In her article "Understanding PayFi: Solana's Next Big Narrative", Lily Liu explained that the core of PayFi lies in the time value of money and illustrates this through three key examples:

1. Buy Now, Pay Never:

Most people are familiar with "Buy Now, Pay Later", but "Buy Now, Pay Never" is almost the opposite. The former optimizes cash flow through installments and has a certain interest cost, while the latter allows funds to be invested in DeFi products, and the interest earned can be used to pay for consumption without using the principal.

For example, a user buys a $5 cup of coffee by depositing $50 into a lending product. Once the accumulated interest reaches $5, the interest will be used to pay for the coffee, and the funds will be unlocked and returned to the user's account. This process relies on the automatic execution of "programmable money".

2. Creator Monetization:

Many creators face cash flow problems during the content creation process. Although creation takes time and money, the returns are often delayed, which can cause financial pressure and affect progress. In Lily Liu's vision, PayFi can help creators monetize faster. For example, if a video is expected to generate $10,000 in revenue, but it takes a month to achieve, the creator can use PayFi to get $9,000 in cash immediately, even if it means sacrificing some revenue, it can improve cash flow.

3. Accounts Receivable:

Accounts receivable is a common type of account in the financial relationship between a business and its customers, referring to the money owed by the customer to the business. Due to the existence of accounts receivable, companies may face cash flow problems. To solve this problem, companies usually pledge accounts receivable to financing companies or sell them at a discount to obtain immediate funds. PayFi aims to further simplify and optimize this process, accelerate settlement through blockchain, improve cash flow efficiency, lower the threshold, and enable more companies to use this supply chain financial tool to accelerate capital flow.

2. How PayFi integrates with DeFi: RWA is a bridge to a new narrative

Source: Coincu

The origin of blockchain technology can be traced back to the revolutionary white paper "Bitcoin: A Peer-to-Peer Electronic Cash System" published by Satoshi Nakamoto in 2008. It lays the foundation for a new era of decentralized payments, not only creating a new form of currency, but also fundamentally changing the payment system entrenched in traditional finance. PayFi leverages blockchain technology and smart contracts to manage capital flows using digital assets and decentralized finance (DeFi) tools. Its core concept is to optimize the time value of money (TVM) and shorten settlement time through decentralized technology. Key operating principles include:

• Time Value of Money (TVM): PayFi emphasizes enhancing the time value of money and helping users improve the efficiency of using funds. For example, users can deposit funds into a lending platform and use the interest generated to pay for daily expenses. For example, when buying a $5 cup of coffee, $50 can be locked, and when the interest accumulates enough to pay for the coffee, the principal remains unchanged.

• Smart Contract Automation: Smart contracts are at the core of PayFi, allowing complex financial operations to be automatically executed based on predefined conditions, reducing intermediary involvement, speeding up transactions and reducing costs.

• Tokenization of Real World Assets (RWA): PayFi tokenizes real-world assets, such as real estate and accounts receivable, to facilitate cross-border payments and capital flows. This not only increases the liquidity of physical assets, but also provides a new platform for global transactions.

As the demand for sustainable value assets in the crypto ecosystem increases, risky assets naturally become a popular choice. Over the past two years, tokenized treasuries with a yield of 4-5% have become the preferred on-chain capital asset, with a total value rapidly rising to $2 billion. With inflation concerns and central bank rate cut signals, treasury yields are falling, forcing capital to seek other high-yield, low-risk assets. This provides an opportunity for PayFi to rise in the risky asset space.

PayFi's typical use cases include:

• Cross-border payment financing: Arf changes traditional cross-border payments by providing on-chain liquidity solutions for financial institutions, supporting 24/7 instant, transparent and low-cost USDC-based settlements without the need for pre-funded global accounts. Cross-border payment financing provides high capital efficiency and scalability.

• Corporate cards backed by digital assets: Rain provides Web3 teams with corporate card settlement liquidity backed by USDC. Companies deposit funds into the vault and set up a credit line in the vault. After each settlement cycle, the balance of the corporate card will be automatically repaid through on-chain asset liquidation, thereby reshaping fee management.

• Trade Finance:BSOS combines an enterprise resource planning (ERP) platform with on-chain liquidity to create RWAs in the supply chain, providing short-term financing options to meet business capital needs.

Real World Assets (RWAs) can include:

• Instant RWA Settlement:Even highly liquid assets such as treasury bonds or tokenized funds typically take 2-4 days to settle because the underlying assets must be liquidated before redemption. Through on-chain liquidity pools, these assets can provide 24/7 real-time subscription and redemption, ensuring fast and transparent transactions.

• DePIN Financing:With the rapid expansion of the DePIN ecosystem, many projects are starting with sharing large infrastructure costs and redistributing future value. For example, TL ay provides key trust infrastructure to accelerate the implementation of DePIN; Peaq customizes L1 for DePIN, allowing machines to efficiently trade or interact with humans, and promotes the development of the machine economy.

At the same time, the rise of stablecoins has become a bridge between fiat currencies and blockchains, driving the emergence of real-world payment scenarios. Since 2014, stablecoins have grown exponentially, indicating an increasing demand for blockchain innovation in the payment field. Today, stablecoins support approximately $20 billion in organic payments per year, close to Visa's annual payment processing volume. Although the crypto ecosystem has overcome challenges such as poor user experience, high latency, high transaction costs, and compliance issues to unlock the potential of stablecoins, there is still room for further development. A historical review of payment systems reveals the key role of financing mechanisms in their evolution. For example:

• Credit cards: Contribute $16 trillion to merchant payments each year, demonstrating how financing drives widespread adoption and practicality.

• Trade Finance: $10 trillion per year in B2B payments, highlighting the critical role of finance in global trade.

• Cross-border Payments: Supporting global remittances and settlements with $4 trillion in prepaid funding. Today, 1 in 6 households worldwide rely on remittances for their livelihoods.

Without payments financing, global liquidity would be severely limited. Similarly, without funding mechanisms, the utility and adoption of native internet currencies would be hampered. PayFi was born to address these limitations. Lily Liu, President of the Solana Foundation, clearly articulated the vision of PayFi: "PayFi aims to create a new financial market around the time value of money. On-chain finance enables new financial primitives and product experiences that traditional or even Web2 finance cannot provide."

3. Thoughts on PayFi

Source: Solana official website

Solana has always been at the forefront of creating narratives in the crypto market, constantly stimulating market activity with various new stories. PayFi's biggest advantage is to return to the blockchain's inherent ability to disrupt traditional finance, using decentralization and security to reduce fraud risks, improve transaction integrity, and eliminate intermediaries in traditional financial payment processing by encoding the entire transaction process on the chain. This lowers the threshold for users to participate in finance and positions PayFi as a bridge connecting RWA and DeFi to the real world from a narrative perspective.

Although PayFi has the potential to support the mass adoption of blockchain, it still faces challenges that may limit its widespread adoption. The main problem is regulatory issues, as global financial institutions have not yet fully understood or created a legal framework for blockchain operations. The first obstacle to connecting with the real world is legality. Another obstacle is scalability; blockchain networks may be congested during peak hours, affecting transaction speeds and costs, and the block production speeds between different chains may be difficult to synchronize. Market acceptance may also be insufficient-enterprises and users currently have low acceptance of new technologies, and blockchain still carries the stigma of "crypto-phobia". In order for blockchain to fully bridge the gap with the real world, it still needs to continuously optimize its coverage in different fields and break down silos.