Recently, the highly anticipated SmartCon conference is being held in Hong Kong. Dr. Xiao Feng, Chairman and CEO of HashKey Group, will also deliver a keynote speech on the new global payment network of compliant stablecoins on the Main Stage. As a godfather-level leader of Web3, his attention to payment is undoubtedly exciting. This not only means a broad space for the Web3 payment industry, but also perhaps implies that Web3 payment is about to explode.
The prospects are broad, but the challenges are numerous; this is the true portrayal of PayFi at the moment.
Compliance and high-level risk management are necessary conditions, which determine whether a project can go long-term. From a long-term perspective, we need to see the healthy development of current regulatory compliance, and the gradual acceleration of the road to compliance. For a PayFi project, in addition to innovative gameplay and strengthened risk management, selecting partners with compliance licenses is the top priority. Whether it is a stablecoin or an exchange, once a joint force is formed, there is undoubtedly a broad world and great potential.
1. PayFi is a new concept, but it solves an old problem
1. Capital turnover efficiency is the core of the time value of money
PayFi (Payment Finance) is a unique concept in the Web3 field. It was first proposed by Lily Liu, chairman of the Solana Foundation, and defined as a new financial market built around the time value of money.
In the above definition, the concept of time value of money is relatively abstract. In short, time value of money means that money has different values in different time periods. To understand it in economic terms, without considering inflation, the rise in the value of money comes from the value added brought by the transfer of the right to use money/funds. To put it more simply, if you use today's $ 1 to invest, manage money, borrow money, etc., at some point in the future, you will make more money, and the money you make is directly determined by the turnover efficiency, cost and income of each turnover of this $1 .
The next question is, is there any unmet demand for this kind of currency time value in Web2? The answer is obviously no. So why do we need Web3 to transform payments? The only conclusion is that the currency time value in Web2 has been greatly weakened, which has resulted in increased costs, reduced benefits, and low levels of convenient access to services.
After understanding the above scenarios, we can roughly give some more detailed descriptions of PayFi. PayFi is an innovative financial market based on payment and settlement scenarios through blockchain technology, with the purpose of capital turnover efficiency, cost and benefits. It is worth noting that there are many scenarios that can improve the time value of money, but PayFi focuses more on payment and settlement rather than financial transactions. Its main improvement in time value lies in shorter fund settlement time and faster turnover efficiency.
2. RWA demand may not be rigid, but PayFi is more urgent
If there is a recognized and enduring mainstream narrative in the We3 industry, it must be the key proposition of Mass Adoption. The RWA track is the key direction born under this narrative, and PayFi belongs to the RWA track from a broader perspective, because from the most core basis, both are the interaction between the blockchain world and the real physical world, but the way of interaction is different.
The core definition of RWA is to put real-world assets on the chain, tokenize/NFT tangible real-world direct assets, and enable them to be traded on the chain. It focuses on the transaction of real assets on the chain and provides higher liquidity for real assets; PayFi focuses on the speed of transactions between real assets and the realization of unmet financial needs through blockchain.
The difference is that the demand for RWA is not necessarily rigid, and it provides more income / fund sources to the blockchain world to some extent; the demand for PayFi is completely rigid, and it provides more income / fund sources to the real world to some extent. Of course, it should be noted that from the perspective of income enhancement alone, neither RWA nor PayFi is one-way, and the following table is more based on its essential functions.
Comparing and juxtaposing RWA and PayFi, the core thinking lies in: under the grand narrative of Mass Adoption, why is a new narrative of PayFi needed rather than a simple extension of the RWA concept, and why it has attracted such high attention.
The above comparison between the two may provide some explanations. One is the migration of the real world to the blockchain world, and the other is the integration of the blockchain world into the real world. The two are similar, but from the perspective of demand, the latter is undoubtedly more urgent in the real world. However, the high attention paid to PayFi is not only due to the urgency of the real world, but also the bottleneck of the blockchain world itself.
In addition, from the perspective of the operation of the blockchain world itself, whether it is payment settlement in seconds, or the use of smart contracts and on-chain Defi liquidity pools to support the real world, the greatest time value behind it lies in improving the turnover efficiency of currency operations.
