The non-transactional nature of cryptocurrencies provides a sound basis for exploring the future of Web3

Written by: Zuo Ye

cryptocurrencyThe non-transactional nature of the Web3 ecosystem provides a soundtrack for exploring a way out

Compared with Ethereum’s separatist regimes, Solana’s ecosystem is smaller in scale but more dynamic. After the collapse of FTX, Solana successfully rose from the ashes by relying on high performance, strong marketing, and various hardware products.Second comeback.

Specifically, high performance refers to the Firedancer upgrade, strong marketing is the Meme season, and hardware is various Web3 mobile phones, but these are not enough. PayFi proposed by Lily Liu, chairman of the Solana Foundation, has also become a hot topic. Although the hot topics in July are a bit outdated in October, in the long run,The entire Web3 industry is shifting to off-chain and real consumption scenarios..

"Once upon a time, you owned me and I owned you."

This article is not a song for Solana, but a song for exploring the way out for Web3.

encryptionwalletThe unbearable regret: the forerunner of PayFi

Before giving Lily Liu’s definition of PayFi, let’s talk about Web3 wallet, from 2022 to 2023, with the development of smartcontractWallet, Account Abstraction (AA), andexchangeDue to the traffic anxiety, a number of Web3 wallets have ushered in the second peak after the 2017-2021 Tugou era.

fromexchangeFrom the perspective of Ethereum, wallets are the main entrance for people to interact with the chain, and traffic will flow in and out from there, and may even replace CEX. L2 As competition becomes increasingly fierce, wallets will surely be the main battlefield for aggregating liquidity in the multi-chain era.

However, the wallet ecosystem in 2024 is not eye-catching. OKX's built-in Web3 wallet is already a leader, but in most cases it has not become an independent product. One of the important reasons is that the Web3 wallet only has traffic but no closed-loop transaction mechanism, that is, the wallet cannot solve the profit problem. If a handling fee is charged, users will directly open the desktop product. Why not pay one less handling fee?

From a more "path-dependent" perspective, the problem with crypto wallets lies in their excessive pursuit of transaction features. Please note that this does not conflict with the above-mentioned profit problem. The core product feature of crypto wallets is to provide users with richer on-chain transaction feature support, from access to more chains to dApp recommendation mechanisms with more bidding ranking features.

However, users’ funds are not kept in encrypted wallets like in Alipay. The non-custodial mechanism can buy peace of mind, but it cannot win the users’ sincerity. In a word, encrypted wallets and Web2 wallets have nothing to do with each other. They neither manage money nor finance.

All of the above factors make it even more difficult for crypto wallets to establish their own closed-loop payment systems like PayPal, WeChat, and Alipay. From a broader business perspective, Web3 wallets only have users and no support from merchants. If dApps are considered merchants, then there are only a small number of merchants on the chain.

However, the wallet does have a large amount of traffic, and DeFi's on-chain gains or losses can indeed be converted into off-chain consumption. However, losses are also possible because it depends on whether it is based on ETH, stablecoins, or fiat currency.

A normal Payments requires support from both the merchant and user sides, but this is precisely the current shortcoming of the industry. Let us use the top male entrepreneur Chuan Bao to illustrate this problem. On September 19, 2024, Chuan Bao visited the PubKey bar in New York and bought beer for only 998 to entertain his supporters. Chuan Bao used Strike to initiate payment, and merchants used Zaprite to collect payment.

In this case, the merchant and Chuanbao do not use the same payment system, which is hard to imagine in the Web2 era. It is equivalent to Chuanbao using Alipay to pay and the merchant using WeChat to receive the payment. However, in Web3, it makes sense because both parties use the Bitcoin network as the settlement layer. Let’s sort out the workflow:

1. Chuanbao uses Strike to initiate a payment request. Strike calls the Lightning Network to start the payment process. The Lightning Network initiates the transaction after confirmation by the Bitcoin network.

2. The merchant PubKey uses Zaprite to collect payments, Zaprite uses the Lightning Network to confirm the payment status, and the Lightning Network completes the transaction after confirmation by the Bitcoin network.

