Introduction
There are currently few projects related to PayFi. The projects in PayFi can be divided into two tracks: cross-border trade and credit finance.
Huma Finance
Product Description: Huma Finance is currently focused on the PayFi track and mainly serves C-end users and small and medium-sized enterprises with PayFi applications. It recently acquired Arf, which primarily solves the liquidity of prepaid capital in cross-border payments.
Arf’s vision is to solve the liquidity and timeliness issues of prepaid capital in cross-border payments. Through the Arf platform, the trust issue between buyers and sellers is resolved without the need for traditional cross-border transaction requirements such as prepayments or letters of credit. Arf provides a peer-to-peer service and builds an on-chain liquidity network, providing stablecoins to enterprises in advance, eliminating the need for prepayments. When using Arf’s services, enterprises only need to pay the relevant fees and repay Arf within the agreed time.
Huma Finance’s main business revolves around the concept of “Buy Now, Pay Never” proposed by Lily Liu. The core concept is that customers can choose to use their upcoming accounts receivable as collateral. Huma tokenizes these accounts receivable through its protocol, and customers can borrow from the loan pool. The enforcement part will be implemented through on-chain smart contracts. Its scalable space includes trade finance, micro-enterprise credit, international tuition payments, etc.
Technical Architecture: Huma Finance’s PayFi Stack consists of six layers: transaction layer, currency layer, custody layer, financing layer, compliance layer, and application layer. It covers all levels from transaction processing to asset management, financing, and compliance. This full-stack design ensures that the entire process from loan application, asset evaluation, fund provision to final payment can be completed within the same ecosystem. PayFi greatly simplifies complex lending and payment processes, improves efficiency, and reduces costs through automation, decentralization, and multi-level technology integration.
Data Analysis: Currently, there is a total lending amount of $1 billion with no default records. Huma Finance, as the leader in the PayFi track, raised $38 million in financing.
Future Market Development of PayFi
After introducing the projects related to PayFi, we also considered the regional application scenarios. ArkStream believes that PayFi undoubtedly has the potential for global mass adoption, and its initial application scenarios may not be limited to developed countries such as the United States, Singapore, and Europe. We believe that emerging markets also have broad prospects.
– Market strategy in developed countries:
In developed countries, PayFi can complement existing digital payment systems with its integrated DeFi innovation. Due to clearer regulatory frameworks and policy support in developed countries, cryptocurrencies such as USDC, PYUSD, and EUROC are widely used. Finding a suitable entry point, such as partnering with retailers, e-commerce platforms, and cross-border financial platforms, to build low-cost and more efficient encrypted payment channels may accelerate the opening of the PayFi market.
– Opportunities in emerging markets:
Meanwhile, in regions lacking traditional financial services, PayFi can provide financial services to the “unbanked population” through products such as encrypted microloans and flash loans. The decentralization and cross-border convenience of encrypted payment systems can meet the financial needs of these populations in Africa, Southeast Asia, Latin America, and countries with high inflation currencies such as Nigeria and Argentina. Providing stable PayFi products may achieve scale faster in emerging markets where complex traditional financial infrastructures are lacking.
Therefore, ArkStream concludes that PayFi should adopt multiple market development strategies and pursue dual-track development: in developed countries, focus on iterating and establishing partnerships for existing application scenarios; in developing countries, promote the penetration of encrypted payments, PayFi applications, and cross-border remittance markets.
Prospects for Development
Although the concept of PayFi was proposed recently, and there are relatively few implemented projects, ArkStream believes that PayFi has the potential for future development, considering the current environment and economic conditions.
In recent years, the global high-interest rate environment caused by US interest rate hikes has attracted attention to bond-like products. Many users in the cryptocurrency market have transferred their funds to tokenized bond markets. Users value the stable underlying assets and the relatively high liquidity and traits of these bond-like products.
According to RWA.XYZ data, the size of the tokenized US bond market has increased from $770 million in early 2024 to $1.916 billion as of August 1, 2024, a growth rate of 248%.
With the announcement of interest rate cuts in the United States, the dependence on US bonds has weakened, and funds are looking for the next scene to invest in. Investors are seeking other assets that provide sustainable value and stable returns.
