Introduction:
PayFi is a relatively new concept with a limited number of related projects. Currently, the projects in PayFi can be divided into two categories: cross-border trade and credit finance.
Huma Finance:
Huma Finance is currently the focus of PayFi and its main business is PayFi applications for consumers and small and medium-sized enterprises (SMEs). It recently acquired Arf, which primarily solves the liquidity issue of prepaid capital in cross-border payments.
Arf aims to solve the liquidity and timeliness issues in cross-border payments. Through the Arf platform, trust issues between buyers and sellers are resolved, eliminating the need for traditional cross-border transactions such as prepayment to banks or letters of credit. Arf provides a peer-to-peer service and builds an on-chain liquidity network, providing stablecoins to enterprises in advance without the need for prepayment. 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” as claimed by Lily Liu. The core concept is that customers can choose to use their upcoming receivables as collateral. Huma tokenizes these receivables through its protocol, allowing customers to borrow from the loan pool. The enforcement is carried out by on-chain smart contracts. Its scalability includes trade financing, SME loans, and international tuition payments.
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 simplifies complex lending and payment processes, improves efficiency, and reduces costs through automation, decentralization, and multi-level technical integration.
Data Analysis:
Currently, Huma Finance has a total lending volume of $1 billion with no default records. As the leader in the PayFi field, Huma Finance has raised $38 million in funding.
Future Market Development of PayFi:
After introducing the PayFi-related projects, we also considered the regional application scenarios of PayFi. ArkStream believes that PayFi undoubtedly has global mass adoption potential, and its early application scenarios may not necessarily be limited to developed countries such as the United States, Singapore, and Europe. We believe that emerging markets also have vast 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, stablecoins 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:
In regions with a lack of traditional financial services, PayFi can provide financial services to the “unbanked population” through products such as encrypted micro-loans and flash loans. The decentralization and cross-border convenience of encrypted payment systems can provide financial services in Africa, Southeast Asia, Latin America, and countries with high inflation currencies like Nigeria and Argentina. Providing stable PayFi products may achieve scale faster than in developed countries due to the lack of complex traditional financial infrastructure in emerging markets.
Therefore, ArkStream concludes that PayFi should adopt multiple market development strategies and pursue dual-track development. In developed countries, the focus should be on iterating and establishing partnerships to complement existing application scenarios. In developing countries, efforts should be made to promote the penetration of encrypted payments, PayFi applications, and cross-border remittance markets.
Prospects of Development:
Although PayFi is a relatively new concept with limited application projects, ArkStream believes that it has great potential for future development. We see positive factors for PayFi from both the development of encrypted payments and the external economic environment.
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 funds to tokenized bond markets. Users value the stability, higher returns, and liquidity of these assets.
According to RWA.XYZ data, the tokenized US bond market has grown from $770 million in early 2024 to $1.916 billion as of August 1, 2024, an increase of 248%.
With the announcement of interest rate cuts by the US, the yield of US bonds continues to decline, and investors are looking for the next investment opportunity. PayFi, combining with the RWA model, fills this demand. The locked-in volume of the RWA track currently stands at $6 billion and continues to rise. RWA moves real-world assets, such as bonds, receivables, and supply chain financial assets, to the chain through tokenization, providing investors with diversified options and higher liquidity.
Here are three potential RWA targets:
1. MakerDAO RWA offers traditional assets such as real estate and receivables. Combined with the DAI stablecoin issued by MakerDAO, it connects offline fund demand with on-chain liquidity. It is currently the top-ranked RWA protocol in terms of Total Value Locked (TVL).
2. Tether Gold provides tokens linked to traditional gold, allowing investors to invest in gold without directly holding physical gold.
3. Ondo Finance provides risk-rated government bonds and corporate bonds on-chain. Funds can be invested based on risk preferences. With the decline in government bond interest rates, RWA products such as corporate loans offered by Ondo may be more attractive to investors.
Conclusion:
Currently, there are very few projects in the PayFi field, 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 such as encrypted payments (e.g., Ripple, Stellar), DeFi lending (e.g., AAVE, Compound), and RWA (e.g., MakerDAO RWA, Ondo Finance). These areas have successfully validated their business models, proving their market demand and growth potential. By referencing the market value of these tracks, PayFi, as a composite innovative business model, may have greater development space. Considering that the market values of leading projects in encrypted payments, credit finance, and RWA have reached 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 value of the PayFi field may even exceed this upper limit.
From a product perspective, future PayFi projects should focus on optimizing efficiency and experience in specific payment scenarios. Undoubtedly, PayFi is one of the few remaining blue ocean markets, but currently, this field lacks a large number of application projects. We call on more developers to utilize existing encrypted payment technologies, focus on the global market, and innovate based on actual needs in real life.
For example, at the Token2049 conference this year, we noticed the collaboration between TADA Ride-Hailing and Ton Network, which reduced the commission rate of ride-hailing software through encrypted payments and profit sharing, making it stand out among similar platforms. We also noted Ether.Fi’s ongoing encrypted payment card business, where its Cash business not only serves traditional encrypted payment applications, enabling spending with encrypted assets but also allows users to repay their expenses using the income from liquid staking.
These breakthroughs in real-life scenarios are the huge potential that PayFi can refer to globally. 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 price and product perspective, thereby further improving the penetration rate of the encrypted market.
It can be imagined that new types of financial products that traditional financial systems find difficult to achieve will emerge in the future, such as:
– Instantaneous lending: Users can obtain loans more advantageously than traditional financial channels by collateralizing encrypted assets on the PayFi platform.
– Advanced consumption and investment: Users can consume or invest before their income cycle arrives without incurring debt.
– High-yield liquid funds: Users can enjoy a high yield of more than 10% while maintaining the liquidity of their funds through collateralization and liquid staking.
– Early payment of interest on locked financial products: Users can use interest as liquid funds before the financial product matures.
These innovative products utilize 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” only. From both practical and innovative perspectives, PayFi is gradually bridging the integration of encryption and traditional finance. As a long-term investor, ArkStream sees the potential of PayFi and even envisions a future without banks.
These innovative application scenarios combine the demands of DeFi and real-life applications, further validating the tremendous potential of PayFi in releasing capital efficiency. ArkStream believes that PayFi has unlimited long-term prospects for application.
