ArkStream Capital: How PayFi Unlocks a New Chapter in Crypto Payments
TL;DR
- The stablecoin market continues to grow, and crypto payments will not completely replace the traditional fiat system.
- The true value of PayFi lies in promoting the application and innovation of crypto assets in real-world scenarios.
- Solana is not the only option for the PayFi or crypto payment sector. Ton Network and Sui, with their respective advantages, could overtake Solana.
- The PayFi sector holds great potential, and as a multi-sector, compound innovative application, its market cap could exceed tens of billions of dollars.
In recent years, the crypto payment sector has been continuously evolving. From the early misconception that crypto payments were tools for gray markets, to Stripe’s acquisition of stablecoin platform Bridge, and the entry of giants like PayPal and Visa into the field, the landscape has drastically changed. PayFi, a new concept that has recently emerged, has garnered widespread attention.
To better understand the future prospects of this sector, ArkStream has conducted a simplified analysis of the crypto payment space, focusing on how PayFi iterates and transforms this space, thereby exploring its future direction.
The Crypto Payment Sector
Since the birth of Bitcoin in 2008, crypto payments have evolved from small-scale transactions among tech enthusiasts to widespread commercial adoption by global merchants. With regulatory intervention and compliance development, a diversified and platform-based payment ecosystem has emerged. Today, as technology matures and application scenarios expand, crypto payments are gradually integrating into the traditional financial system, offering users more efficient, low-cost, transparent, and decentralized payment solutions, heralding a new wave of fintech innovation.
Behind this innovation, stablecoins serve as the bridge connecting cryptocurrencies and fiat currencies, providing a foundation for the widespread application of crypto payments through stable value storage and efficient on-chain circulation. Understanding the stablecoin market is key to interpreting the entire market.
Overview of the Stablecoin Market
Undoubtedly, the popularity of crypto payments is directly tied to the stablecoin market. These charts (total stablecoin supply and individual market shares) reflect a long-term global growth trend. USDT and USDC, the two stablecoin giants, control 90% of the market, with USDT taking the lead with a 70% market share, exhibiting a steady upward trend.
We also investigated the distribution of USDT and USDC across different chains. USDT is issued on 13 chains, with Tron leading with over 50% of the issuance, followed by Ethereum and Solana. The top four chains account for nearly 99% of the total issuance. In contrast, USDC is more concentrated, with about 92% issued on Ethereum, followed by Solana, Tron, and Polygon.
It’s clear that ETH and Solana remain the primary use cases for stablecoins. The continuous growth of the stablecoin market, combined with the entry of traditional payment industry leaders, proves that the crypto payment sector is taking shape with a scalable operational system. It also demonstrates that the market acknowledges the application scenarios for stablecoin payments.
To better understand the mechanisms behind crypto payments, we will next analyze the four-layer architecture of crypto payment solutions, which ensures the security, scalability, and user experience of crypto payments.
Crypto Payment Solutions
Crypto payment solutions consist of a four-layer architecture:0
- Settlement Layer: The foundational public blockchains such as Layer 1s and Layer 2s like Optimism and Arbitrum. They differ slightly in terms of speed, scalability, and privacy but essentially trade block space.
- Asset Issuance Layer: Responsible for creating, maintaining, and redeeming stablecoins, ensuring stable value pegged to fiat or a basket of anchored assets. Issuers profit by investing in stable-yield assets like government bonds.
- On/Off Ramp Layer: Facilitates the bridge between blockchain stablecoins and fiat systems, commonly seen in B2C and C2C platforms.
- Interface/Application Layer: Provides software interfaces to users for crypto payments, often driven by traffic and transaction volume from the front end.
State of the Crypto Payment Sector
- Traditional Payment Giants Enter the Market As the crypto market expands yearly and the approval of ETFs draws closer, traditional payment giants and native crypto payment projects actively develop and expand their businesses. Visa extended USDC settlement to Solana in 2023, providing more efficient cross-border payments and real-time settlements.
Visa, through its multi-layer partnerships, is constructing its crypto payment ecosystem.
- At the asset issuance layer, Visa collaborates with Circle, using USDC for settlement.
- At the on/off-ramp layer, Visa partners with Crypto.com, allowing users to transfer funds between fiat and crypto.
- At the application layer, Visa offers USDC settlement options to acquiring institutions like Worldpay and Nuvei, enabling merchants to handle crypto payments flexibly.
- At the settlement layer, Visa chose Solana for its blockchain infrastructure, leveraging its high throughput, predictable fees, and fast block confirmations for more efficient on-chain settlements.
By integrating these systems, Visa eliminates its reliance on traditional banking settlements. This integration allows users to settle directly on the blockchain using USDC, reducing intermediaries, shortening settlement times, and lowering costs. This move showcases how crypto payments can revolutionize the traditional payment system and offers a new perspective on future global payment networks.
Likewise, PayPal has also selected Solana as the new blockchain for its PYUSD payment system and is actively promoting blockchain-based payment methods. PayPal’s vice president has repeatedly emphasized Solana’s performance in high throughput and low latency, making it an ideal infrastructure for crypto payments. While these traditional giants may not understand blockchain as well as native Web3 players, their massive user bases and resources enable them to quickly enter and capture market share.
- Native Crypto Payment Projects Compared to these traditional giants, native crypto payment projects drive business development through more innovative approaches. Here, we have compiled a list of crypto payment-related projects within the Binance exchange.
- Ripple (B2B Cross-border Transactions) Ripple has raised nearly $300 million in total funding, backed by prominent investors like a16z, Pantera, Polychain, and IDE. Ripple currently has about 6 million active accounts, with over 300 partner institutions spread across 50 countries. XRP is the native token of the Ripple Network. Ripple, as a Layer 1 blockchain, focuses on the B2B market and aims to build a decentralized payment settlement and asset exchange platform, collaborating with global banks to construct CBDC ecosystems.
