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Understanding PayFi: Solana’s Next New Narrative

4Alpha Research

2024-08-22 17:07

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Original title: "Catch Solana's Next New Narrative, Understand PayFi in One Article"

Original author: Stitich, Cloris, 4Alpha Research

Friends who often attend meetings should be impressed by the word "PayFi". In fact, this is the must-have speech topic of Lily Liu, chairman of Solana Foundation, every time she attends a meeting. This article will focus on the introduction of the concept of "PayFi" and related projects to help readers keep up with Solana's latest narrative.

Note: Any project mentioned in this article is for research only and does not represent any recommendation.

What is PayFi?

Lily Liu said: "PayFi is motivated by the original vision of Bitcoin payments. PayFi is not DeFi, but creates new financial primitives around the time value of money, etc."

Vision of PayFi

The initial vision of Bitcoin payment referred to by Lily Liu is not a simple "peer-to-peer electronic financial system", but "Program Money, Open Financial System, Digital Property rights, Self Custody and economic sovereignty". PayFi's vision is to "build a system of programmable currency in an open financial system, which 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 also automatically perform complex financial operations based on preset rules. In fact, smart contracts and DeFi are an application of programmable currency. However, the reason why PayFi is emphasized is not DeFi is because DeFi is still built around financial and transaction products, while PayFi is trying to build products around goods and services. PayFi strictly belongs to the RWA track.

Time Value of Money

When Lily Liu mentions PayFi, she always mentions 3 examples: "Buy Now Pay Never", "Creator Monetization" and "Account Receivable". Understanding these three examples can help you further understand PayFi.

1) Buy Now Pay Never

Most people are already very familiar with Buy Now Pay Later (installment payment), while Buy Now Pay Never is almost the opposite of installment payment. Installment payment is a kind of credit loan, which incurs a certain interest cost in exchange for better cash flow. Buy Now Pay Never, on the other hand, deposits money into DeFi products, earns interest through lending, and then uses the interest to pay, sacrificing cash flow.

For example, if a user buys a $5 coffee, he will deposit $50 into the lending product and lock it. When the interest is enough for $5, he will pay for the coffee and then unlock it and return it to the user's account. All this needs to be executed under automatic rules, which requires the "programmable currency" mentioned earlier.

2) Creator Monetization

This example assumes that many creators will encounter cash flow difficulties. Creation itself requires time and money, but after the creation is completed, it is often not immediately rewarded for various reasons. Therefore, from the beginning of creation to the reward, the creator will have to wait for a long time to get the payment. If the creator's cash reserves are insufficient, there may be no way to continue creating during this period, and the time will be wasted.

In Lily Liu's vision, PayFi can help creators solve this problem. For example, the income of a video is 10,000 US dollars, and it takes a month to arrive. The creator can use PayFi to immediately discount this income to 9,000 US dollars, sacrificing a certain amount of income in exchange for better cash flow.

3) Account Receivable

Accounts receivable is a very traditional concept. Simply put, it is the money owed by customers to the company. Due to the existence of accounts receivable, companies sometimes run into cash flow problems. In order to solve this problem, many accounts receivable financing companies have emerged, using the company's accounts receivable as collateral for loans or direct discount sales, so that companies can immediately obtain cash, thereby always maintaining a stable cash flow and continued growth, without being restricted by the speed of customer payment.

PayFi hopes to further popularize and optimize this scenario. Because although the above services already exist in Web2, the overall capital turnover still relies on the traditional payment system, resulting in slow settlement. Therefore, if the settlement speed can be increased through the blockchain, and the service objects of this supply chain finance can be popularized and the threshold can be lowered, the capital turnover speed of the entire real world can be increased.

The time value of money and the potential of PayFi

In fact, the above three cases all revolve around one point: "time value of money", that is, due to factors such as opportunity costs and interest rates, the current money is more valuable than the money of equal value received in the future. What PayFi has to do is to help users/customers maximize the time value of money. For example, Buy Now Pay Never is paid with the time value of money, and creators' monetization and accounts receivable are paid by paying the time value of money to get the current money, which is closer to Buy Now Pay Later.

Overall, PayFi is not a new concept. The problems it wants to solve are all problems that already exist in the traditional financial system and have solutions, but this does not mean that PayFi has no value, because traditional solutions are still not good enough.

Take corporate financing as an example. Accounts receivable is a form of corporate financing. In actual production, from the perspective of financial institutions, in order to meet policy supervision and their own risk control requirements, it is difficult to simplify the evaluation and execution process of collateral; on this basis, for many small and medium-sized enterprises, it is easy to cause financing difficulties due to the complexity and cumbersomeness of the process, and even unwilling to finance, unable to fully utilize the time value of money.

