Compared with Ethereum's fragmented rule, Solana's ecosystem is smaller in scale but more dynamic. After the collapse of FTX, Solana relied on high performance, strong marketing, and various hardware products to successfully regain popularity.
Specifically, high performance refers to the Firedancer upgrade, strong marketing is the Meme season, and hardware is various Web3 mobile phones, but these are not enough. PayFi proposed by Lily Liu, chairman of the Solana Foundation, has also become a hot topic. Although the hot topics in July are a bit outdated as they were written in October, in the long run, the entire Web3 industry’s shift to off-chain and real consumption scenarios has become a big deal.
"Once upon a time, you owned me and I owned you."
This article is not a song for Solana, but a song for exploring the way out for Web3.
The Dilemma of Crypto Wallets: PayFi’s Forerunner
Before giving Lily Liu's definition of PayFi, let's talk about Web3 wallets. From 2022 to 2023, with the traffic anxiety of smart contract wallets, account abstraction (AA) and exchanges, a number of Web3 wallets ushered in the second peak after the 2017-2021 Tugou era.
From the perspective of exchanges, wallets are the main entrance for people to interact with the chain. Traffic will flow in and out from here, and they may even replace CEX. Secondly, with the increasingly fierce competition in Ethereum L2, wallets will definitely be the main battlefield for aggregating liquidity in the multi-chain era.
However, the wallet ecosystem in 2024 is not eye-catching. OKX's built-in Web3 wallet is already a leader, but in most cases it has not become an independent product. One of the important reasons is that the Web3 wallet only has traffic but no closed-loop transaction mechanism, that is, the wallet cannot solve the profit problem. If a handling fee is charged, users will directly open the desktop product. Why not pay one less handling fee?
From a more "path-dependent" perspective, the problem with crypto wallets lies in their excessive pursuit of transaction features. Please note that this does not conflict with the above-mentioned profit problem. The core product feature of crypto wallets is to provide users with richer on-chain transaction feature support, from access to more chains to dApp recommendation mechanisms with more bidding ranking features.
However, users’ funds are not kept in encrypted wallets like in Alipay. The non-custodial mechanism can buy peace of mind, but it cannot win the users’ sincerity. In a word, encrypted wallets and Web2 wallets have nothing to do with each other. They neither manage money nor finance.
All of the above factors make it even more difficult for crypto wallets to establish their own closed-loop payment systems like PayPal, WeChat, and Alipay. From a broader business perspective, Web3 wallets only have users and no support from merchants. If dApps are considered merchants, then there are only a small number of merchants on the chain.
However, the wallet does have a large amount of traffic, and DeFi's on-chain gains or losses can indeed be converted into off-chain consumption. However, losses are also possible because it depends on whether it is based on ETH, stablecoins, or fiat currency.
A normal Payment requires support from both the merchant and user sides, but this is precisely the current shortcoming of the industry. Let us use the top male entrepreneur Chuan Bao to illustrate this problem. On September 19, 2024, Chuan Bao visited the PubKey bar in New York and bought beer for only 998 to entertain his supporters. Chuan Bao used Strike to initiate payment, and the merchant used Zaprite to collect payment.
In this case, the merchant and Chuanbao do not use the same payment system, which is hard to imagine in the Web2 era. It is equivalent to Chuanbao using Alipay to pay and the merchant using WeChat to receive the payment. However, in Web3, it makes sense because both parties use the Bitcoin network as the settlement layer. Let’s sort out the workflow:
Chuanbao uses Strike to initiate a payment request. Strike calls the Lightning Network to start the payment process. The Lightning Network initiates the transaction after confirmation by the Bitcoin network.
The merchant PubKey uses Zaprite to collect payments, Zaprite uses the Lightning Network to confirm the payment status, and the Lightning Network completes the transaction after confirmation by the Bitcoin network.
In this process, Zaprite only has a subscription fee of $25. Apart from that, merchants only need to deduct the miner processing fee, and the rest is their own income. We can compare it. Visa/MasterCard/AE, etc. require a handling fee of about 1.95%-2%, while the miner processing fee of Bitcoin has recently averaged around $1.46, and there is no handling fee at all for accepting Bitcoin.