In this process, Zaprite only charges a subscription fee of $25. Apart from that, merchants only need to deduct the miner processing fee, and the rest is their own income. We can compare it. Visa/MasterCard/AE, etc. require a handling fee of about 1.95%-2%, while the miner processing fee of Bitcoin has an average price of about $1.46 recently, and there is no handling fee at all for accepting Bitcoin.

We continue to extend forward.The logic of Web2 Payments is generally similar to that of Chuanbao buying beer, but there are quite a lot of intermediate links, which is also the drawback of Web2, and the opportunities of Web3 Payments and PayFi are also hidden therein.

Let's replace the concepts and products. The products we usually use, such as Alipay, WeChat Pay and Paypal, are e-wallets and are oriented to the C-end. The corresponding ones are the acquiring systems of B-end enterprises/merchants. As long as a funds clearing network similar to the Lightning Network is built, the simplest P2B (individuals and enterprises) interaction system can be built. Generally speaking, the clearing network in the middle needs to be jointly composed of card organizations and payment protocols.

Taking the above picture as an example, the Web2 payment system can be divided into P2P payment between individuals, P2B and B2B payment between individuals and enterprises, and payment between merchants. Banks can also conduct inter-bank transaction systems such as SWIFT or CIPS, or cross-border CBDC transaction systems such as mBridge.

However, it should be noted that payment, strictly speaking, occurs between individuals and businesses, and between businesses. We include P2P and interbank payment here to facilitate comparison with Web3 payment behavior. In Web3, the main scenario for payment behavior is between individuals. For example, Bitcoin is a peer-to-peer electronic cash payment system.

If we refer to the payment system of Web2, the payment system of Web3 is actually very simple. Of course, the theoretical simplicity cannot cover up the fragmentation of the ecosystem. An obvious feature is that the traditional payment system has many banks and few card organizations, so it has a strong network effect, while Web3 does the opposite.L2 There are many, but the main assets are only US dollar stablecoins and only a few types of products such as USDT/USDC.

Even with the most optimistic estimates, there are only about 30,000 merchants worldwide that support Bitcoin. Although there are big brands like Starbucks in some areas, in terms of acceptance, it is still not comparable to traditional card organizations or e-wallets.

Merchants that accept Binance Pay/Solana Pay are mostly online merchants, such as travel OTA platforms such as Travala. The number of merchants that can be expanded into card organizations on a large scale is still a little bit away from 100 million.

We will discuss the payment system in detail below, and now it is time to introduce the concept of PayFi.

The PayFi Stack: The intersection of DeFi, RWA, and Payments

The reason why the narrative structure of talking about Payments first and then introducing PayFi is adopted is because the differences between the two are very large. On the whole, PayFi is more like DeFi + stablecoin + payment system, and it is not closely related to Web2 Payments. As mentioned earlier, everyone can feel it.

Let’s start with Lily Liu’s explanation. PayFi uses the time value of money (TVM). For example, making a profit from funds in DeFi is the use of TVM. But the problem is that this may take time, such as staking.TokenTo obtain rewards, a lock-up period is usually required, but as long asToken, then there is the possibility of appreciation. In previous operations, after obtaining profits, you can invest them in DeFi again, and in this way, you can continue to look for the possibility of profit.

Now, this part of the income can be transferred to other directions, such as using the expected income for current consumption, for example:

1. Alice invests 100 USDXiaobai NavigationC. A financial product with an annual percentage rate (APR) of 5% can earn $105 in principal and interest after one year;

2. Bob runs a watermelon stall. In order to sell more watermelons, he now allows Alice to come here with a financial certificate to eat $5 watermelons. One year later, Bob can exchange the ticket for $5 of financial products.

This example is very simple, so simple that it cannot stand up to scrutiny. For example, how can Alice and Bob ensurecontractIf the plan is successfully implemented, what will happen if Alice's financial management income is reduced? However, without considering these, Alice can get the melon without paying any cost, and Bob gets $5 in accounts receivable.

A year later, the bull market came. Bob received a lot of $5 bills and was ready to become a supplier to large enterprises. After choosing and choosing, he saw Evergrande looking for someone to sell watermelons. The order was for $5 million. Bob was very happy, but Evergrande gave him a commercial bill. With the experience of cooperation with Alice, Bob happily accepted the commercial bill. The two parties agreed to pay cash in one year based on the bill. If not, he would use his house to pay off the debt.

