Blockchain is an industry that heavily relies on narrative. By constructing thematic narratives, it can guide market discussions, promote capital concentration, and attract relevant teams to create ecosystems within the same narrative framework, collectively composing a complete story. The narrative of PayFi was proposed by Lily Liu, Chair of the Solana Foundation, who has centered nearly all her keynote speeches over the past six months around PayFi, declaring it will be the exclusive focus of Solana moving forward, demonstrating her immense determination.
During Token 2049, the first PayFi Summit, hosted by Solana, Huma, and Stellar, will take place in Singapore, serving as an important event to define the essence of PayFi. As an early practitioner of PayFi and RWA (Real World Assets), BSOS has previously collaborated with international ecosystem partners and has been invited to participate and speak. On the eve of the PayFi Summit, I am pleased to share my understanding of the PayFi narrative from the perspective of a frontline practitioner.
BSOS delivering a speech at the first PayFi Summit
What is PayFi?
PayFi refers to the use of blockchain technology to provide the financial services necessary for real-world payment scenarios. Blockchain is inherently a peer-to-peer payment system, capable of achieving “direct money transfers between parties.” However, the payment behaviors in modern society often involve more complex processes. For example, although credit cards appear to be a payment tool, each transaction implicitly involves various financial operations such as short-term financing, advances, and cross-border remittances.
Another example is trade payments, where the transportation of goods takes time, making immediate transactions impossible; thus, trade payments often involve financial actions like performance guarantees (where the payer transfers funds to an intermediary for safekeeping) and short-term financing. As transaction behaviors evolve, “payments” in many cases resemble an integration of multiple financial services. PayFi leverages the money movement characteristics of blockchain and the advantages of programmable money to provide liquidity solutions for complex payment processes in the real world, thereby enhancing payment efficiency and reducing costs.
Key Components of PayFi: The Replacement of Payment Networks
PayFi is not about whether users pay with cryptocurrency, but rather about how liquidity operates during the payment process and the payment network used.
We illustrate this with two cases: one is Huma Finance and the other is the Crypto.com VISA card. Traditional banks cannot provide 24/7 real-time cross-border remittance services, primarily due to limitations in their underlying payment network accounting methods. To achieve real-time settlement, many fintech companies in cross-border remittances adopt a “collecting in location A, paying in location B” approach, meaning they need to reserve funds across banks worldwide to facilitate operations. This model presents significant challenges regarding capital requirements and scalability.
Huma Finance is a lending protocol specifically designed to provide short-term liquidity support to fintech companies in cross-border remittances. Once a fintech company completes a collection in location A, it can mobilize US dollar stablecoins through Huma Finance and immediately convert them into fiat currency in location B, paying the recipient. This way, fintech companies no longer need to establish large capital reserves globally; Huma Finance utilizes the “direct money flow” capability of blockchain to flexibly address short-term liquidity needs, earning interest from these short-term loans and generating returns for liquidity providers (LPs) on-chain.
From actual data, Huma Finance has provided short-term advances to Arf, achieving an on-chain transaction volume of $1.8 billion in just over a year. The issuer of the US dollar stablecoin USDC, Circle, has also published articles introducing this case. Huma Finance is a typical application of PayFi, circumventing the costs and time limitations of traditional payment networks to achieve a leap in overall payment efficiency.
Another comparative example is the Crypto.com VISA debit card, which is well-known in the crypto community. Although users perceive payment through their cryptocurrency balances when using this service, the transactions still rely on VISA and traditional payment networks, with no fundamental improvement in payment efficiency or costs (Crypto.com first converts cryptocurrency to fiat at the time of swiping before handing it over to VISA for processing in the conventional manner). Therefore, I believe this model does not fall within the value scope of the PayFi discourse.
PayFi applications in supply chain payment scenarios
Another interesting case is the payment scenarios within supply chains. Supply chains inherently face liquidity issues: after the seller delivers goods to the buyer, the buyer usually needs processing time to convert the goods back into cash. During this period, both parties’ liquidity is effectively locked in the goods. To address this time gap, parties in the supply chain often adopt the convention of “payment terms combined with amounts” when determining transaction conditions. “Payment terms” decide who bears the liquidity gap before the goods are converted into cash, while the “amount” implies a subsidy for the time value of the payment terms. Regardless, one party must bear the short-term liquidity pressure.