If we continue to extend this, the logic of Web2 Payments is generally similar to that of Chuanbao buying beer, but there are quite a lot of intermediate links, which is also the drawback of Web2, and the opportunities of Web3 Payments and PayFi are also hidden therein.
Let's replace the concepts and products. The products we usually use, such as Alipay, WeChat Pay and Paypal, are e-wallets and are aimed at the C-end, while the corresponding one is the acquiring system of B-end enterprises/merchants. As long as a funds clearing network similar to the Lightning Network is built, the simplest P2B (individual and enterprise) interaction system can be built. Generally speaking, the intermediate clearing network needs to be jointly composed of card organizations and payment protocols.
Taking the above picture as an example, the Web2 payment system can be divided into payment behaviors between individuals in P2P, individuals and enterprises in P2B and B2B, and merchants. Banks can also conduct payments through interbank transaction systems such as SWIFT or CIPS, or cross-border CBDC transaction systems such as mBridge.
However, it should be noted that payment, strictly speaking, occurs between individuals and businesses, and between businesses. We include P2P and interbank payment here to facilitate comparison with Web3 payment behavior. In Web3, the main scenario for payment behavior is between individuals. For example, Bitcoin is a peer-to-peer electronic cash payment system.
If we refer to the payment system of Web2, the payment system of Web3 is actually very simple. Of course, the theoretical simplicity cannot cover up the fragmentation of the ecosystem. An obvious feature is that the traditional payment system has more banks and fewer card organizations, so it has a strong network effect, while Web3 goes the other way. There are many public chains/L2s, but the main assets are only US dollar stablecoins and only a few types of products such as USDT/USDC.
Even with the most optimistic estimates, there are only about 30,000 merchants worldwide that support Bitcoin. Although there are big brands such as Starbucks in some areas, in terms of acceptance, it is still not comparable to traditional card organizations or e-wallets.
Merchants that accept Binance Pay/Solana Pay are mostly online merchants, such as travel OTA platforms such as Travala. The number of merchants that can be expanded into card organizations on a large scale is still a little far from 100 million.
We will discuss the payment system in detail below, and now it’s time to introduce the concept of PayFi.
The PayFi Stack: The intersection of DeFi, RWA, and Payments
The reason why the narrative structure of talking about Payments first and then introducing PayFi is adopted is because the differences between the two are very large. On the whole, PayFi is more like DeFi + stablecoin + payment system, and it is not closely related to Web2 Payments. As mentioned earlier, everyone can feel it.
Let’s start with Lily Liu’s explanation. PayFi uses the time value of money (TVM). For example, making a profit from funds in DeFi is the use of TVM, but the problem is that this may take time. For example, staking tokens to obtain rewards usually requires a lock-up period, but as long as there are tokens, there is the possibility of appreciation. In previous operations, after obtaining profits, they can be invested in DeFi again, and the cycle continues, constantly looking for the possibility of profit.
Now, this part of the income can be transferred to other directions, such as using the expected income for current consumption, for example:
1. Alice invests 100 USDC in a financial product with an annual interest rate (APR) of 5%. After one year, she can receive $105 in principal and interest.
2. Bob runs a watermelon stall. In order to sell more watermelons, he now allows Alice to come here with a financial certificate to eat $5 watermelons. One year later, Bob can redeem the ticket for $5 of financial products.
This example is very simple, so simple that it cannot withstand scrutiny. For example, how can Alice and Bob ensure the smooth execution of the contract? What if Alice's financial income decreases? However, without considering these, Alice can get the benefits without paying any cost, and Bob gets $5 in accounts receivable.
A year later, the bull market came. Bob received a lot of $5 bills and was ready to become a supplier to large enterprises. After choosing and choosing, he saw Evergrande looking for someone to sell watermelons. The order was for $5 million. Bob was very happy, but Evergrande gave him a commercial bill. With the experience of working with Alice, Bob happily accepted the commercial bill. The two parties agreed to pay cash in one year based on the bill. If not, he would use his house to pay off the debt.