3. The development bottleneck of blockchain calls for a new narrative with real scenarios, and PayFi has a very high ceiling
From the perspective of the blockchain world, narrative exhaustion is an indisputable fact in the current blockchain world. The phenomenon of liquidity segmentation is almost getting worse and worse, accompanied by the false prosperity of project data. After the project TGE, the user data of most projects has almost plummeted, accompanied by a sharp drop in the price of coins. This phenomenon shows the rapid development of the blockchain world under the blessing of capital and gradual compliance from a positive perspective. From a negative perspective, it reflects that there is no real demand scenario behind many current projects. Most of them are nesting doll projects with extremely weak self-sustaining ability. If there is no capital blessing, they will almost " die in the light " .
In the real world, in an increasingly complex geopolitical environment, the increasingly complex and bloated international payment and settlement system is not only facing the inefficiency that is difficult to reverse, but also facing doubts about its neutrality and equality. Russia's exclusion from the Swift system is undoubtedly a precedent, but it is by no means the last. In addition, financial oligarchies and inequalities are everywhere, and what's worse is that this phenomenon is still intensifying.
It is hard to say that blockchain can perfectly solve the problems in the real world, and blockchain itself is also facing a development bottleneck, but it is at least one of the most likely paths at present. Whether it is the giants of Web2 or the top streamers of Web3, they are undoubtedly unwilling to miss the bet on this track, such as BlackRock, JD.com, Coinbase, A16z, Sequoia, Softbank, etc. More importantly, for the huge amount of capital of the giants, they are more likely to be attracted by the limited short-term wealth effect, but pay more attention to the long-term incremental space. This is also the core reason why RWA or PayFi can attract large funds.
2. The PayFi ecosystem has taken shape. From stablecoins to exchanges, compliance is the basis for cooperation
The wider ecosystem relies on partners with compliance qualifications
As analyzed in the previous article, the PayFi track is the blockchain world's way of leveraging huge amounts of real-world assets. In this track landscape, if we simply analyze the individual projects of PayFi itself, it will undoubtedly be a blind spot. What we need to see more is how to form a broader synergy to create a new financial paradigm in such a blockchain ecosystem.
It is not limited to the PayFi project itself, or in other words, PayFi is just an entrance and exit. However, from the perspective of PayFi’s project logic, it links the funding pool of the blockchain world and the financial needs of the off-chain world. This linking relationship requires the integration of multiple forces.
The first factor is that you must operate in a relatively relaxed regulatory environment and crypto-friendly city. For example, the recently popular Huma Finance is located in San Francisco, and the early compliant exchange Kraken is also located in the city, such as Hong Kong.
Secondly, the current main partners are still focused on large licensed institutions that need to be able to provide a full set of deposit and withdrawal, liquidity provision, and decentralized infrastructure compliance service solutions. In fact, from this point of view, this is also one of the current high barriers to entry and obstacles to the growth of PayFi.
Taking Hong Kong as an example, there are not many physical companies with certain financial strength that can provide a compliance regulatory framework from infrastructure, deposits and withdrawals, liquidity including KYC, etc. There are only a few licensed regulatory institutions, such as HashKey Exchange, the largest licensed virtual asset exchange in Hong Kong.
As the largest licensed virtual asset exchange in Hong Kong, HashKey Exchange has ranked among the top 10 exchanges in the world and is the best partner for the PayFi project. Its current trading volume has exceeded HK$538 billion, and its asset accumulation has exceeded HK$5 billion. According to the latest data from Coingecko, HashKey Exchange ranks among the top 8 exchanges in the world and is also the highest-ranked licensed virtual asset exchange in Hong Kong. The benefit of cooperating with such compliant institutions is that the breadth and depth of cooperation and the difficulty of collaboration are reduced to a higher level, which is more conducive to the rapid construction of the project and the expansion of its popularity. Otherwise, it is necessary to find different partners in different links, which in a sense increases the operating costs of the project.
1.1 The prototype of the track has emerged, and the future is worth looking forward to
RWA is a hot topic in this cycle, but the concept of PayFi was only proposed in July this year. It was not until the leading project Huma Finance raised US$38 million in September that it was widely spread. In less than three months, it has become a hot and highly watched new concept and narrative in the industry. Behind it are the industry's top venture capital, compliant exchanges, and public chain funds such as Distributed Global, HashKey Capital, and Stellar Development Foundation.
At this year's Singapore Token2049, the PayFi Summit event also showcased 12 PayFi track projects and the corresponding underlying modular Stack technology stack, with the intention of further lowering the threshold for project development.
From a compliance perspective, payment services currently have different regulatory frameworks in different regions, such as TCSP and MSO in Hong Kong; DPT in Singapore and VARA license in Dubai, which are all regulatory frameworks that must be considered when projects enter the payment track.
