The main objective is to solve the liquidity problem of prepaid capital in cross-border payments. Arf’s vision is to address 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, eliminating the need for traditional cross-border transactions such as prepayment to banks or letters of credit. Arf builds an on-chain liquidity network by providing peer-to-peer services and providing stablecoins on-chain in advance to enterprises, eliminating the need for prepayment. When using Arf’s services, enterprises only need to pay the relevant fees and repay Arf within the agreed time.
At the same time, Huma Finance’s main business revolves around Lily Liu’s concept of “Buy Now, Pay Never”. Its core concept is that customers can choose to use their soon-to-be-due accounts receivable as collateral. Huma tokenizes these accounts receivable through its protocol, and customers borrow from the loan pool, while the enforcement part is implemented by on-chain smart contracts. Its scalability includes trade financing, micro-enterprise credit, international tuition payment, 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, covering 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 technical integration.
Data analysis: As of now, there is a total lending amount of 1 billion US dollars with no records of default. Huma Finance, as a leader in the PayFi track, raised 38 million US dollars in financing.
Future development markets for PayFi
After introducing the relevant projects of PayFi, we also have thoughts on the regional application scenarios. ArkStream believes that PayFi undoubtedly has the potential for global mass adoption, and its early application scenarios may not be limited to developed countries (such as the United States, Singapore, Europe). We believe that emerging markets also have broad prospects.
Market strategy in developed countries:
In developed countries, PayFi can use its integrated DeFi innovation capabilities to complement existing digital payment systems. Due to clearer regulatory frameworks and policy support in developed countries, cryptocurrencies such as USDC, PYUSD, and EUROC are widely used in these countries. 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:
At the same time, PayFi can provide financial services to areas lacking traditional financial services. By providing products such as encrypted microloans and flash loans, the decentralized and cross-border convenience of encrypted payment systems can provide financial services to the “unbanked population” in these areas. For example, in Africa, Southeast Asia, Latin America, or countries with high inflationary fiat currencies such as Nigeria and Argentina. Because emerging markets lack complex traditional financial infrastructure, providing stable PayFi products may achieve scale faster than in developed countries.
Therefore, ArkStream concludes that PayFi should adopt multiple market development strategies and pursue dual-track development: in developed countries, focus on iterative improvements and establishing partnerships in 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 not long ago, and there is a scarcity of implemented projects, ArkStream believes that PayFi has potential for future development, considering both the development of encrypted payments and the external economic environment, which provides significant advantages.
In the past few years, the global high-interest-rate environment caused by the US interest rate hikes has led to significant attention to bond-like products, and many users in the cryptocurrency market have transferred their funds to tokenized bond markets. Users value the stable underlying assets and relatively high liquidity of these products.
According to RWA.XYZ data, the market size of tokenized US bonds has increased from $770 million in early 2024 to $1.916 billion today (as of August 1, 2024), an increase of 248%.
With the announcement of interest rate cuts in the United States, the yield of US bonds continues to decline, and investors’ reliance on US bonds is weakening, resulting in a need to find the next investment opportunity. Investors are turning to find other assets with sustainable value and stable income sources.
The rise of PayFi in combination with the RWA model happens to meet this demand. The total locked-in value (TVL) in the RWA track currently stands at $6 billion and continues to rise. RWA moves real-world assets (such as bonds, accounts receivable, supply chain financial assets, etc.) onto the chain through tokenization, providing investors with diversified choices and higher liquidity.
Here are three potential RWA targets:
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 TVL.
Tether Gold provides tokens linked to traditional gold, allowing investors to invest in gold without directly holding physical gold through cryptocurrencies.
Ondo Finance provides risk-stratified government bonds, corporate bonds, and other real financial assets on-chain. Funds can be invested based on risk preferences. Under the background of declining government bond interest rates, RWA products such as corporate loans provided by Ondo may be more in line with investors’ preferences.
Conclusion:
Currently, the number of projects related to the PayFi track is extremely limited, and most of them are still in the early stages of development. Therefore, we pay more attention to the innovation of PayFi project solutions.
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 fields have successfully validated the feasibility of their business models, proving their market demand and growth potential. By referencing the market value of these tracks, PayFi, as a compound innovative business model, may have greater development potential. Considering that the market value of leading projects in encrypted payments, credit financing, and RWA has reached tens of billions to hundreds of billions of dollars, we have reason to speculate that with the unlocking and superposition of multiple scenarios such as cross-border payments, supply chain finance, and corporate financing, the overall market value of the PayFi track may even exceed this upper limit.
From a product perspective, future development of PayFi projects should focus on optimizing efficiency and 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 the actual needs of real-life industries.
For example, at this year’s Token2049 conference, we noticed the collaboration between TADA Ride and the Ton Network, which reduced the commission rate of ride-hailing software through encrypted payments and profit-sharing. This allowed them to stand out among similar ride-hailing platforms. We also noticed the ongoing encrypted payment card business by Ether.Fi, in which the Cash service not only provides the functions of traditional encrypted payment applications, such as using encrypted assets for consumption but also allows users to use the proceeds from liquid staking to repay their expenses.
These breakthroughs in real-life scenarios are the great potential that PayFi can refer to on a global scale. Project parties should not only focus on finding the next high-yield “reservoir” for on-chain funds but also pay more attention to how to make users in traditional industries experience the convenience of PayFi from a selfless perspective, such as price, products, etc., and further enhance the penetration rate of the encrypted market.
It can be imagined that in the future, there will be many new financial products that are difficult to achieve in traditional financial systems, such as:
Instant loans: Through the PayFi platform, users can obtain more advantageous loans than traditional financial channels by collateralizing encrypted assets.
Advance consumption and investment: Users can consume or invest in advance before the arrival of future income cycles without incurring debts.
High-yield liquid funds: By pledging and providing liquidity, users can enjoy a yield of more than 10% while retaining the liquidity of their funds.
Interest payment in advance for lock-up period financial products: Users can use interest as liquid funds before the maturity of financial products.
These innovative products leverage the core concept of “time is money” and maximize the value of time. We realize that PayFi is not just a castle in the air or a “carnival for insiders”. Whether from a practical or innovative perspective, PayFi is gradually bridging the gap between encryption and traditional finance. As a long-term investor, ArkStream sees the potential of PayFi and even envisions a future without banks.
The innovation of these application scenarios combines the needs of DeFi and real-life applications, further demonstrating the tremendous potential of PayFi in releasing capital efficiency. ArkStream believes that PayFi has unlimited long-term prospects.