However, after half a year, Bob was ready to enter the stock market and needed to cash in on the commercial bills. After being rated by PricewaterhouseCoopers, Evergrande's commercial bills were AAA-level high-quality assets. Banks, non-financial institutions, and even individuals in the market all wanted them. Everyone was scrambling to get them because Evergrande properties had quality assurance and great potential for appreciation.

Bob successfully sold the commercial bill at an excess price of 5.01 million. The bank got the commercial bill, Evergrande got something for free, and Bob got a bonus from the stock market. Everyone has a bright future. (Generally, commercial bills need discounts and handling fees to be cashed out. This is just to explain the process. Evergrande's commercial bills were only about 70% of their face value before the crash.)

Another meaning of TVM is the monetization of non-circulating assets. Even non-circulating assets themselves can be currencies or their equivalents. This is similar to the logic of re-pledge. For details, please refer toTriangular debt or mild inflation: an alternative perspective on restakingOne article.

In the context of Web3, the monetization of non-circulating assets can only be DeFi, so PayFi is a natural extension of DeFi, except that it extracts part of the liquidity of the previous on-chain Lego and invests it off-chain to improve life.

PayFi 和 Payments 的关系在于支付是满足资金下链的最简易和最便捷途径，PayFi 和 RWA 则互有交叉，只不过传统的 RWA 更强调是「上链」，比如所谓的代币化（Tokenization）流程，需要先将证券、黄金或者房产进行代币化，以满足链上流通的可能，国内更熟悉的很多联盟链就是干这个的，比如BlockchainElectronic invoice, or GXM, etc.

It is difficult to say that PayFi is a subset of RWA. A considerable part of PayFi's behavior is "off-chain". As for whether there is an on-chain link, it is not the focus of the PayFi concept. It's just that its behavior needs to involve interaction with off-chain links.

However, there is no need to worry about it. Many concepts of Web3 lack large-scale products and user groups. They are more about hyping concepts and selling coins. Roughly speaking, products involving PayFi/Payments and RWA can be divided into the following chronological order:

• Old era: Ripple, BTC (Lightning Network, BTCFi, WBTC), Stellar

• 2022 RWA Concept Three Musketeers: Ondo/Centrifuge/Goldfinch

• New Era-2024 PayFi: Huma (already established, will become popular in 2024), Arf

In fact, based on the above product development history, it is no problem for you to say that PayFi is the successor of RWA. The traditional narrative, especially the business model of on-chain funds lending to off-chain entities, is PayFi in 2024, and in 2022 they are all called RWA.

We can even say that lending in RWA, cross-border settlement similar to Ripple, and off-chain consumption of stablecoins constitute several aspects of current PayFi. In essence, these are the only contents.

It can be said that Web3 software and hardware are built on the material and ideological foundation of Web2, and so is Web3 PayFi. Its similarities with Payments are actually greater than its differences, and lending products are actually more from the perspective of capital flow. If off-chain products can have more returns, then these returns can also be used for payment behavior.

Being misunderstood is the fate of the expresser. I don’t know whether Lily Liu agrees with this interpretation, but I think only in this way can the logic be smooth. As long as the on-chain income is used for off-chain consumption scenarios, it conforms to the PayFi concept. Therefore, the next focus of the market will be Web3 Payments, RWA Loans and stablecoins. In fact, the three can often be included in a cyclical process.

For example, RWA corporate lending is priced in U-standard. Individuals enter the lending pool on the RWA chain through the DeFi protocol. The RWA lending protocol lends to physical enterprises after evaluation. After recovering the accounts receivable, LP obtains a share of the profits from the protocol and withdraws funds through the Mastercard U card. The merchant happens to support Binance Pay, creating a perfect closed loop.

History belongs to the pioneers, not to the summarizers.It doesn’t matter how PayFi is defined. The top priority is to explore the real benefits beyond the internal circulation of the DeFi chain. The demand from billions of people off-chain will bring more abundant liquidity and higher leverage valuation support to the chain. Whoever can make it work can define the market.

The article comes from the Internet:The non-transactional nature of cryptocurrencies provides a sound basis for exploring the future of Web3

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