In the cross-border payment scenario, the monetary value of time is more obvious, because cross-border payments rely more on long-standing financial networks such as agent banks and SWIFT, but they cannot transfer funds between different countries in real time, and more and more customer system remittance companies can achieve next-day settlement or same-day settlement for them. In order to meet customer needs and provide a certain degree of real-time performance, these financial institutions must reserve a certain amount of financial capital in various countries in advance (just like Orbiter crosses chains between different bridges), which is a pre-financing account. According to a study by Arf, more than $4 trillion will be locked in pre-funded accounts worldwide in 2022, which is a huge waste of monetary time value costs for financial institutions. Therefore, PayFi still has huge potential value to be discovered, just as trams are still cars, but they have completed the revolution of cars. Even if PayFi may be old wine in a new bottle, the core element is still to observe whether it can optimize the original system through blockchain, achieve user experience that cannot be obtained under the old system and technology stack, and then achieve revolution.

What projects are worth paying attention to in the PayFi field?

There are not many projects focusing on the concept of "PayFi" at present. PayFi is still a very early concept. Next, we will focus on introducing several PayFi-related projects to help readers further understand the progress of the PayFi track.

Huma

Huma is one of the most popular PayFi concept protocols. As of August 16, 2024, the platform has provided nearly $890 million in payment financing, and the default rate is 0%.

Huma currently has two versions, V1 and V2. V1 is a loan agreement for enterprises and individuals, allowing users to borrow with future income (RWA) as collateral; Huma V2 adds the function of accounts receivable acquisition on the basis of V1.

There are currently multiple pools on Huma for different purposes and with different partners, but Huma is still a long way from the decentralized, barrier-free, and identity-free financial products that the blockchain vision expects. When trying to borrow money from Huma or provide funds for Huma, the author found that he would encounter obstacles such as not being able to find an entrance, requiring KYC, and having a certain usage threshold, which was daunting.

Arf

Arf is a cross-border payment network project that provides licensed financial institutions with unsecured, short-term, USDC-based working capital credit lines to enable these institutions to smoothly make cross-border payments without additional collateral or depositing funds in prepaid accounts.

For example, suppose Arf's European customers want to remit money to partners in Africa. Customers only need to remit funds to Arf's local bank account, and Arf will convert USDC into local legal tender for Africa's partner currency for same-day settlement. After the transaction is completed, Arf's customers can deposit funds into Arf's account through Wire, SWIFT, etc. Arf will immediately convert these deposits into USDC to ensure that the funds are available at any time.

Arf completed a $13 million seed round of financing in 2022. So far, Arf's services are still aimed at enterprises, and you need to fill out an application form to become its customer. In April this year, Arf announced a merger with Huma. Currently, 70% of the nearly 900 million payment financing on the Huma platform comes from Arf. The combination of the two may give full play to Arf's liquidity advantage and Huma's platform advantage.

Credix Finance

Credix is also a B2B credit agreement in the Solana ecosystem. Its product logic is very similar to Huma. There are investment pools for specific types on the Credix platform. Institutional investors who have passed KYC certification can provide credit by adding liquidity to the pool. Currently, Credix's services are mainly concentrated in Latin America, such as accounts receivable factoring.

Compared with Huma, Credix has higher requirements for investors and supports a narrower range of businesses. Therefore, the amount of loans lent by Credix so far is relatively small compared to Huma and Arf. In addition, Credix has also launched a feature called CrediPay, which is a "Buy Now Pay Later" service for enterprises.

NX Finance

The last thing to introduce is NX Finance. NX is the yield layer protocol on Solana, providing users with leverage or point farming strategies for interest-bearing assets within the Solana ecosystem. The corresponding two types of strategies on NX Finance are called Fulcram strategy and Gold mining strategy. Currently, NX Finance is still in a relatively early stage, and the platform TVL is around 14M.

Fulcrum Strategy: This strategy allows users to leverage high-quality interest-bearing assets (currently supports JLP). Lenders obtain interest income paid by borrowers by depositing USDC; borrowers need to use high-quality assets (JLP) supported by the collateral strategy to borrow. At the same time, NX Finance will use part of the loan to purchase JLP to increase JLP holdings. In other words, borrowers do not get USDC, but the return on JLP after leverage.

Strictly speaking, NX Finance is different from the above projects and is not a PayFi project. It is more like a Crypto Native lending protocol. However, from a broader perspective, the lending protocol itself is a full utilization of the time value of money and is also an indispensable part of achieving Buy Now Pay Never. The ultimate measure of whether a project is PayFi depends on whether the services it provides will eventually involve the real production and consumption needs of customers, rather than a financial lever that simply makes money. To link and integrate these real off-chain needs, the project party needs to do a lot of work, such as applying for licenses.

Summary

Overall, PayFi is still in an extremely early stage, and many projects claiming to be PayFi have not yet been launched. However, at present, PayFi is a subdivision of the RWA track, and is currently mainly iterating around the two needs of accounts receivable factoring and cross-border payments for Web2.

In addition, PayFi is still a certain distance away from the "openness" in its vision, because most of the projects that have launched products still have strict KYC and user geographical restrictions; but even so, we have seen that some PayFi projects, such as Huma, have accumulated a certain amount of data to show the existence of their product demand. As a track far away from on-chain users and exchange users, can PayFi create more innovative products around the time value of money and other attributes of money, and even accommodate more physical asset categories and improve the liquidity of physical assets? These issues are worthy of investors' long-term attention.