ISLE Finance is a lending protocol designed specifically for supply chain payment scenarios, incubated by BSOS and Outlier Ventures, and selected for the 2024 BNB Incubation Alliance (BIA). ISLE Finance provides enterprises with credit lines for global payments, addressing liquidity bottlenecks during supply chain transactions. In a transaction, if both parties choose to use ISLE Finance as the payment network, the ISLE Finance protocol acts like an on-chain card reader; the seller uploads the invoice to the ISLE Finance protocol, and as long as the buyer signs with their private key on-chain indicating that the information is accurate and agrees to payment, the seller receives US dollar stablecoins (of course, the amount cannot exceed the buyer’s on-chain credit line).
Ultimately, the buyer must repay this stablecoin to ISLE Finance by the agreed-upon due date; the buyer can also negotiate a later date within certain limits with the protocol than the originally scheduled payment date. This way, both parties can effectively share the costs associated with the time value of money and benefit from the liquidity injected by ISLE Finance, as illustrated below.
The time value model of ISLE Finance payments
Opportunities in PayFi: Addressing “Payment Time Gaps” in Transaction Scenarios
The core opportunity of PayFi lies not in providing liquidity for “investment loans,” but in solving liquidity issues arising from “payment time gaps.” Compared to investment loans, the characteristics of payment loans are short cycles, high frequency, small individual amounts, and lower risks. These time gaps could stem from bank remittance processing times, goods transportation durations, or capital gaps before the buyer receives their next income. Although these time gaps typically range from days to weeks, they often create significant pain points for users. The intersection of this liquidity demand with globalized payments is where PayFi can play a crucial role.
Furthermore, the potential of PayFi extends to the future DePIN (Decentralized Physical Infrastructure Networks) ecosystem, supporting high-frequency, small-amount, global needs for revenue-sharing, settlements, clearing, and payments between devices. With liquidity support from PayFi, the continuity of automated transactions between devices can be ensured, maintaining the stable operation of DePIN. This is a service that traditional financial infrastructure cannot support.
From Asset Tokenization to PayFi: The Shift in the RWA Narrative
In the previous cycle, the main narrative surrounding the RWA (Real World Assets) sector focused on asset tokenization. One successful case is Ondo Finance, whose tokenized US short-term treasury ETF reached a total value locked (TVL) of over $600 million, becoming a highlight in the industry. However, asset tokenization often involves the management and legal regulations of off-chain assets, incurring significant operational costs, making it difficult to achieve notable benefits without sufficient asset scale. Recently, we have observed that the narrative protagonist of asset tokenization has gradually shifted from grassroots blockchain initiatives to large institutions like BlackRock and Franklin Templeton.
The core concept of asset tokenization is to circulate physical assets on the blockchain; PayFi’s vision, however, is to combine blockchain liquidity with real-world payment behaviors, positioning it as a short-term debt for LPs off-chain, thus regarded as part of the RWA narrative. Its potential scale may far exceed that of US treasury tokenization (illustrated below). According to a PayFi research report published by CGV Research in September this year, the market size of PayFi is expected to reach 20 times that of the previous DeFi market size. We believe PayFi will become an important narrative in this cycle of RWA.
The potential scale of PayFi, source: Huma Finance Blog
Having delved into blockchain applications for many years, I have witnessed the initial ideals of practitioners — the naive and romantic notion that “blockchain or Bitcoin’s peer-to-peer payments will replace fiat payment systems” — evolve into the current PayFi narrative, which emphasizes entry into real payment scenarios. By deeply understanding the operations of the real world and the advantages of blockchain itself, we pragmatically integrate different on-chain and off-chain roles, allowing more people to benefit from the advantages brought by this technology.
Perhaps years from now, we will look back and find today’s thoughts still too idealistic, but at least we are paving a path toward possibilities for the future
The viewpoints presented in this article reflect diverse opinions and do not represent the stance of WEB3+