Why PayFi Market Could Be 20 Times Larger Than DeFi

PayFi (Payment Finance) represents an innovative application model within the blockchain and cryptocurrency space that combines payment functionalities with financial services. Its core revolves around the processes of sending, receiving, and settling cryptocurrencies, rather than merely focusing on trading.

This model encompasses not only cryptocurrency payments and transactions but also various financial activities such as lending, wealth management, and cross-border payments. By leveraging decentralized technology, PayFi enhances the speed, security, and efficiency of financial activities, reducing friction and costs inherent in traditional financial systems. This advancement facilitates seamless global value transfer and financial inclusion.

The Genesis of PayFi

PayFi was introduced by Lily Liu, Chair of the Solana Foundation, during the EthCC conference in July 2024. Liu views PayFi as a novel way to build financial markets, creating financial primitives and product experiences centered around the Time Value of Money (TVM). This approach aims to achieve what is challenging or impossible in traditional or even Web2 finance.

PayFi’s vision is to revolutionize payment systems through blockchain technology, enabling more efficient and cost-effective transactions. It seeks to provide new financial experiences, create more complex financial products and applications, and build an integrated value chain, leading to the formation of a new financial cluster.

PayFi: Extending Bitcoin’s Payment Vision

Bitcoin’s inception was driven by Satoshi Nakamoto’s revolutionary white paper, “Bitcoin: A Peer-to-Peer Electronic Cash System,” which introduced the concept of decentralized payments. This vision proposed a global payment system without intermediaries, designed to overcome the limitations of traditional financial institutions and achieve more efficient and transparent value transfer. Nakamoto aimed to reform the payment system by eliminating high fees, lengthy settlement times, and financial exclusion.

However, while Bitcoin has significantly advanced the cryptocurrency revolution, its original intention as a daily payment medium has not been fully realized. Bitcoin has often been regarded more as a store of value rather than a practical currency for everyday transactions.

The emergence of stablecoins has partially filled this gap. By mapping the value of fiat currencies onto the blockchain, stablecoins bridge the gap between cryptocurrencies and real-world financial systems, driving the first practical use case for blockchain payments.

Since 2014, stablecoins have grown exponentially, proving the market’s strong demand for blockchain payments. Currently, stablecoins facilitate around $2 trillion in payments annually, approaching Visa’s annual payment processing volume.

Despite this, blockchain payments still face challenges such as poor user experience, transaction delays, high costs, and regulatory issues, limiting their widespread adoption as a mainstream payment medium.

The Role of Financial Tools and Financing Mechanisms

Traditional financial tools like credit cards, trade financing, and cross-border payments have greatly facilitated global payment applications by providing liquidity and financing options.

Blockchain, as an emerging industry, does not need to completely rebuild the market but can enhance existing markets with more valuable products and solutions through blockchain technology. This backdrop gave rise to PayFi.

Leveraging the high performance and low-cost transaction features of advanced public blockchains, PayFi aims to surpass traditional financial mechanisms and create a more liquid and adaptive global financial market.

This evolution represents both a return to Bitcoin’s original intent and a significant innovation built on Bitcoin’s foundation. PayFi promises to unlock the full potential of blockchain payment systems, propelling the global financial system toward a more efficient and inclusive future.

Core Concept of PayFi: Time Value of Money (TVM)

“Time is more valuable than money; you can get more money, but you cannot get more time.”

Time Value of Money (TVM) is a fundamental concept in finance, emphasizing the value difference of money at different points in time. The basic principle of TVM is that a sum of money today is typically worth more than the same amount in the future. This is because current funds can be invested immediately to generate returns or used for immediate consumption.

In essence, TVM is about “opportunity cost.” Holding money without immediate use results in missed investment opportunities and potential returns. For instance:

• Loans and Mortgages: Interest rates in bank loans are based on TVM, where the interest paid compensates for the use of the bank’s funds.
• Investment Evaluation: Investors consider the present value of future returns when evaluating stocks, bonds, or real estate investments.
• Capital Budgeting: Companies assess the future cash flows of projects and discount them to their present value to make favorable investment decisions.

PayFi utilizes blockchain technology to efficiently realize the time value of money on-chain, allowing users to manage and invest funds without intermediaries, maximizing fund utilization. This model significantly reduces transaction costs and speeds up transaction times, enabling rapid market reinvestment or other uses.