Overall, the current scale and popularity of the track cannot be considered mainstream; but in the context of the lack of new narratives in the industry, the high attention given by the industry also indirectly proves the recognition of this direction. At least under the current influence, the prototype of the track has taken shape, and the future is still worth looking forward to.
1.2 PayFi ’s three major challenges: compliance is the foundation of development, risk control is the guarantee of development, and lowering the threshold is the lever of development
Looking ahead, the most important issue for PayFi’s development is regulatory compliance, followed by how to connect the entire scenario from on-chain to off-chain through process management. The main challenges involved are as follows.
Challenge 1: Compliance management of the entire chain. From a risk perspective, if the compliance risk on the chain spreads to the off-chain, it will be a fatal blow to the project, so the use of compliant stablecoins is only the first step; in the long run, the current stablecoins are all pegged to the US dollar. In the process of large-scale promotion, they may face the risk of cross-border foreign exchange control. For example, South Korea also plans to introduce relevant regulations recently. In addition, compliance in the deposit and withdrawal links and liquidity provision links plays a decisive role in the success or failure of the project. This is why it is necessary to cooperate with compliant exchanges such as HashKey Exchange as mentioned above.
Challenge 2: The management difficulty of technology, security risks and credit risks increases. If the business model is purely on-chain, the technical risks are relatively concentrated. PayFi's business model determines that its technical risks exist not only in hacker attacks on the chain, but also in offline performance witnessing risks. In addition, whether it is based on accounts receivable or trade, a large amount of online and offline data cross-verification is required, and there is no on-site offline research, which actually puts higher demands on its credit risk management capabilities.
Challenge 3: The user entry threshold is still high. From the current PayFi project, due to regulatory compliance factors, the user KYC and investment threshold are not suitable for retail investors to participate, but are more suitable for institutions/high net worth individuals to participate. However, from a business logic perspective, institutional business is easier to carry out and the model is relatively simple. However, assuming that it is to be promoted on a large scale in the future, the user threshold is still one of the barriers.
IV. Suggestions and prospects: Based on compliance, multi-party cooperation, innovative gameplay, great potential
Judging from the development of PayFi, it is currently still in the stage of solving a one-way financing solution, that is, looking for financing in the blockchain world for real physical scenarios. If it goes a step further, it can develop into an integrated payment and financing business, or it can be said to be a comprehensive form of PayFi+Defi+RWA. On the one hand, it expands the source of funds and increases the income source of on-chain DeFi or exchange wealth management products; on the other hand, it also seeks breakthrough solutions for the huge financial turnover needs of offline assets.
The current PayFi funding pool does not come directly from DeFi and exchanges, but more from the project's own self-built funding pool. However, for the underlying assets, under compliant funds, it does not matter where the funds come from, especially considering the current liquidity segmentation in the market. It can consider cooperating with Defi protocols and compliant exchanges to fully integrate the liquidity of the blockchain world. On the one hand, it can design more products with fund risk attributes and terms, and at the same time, it can also achieve payment and financing integration, or use the high timeliness of blockchain payment settlement, combined with on-chain income, to seamlessly achieve payment and financing integration. This is equivalent to users using the income obtained by LP as collateral to instantly obtain credit advances from the PayFi platform, which can be directly used to pay for offline consumption.
In addition, for centralized compliant exchanges and Defi protocols, there is an effective way to retain user funds. A possible scenario is: for example, user A deposits and withdraws funds through HashKey Exchange. After investing in BTC, he can use BTC or USDC and other compliant stablecoins to invest in the exchange's wealth management products. The underlying assets of the wealth management products are PayFi's financing projects to earn stable returns, which can also be paid offline directly through PayFi.
In summary, from the perspective of PayFi’s own development, combined with the many ways to play in the blockchain world, the time value of currency can make full use of the efficiency of blockchain for innovation, and the shortened time can not only improve turnover efficiency, but also more conveniently form a product form that integrates payment, financing, and settlement.
According to incomplete statistics, the entire payment field, including credit cards, trade financing, cross-border payments, etc., has a total market of more than 40 trillion US dollars, and currently PayFi is only expanding in the long-tail market that has been neglected by traditional finance.
In the increasingly compliant blockchain world, the scale of PayFi alone is roughly estimated to be more than one trillion. In the foreseeable future, if the barriers to deposits and withdrawals are removed, online and offline integration is deepened, and compliance is accelerated, perhaps the highway from the Web2 world to the Web3 world will be truly connected, and PayFi may also be the key turning point for We3 to truly move towards Mass Adoption.