However, half a year later, Bob was ready to enter the stock market and needed to cash in his commercial bills. After being rated by PricewaterhouseCoopers, Evergrande's commercial bills were AAA-level high-quality assets. Banks, non-financial institutions, and even individuals in the market all wanted them. Everyone was scrambling to get them because Evergrande properties had quality assurance and great potential for appreciation.
Bob successfully sold the commercial bill at an excess price of 5.01 million. The bank got the commercial bill, Evergrande got something for free, and Bob got a bonus from the stock market. Everyone has a bright future. (Generally, commercial bills need discounts and handling fees to be cashed out. This is just to explain the process. Evergrande's commercial bills were only about 70% of their face value before the crash.)
Another meaning of TVM is the monetization of non-circulating assets. Even non-circulating assets themselves can be currencies or their equivalents, which has some similarities with the logic of re-pledge. For details, please refer to the article "Triangle Debt or Mild Inflation: An Alternative Perspective on Restaking".
In the context of Web3, the monetization of non-circulating assets can only be DeFi, so PayFi is a natural extension of DeFi, which is just a matter of extracting some of the liquidity from the previous on-chain Lego and investing it off-chain to improve life.
The relationship between PayFi and Payments is that payment is the simplest and most convenient way to satisfy the need for funds to go off-chain, while PayFi and RWA overlap with each other, except that traditional RWA places more emphasis on "going on-chain". For example, the so-called tokenization process requires securities, gold or real estate to be tokenized first to satisfy the possibility of on-chain circulation. Many of the more familiar consortium chains in China do this, such as blockchain electronic invoices or GXT.
It is difficult to say that PayFi is a subset of RWA. A considerable part of PayFi's behavior is "off-chain". As for whether there are on-chain links, it is not the focus of the PayFi concept. It's just that its behavior needs to involve interaction with off-chain links.
However, there is no need to worry about it. Many concepts of Web3 lack large-scale products and user groups. They are more about hyping concepts and selling coins. Roughly speaking, products involving PayFi/Payments and RWA can be divided in the following chronological order:
Old era: Ripple, BTC (Lightning Network, BTCFi, WBTC), Stellar
2022 RWA Concept Three Musketeers: Ondo/Centrifuge/Goldfinch
New Era-2024 PayFi: Huma (already established, will become popular in 2024), Arf
In fact, based on the above product development history, it is no problem for you to say that PayFi is the successor of RWA. The traditional narrative, especially the business model of on-chain funds lending to off-chain entities, is PayFi in 2024, and in 2022 they are all called RWA.
We can even say that lending in RWA, cross-border settlement similar to Ripple, and off-chain consumption of stablecoins constitute several aspects of PayFi at present. In essence, these are the only contents.
It can be said that Web3 software and hardware are built on the material and ideological foundation of Web2, and the same is true for Web3 PayFi. Its similarities with Payments are actually greater than its differences, and lending products are actually more from the perspective of capital flow. If off-chain products can have more returns, then these returns can also be used for payment behavior.
Being misunderstood is the fate of the expresser. I don’t know whether Lily Liu agrees with this interpretation, but I think only in this way can the logic be smooth. As long as the on-chain income is used for off-chain consumption scenarios, it conforms to the concept of PayFi. Therefore, the next focus of the market will be Web3 Payments, RWA Loans and stablecoins. In fact, the three can often be included in a cyclical process.
For example, RWA corporate lending is priced in U-standard. Individuals enter the lending pool on the RWA chain through the DeFi protocol. The RWA lending protocol lends to physical enterprises after evaluation. After recovering the accounts receivable, LP obtains a share of the profits from the protocol and withdraws funds through the Mastercard U card. The merchant happens to support Binance Pay, creating a perfect closed loop.
History belongs to the pioneers, not the summarizers. It doesn’t matter how PayFi is defined. The most urgent task is to explore the real benefits beyond the internal circulation of the DeFi chain. The demand from billions of people off the chain will bring more abundant liquidity and higher leverage valuation support to the chain. Whoever can run it through can define the market.