Furthermore, PayFi’s infrastructure supports the development of more complex on-chain financial products, such as on-chain credit markets, installment payment systems, and automated investment strategies based on smart contracts. This expansion will lead to the creation of an integrated value chain, forming a new “financial cluster.”

Integrating RWA and DeFi: Building a New Financial Cluster Centered on PayFi

In the financial system, Real-World Assets (RWA) and Decentralized Finance (DeFi) each have unique advantages and challenges. RWAs have significant market size and stable value but face issues like lower liquidity and transparency. DeFi offers efficient transaction mechanisms and global liquidity but relies heavily on crypto assets, lacking direct ties to the real economy.

Contrary to some views that PayFi is merely a subset of RWA, CGV Research considers RWA a component of the PayFi ecosystem. PayFi encompasses a broader range of crypto assets, smart contract-driven financial services, and decentralized payment and settlement systems. Incorporating DeFi into RWA is a critical component of PayFi’s core functionality.

Bridging RWA with Blockchain

Digitalization and On-Chain Integration

PayFi platforms digitalize RWAs through smart contracts, enabling them to be represented and traded on the blockchain. This process ensures transparency and security of RWA values and ownership on-chain, allowing traditional assets to be divided into smaller units for global trading and investment.

Smart Contracts and Payment Systems

Once digitized, PayFi uses smart contracts to automate transaction and settlement processes, accelerating transaction speeds, reducing costs, and ensuring transparency and security. PayFi’s on-chain payment system simplifies asset transfer and payment, addressing issues like settlement delays and high fees in traditional finance.

Liquidity Pools and Financing Channels

PayFi’s liquidity pools provide sufficient funding for RWAs, attracting global investors. By using RWAs as collateral, PayFi enables participation in DeFi financing activities, offering stable funding sources and diverse investment opportunities.

Risk Management and Transparency

Blockchain technology ensures transparency and verifiability of RWA transactions, reducing information asymmetry and operational risks.

Automated execution through smart contracts minimizes human intervention risks, and blockchain’s immutability ensures transaction record security, enhancing market trust and driving further RWA and DeFi integration.

Future Prospects and Challenges for PayFi

Market Growth Potential

PayFi aims to bring the time value of money on-chain and reconstruct the financial system in a more programmable, sub-custodial, and decentralized manner. With the rapid growth of global stablecoin numbers and ongoing improvements in cryptocurrency infrastructure, PayFi is poised to become a major force in transforming traditional finance.

According to Statista, the global digital payment transaction volume is expected to reach approximately $9.46 trillion in 2023 and continue growing, potentially reaching $14 trillion by 2027. Mordor Intelligence estimates the DeFi market size at $46.61 billion in 2024, with a projected growth to $78.47 billion by 2029, at a compound annual growth rate of 10.98%.

CGV Research estimates that if PayFi captures 10% of the global digital payment transaction volume (a conservative estimate), its market size could reach $1.8 trillion by 2030, 20 times the size of the DeFi market ($87 billion). This indicates PayFi’s enormous market potential and its potential to play a significant role in the global digital payment sector.

Regulatory and Compliance Challenges

As global stablecoin issuance increases, central banks’ attitudes toward stablecoins are becoming more lenient. PayFi’s payment activities, primarily using stablecoins, are still subject to the regulations of sovereign currency systems.

Current PayFi projects focus on compliance, typically allowing only licensed institutions to participate, while individuals undergo stringent KYC processes. Additionally, many PayFi projects target developing countries where regulatory barriers are lower, reducing compliance risks.

Technical and Security Risks

Despite significant advancements in DeFi security, some issues remain unresolved. Security vulnerabilities have been identified and addressed through rigorous audits, ensuring that on-chain PayFi security is comparable to traditional DeFi.

However, technical challenges persist in off-chain components. Aligning on-chain and off-chain logic remains a challenge, with current solutions involving intermediary entities that require further refinement.

Conclusion

PayFi, as a new wave in payment finance, is reshaping the global financial ecosystem with its unique charm. It not only extends Bitcoin’s payment vision but also elevates the efficiency and inclusivity of financial services through blockchain innovation. Supported by high-performance public blockchains like Solana, PayFi’s market scale is expected to grow exponentially, becoming a major driver in the future financial market.

As Lily Liu envisions, PayFi will integrate RWA and DeFi, building an integrated value chain and forming a new financial cluster. This revolutionary innovation will advance the global financial system toward a more efficient and inclusive future.