PayFi, combining the RWA model, precisely fills this demand. The locked value of the RWA track is currently as high as $6 billion and continues to rise. RWA moves real-world assets such as bonds, accounts receivable, and supply chain financial assets to the blockchain through tokenization, providing investors with diversified choices and higher liquidity for assets.
Here, we provide three potential RWA targets:
1. MakerDAO RWA provides traditional assets such as real estate and accounts receivable, combined with the DAI stablecoin issued by MakerDAO, to effectively connect off-chain funding needs with on-chain liquidity. It is currently the top-ranked RWA protocol in terms of TVL.
2. Tether Gold provides tokens linked to traditional and gold, allowing investors to invest in gold without directly holding physical gold through cryptocurrencies.
3. Ondo Finance provides risk-graded national bonds, corporate bonds, and other real-world financial assets on-chain. Funds can be invested based on risk preferences. Against the background of declining government bond rates, RWA products offered by Ondo, such as corporate loans, may be more in line with investors’ preferences.
Conclusion
Currently, there are very few projects related to the PayFi track, and most of them are still in the early stages of development. Therefore, we pay more attention to the innovative solutions of PayFi projects.
From a business model perspective, PayFi combines multiple tracks, including encrypted payments (such as Ripple, Stellar), DeFi lending (such as AAVE, Compound), and RWA (such as MakerDAO RWA, Ondo Finance). Projects in these areas have successfully verified the feasibility of their business models, proving their market demand and growth potential. By referring to the market capitalization of these tracks, PayFi, as a compound innovative business model, may have greater development space. Considering that the market capitalization of leading projects in encrypted payments, credit finance, and RWA has reached tens of billions to hundreds of billions of dollars, we have reason to speculate that with the unlocking and overlapping of multiple scenarios such as cross-border payments, supply chain finance, and corporate finance, the overall market capitalization of the PayFi track may even exceed this upper limit.
From a product perspective, future PayFi projects should focus on optimizing efficiency and user experience in segmented payment scenarios. Undoubtedly, PayFi is one of the few remaining blue ocean markets at present, but this track still lacks a large number of application projects. We call on more developers to use existing encrypted payment technologies, focus on the global market, and innovate based on actual needs in real life.
For example, at this year’s Token2049 conference, we noticed the cooperation between TADA Ride-Hailing and the Ton network, which reduced the commission rate of ride-hailing software through encrypted payments and profit-sharing, making it stand out among similar ride-hailing platforms. We also noticed the encrypted payment card business being developed by Ether.Fi, which not only has the functions of traditional encrypted payment applications, such as using encrypted assets for consumption but also allows users to repay their expenses with the proceeds from staking.
The breakthroughs in these real-life scenarios are the great potential for PayFi to refer to globally. Project parties should not only focus on finding the next high-yield “pool” for on-chain funds but also pay more attention to how to make users in traditional industries experience the convenience of PayFi from a price and product perspective, thereby further increasing the penetration rate of the cryptocurrency market.
It can be imagined that there will be many new financial products in the future that are difficult to achieve in traditional financial systems, such as:
– Instant loans: Users can obtain loans with more advantages than traditional financial channels by collateralizing encrypted assets through the PayFi platform.
– Pre-consumption and investment: Without debt, users can consume or invest before the arrival of future income cycles.
– High-yield liquid funds: By pledging and providing liquidity, users can enjoy a high yield of over 10% while retaining the liquidity of funds.
– Prepayment of interest on locked financial products: Users can use interest as liquid funds before the maturity of financial products.
These innovative products utilize the core concept of “time is money” and maximize the value of time. We are aware that PayFi is not just a castle in the air or a carnival for “insiders” only. In terms of practicability and innovation, PayFi is gradually bridging the fusion of cryptocurrencies and traditional finance. As long-term investors, ArkStream sees the potential of PayFi and even foresees a future without banks.
The innovation of these application scenarios combines the needs of DeFi and real-world applications, further validating the tremendous potential of PayFi in releasing capital efficiency. ArkStream believes that PayFi has unlimited long-term application prospects.