Ripple uses the RPCA consensus algorithm, and its RippleNet is built on the XRP Ledger, offering solutions such as xCurrent, xVia, and xRapid to improve cross-border fund transfers and liquidity. These technologies enable Ripple to partner with traditional financial institutions like Bank of America and Credit Suisse. Compared to the traditional SWIFT system, Ripple offers significant advantages in transaction speed and cost, completing transactions at less than 1% of the cost of traditional cross-border payments in just a few seconds.
It is estimated that XRP users conduct around 150,000 transactions daily, with an average daily active user count of over 10,000. Ripple’s development has not been without challenges, as it faced a lengthy lawsuit from the SEC, accusing it of unregistered securities offerings. The lawsuit was only recently dismissed by the SEC.
- Alchemy Pay Alchemy Pay has raised $10 million from investors such as DWF and CGV. Its recent partnership with Samsung Pay, introducing virtual cards, has reignited public attention. Alchemy Pay integrates foundational payment protocols like Lightning Network, State Channels, and Raiden Network, building a hybrid payment architecture combining on-chain and off-chain elements. The on-chain component handles ledger management and data storage, while the off-chain component processes intensive tasks like verification and reconciliation. This architecture allows Alchemy Pay to offer custom solutions, including fiat on/off ramps, NFT quick purchases, crypto credit cards, and crypto payments.
According to a third-party report on the ACH ecosystem, Alchemy Pay’s ecosystem connects four key sectors: payments, merchant networks, DeFi, and trusted assets. Its partners include industry leaders like Binance, Shopify, Visa, and QFPay, highlighting its broad reach across the entire payment chain.
Unlike XRP, Alchemy Pay’s token (ACH) is not used as a medium for crypto transactions. Instead, it offers cashback rewards for users with every payment, similar to traditional credit card reward programs, enhancing real-world payment scenarios and improving user loyalty.
ArkStream believes that both traditional industry giants, leveraging their vast resources and global networks, and native crypto payment projects, with their decentralized architectures and token economy models, are driving industry development in different ways. Traditional giants have strong market influence and compliance advantages, while native crypto projects excel in technological innovation and rapid iteration. Recently, we also witnessed Stripe’s acquisition of Bridge, marking the largest acquisition in crypto history. We look forward to these two forces working together, combining traditional industry resources and scalability with crypto’s innovation mechanisms, pushing the entire payment industry towards digitalization, cost reduction, and increased efficiency.
Challenges in the Crypto Payment Sector
- Unstable Transaction Costs: While the original goal of crypto payments was to reduce intermediaries and transaction costs, in practice, fees are not always cheaper than traditional payments. Transaction fees often surge during network congestion, especially on major blockchains. In contrast, traditional payment tools like credit cards or third-party payment platforms offer more stable rates, and many everyday transactions’ fees are covered by merchants (similar to free shipping models), making them more acceptable to users due to lower perceived costs.
- Limited Processing Capacity: While blockchain’s decentralization and consensus mechanisms ensure system transparency and security, they also severely limit network processing capacity. Because blockchain requires global consensus across nodes, transaction speed is constrained by block size and confirmation time. Although Layer 2 solutions like the Lightning Network, improved cross-chain communication, and sharding technology may bring breakthroughs, even the best-performing blockchain, Solana, struggles to match Visa’s capacity in terms of TPS. For high-frequency, low-value payment scenarios, current crypto payment networks still face significant bottlenecks.
- Lack of Application Scenarios: While crypto payments have managed to cover basic real-world needs such as daily consumption, transfers, and cross-border payments, more complex business scenarios commonly found in mature financial markets — such as lending, insurance, leasing, crowdfunding, and asset management — still rely on traditional financial systems. Crypto payment penetration in these areas is non-existent.
ArkStream attributes this to the fact that crypto technologies and product applications tend to prioritize the interests of existing users within the crypto ecosystem, neglecting broader market demand. Whether it’s Alchemy or Visa, their focus on blockchain remains on fiat on/off ramps, crypto debit cards, and peer-to-peer crypto payments. To achieve mass adoption, ArkStream believes project teams need to focus on user demands outside the crypto ecosystem, especially unlocking more application scenarios and building a comprehensive crypto payment ecosystem.
Lily Liu, chairwoman of the Solana Foundation, recognized this market gap and introduced the concept of “PayFi” at the Hong Kong Web3 Carnival in April 2024 to address these challenges and promote the widespread adoption of crypto payments.
PayFi: A New Chapter in Web3 Payments
Introduction to PayFi What exactly is PayFi? PayFi is not an independent concept but rather an innovative application that integrates Web3 payments, DeFi, and RWA (Real World Assets).
- RWA: This involves tokenizing real-world assets and seamlessly transferring their value on-chain, using smart contracts to build transaction and settlement processes.
- DeFi: Focuses on revolutionizing traditional financial products by decentralizing on-chain economies, with innovations like AMMs (Automated Market Makers), flash loans, and liquidity mining, which mainly revolve around trading.
- Web3 Payment: Primarily focuses on using cryptocurrencies as a medium for payments, such as cross-border remittances and crypto payment cards, enhancing the efficiency of traditional financial systems.
However, PayFi is not equivalent to RWA, Web3 Payment, or DeFi. ArkStream believes that its true significance lies in promoting the application of digital assets in real-world scenarios. More precisely, PayFi builds upon the foundation laid by RWA and Web3 Payment and extends DeFi’s innovative applications to the real world.
Core Concepts of PayFi PayFi’s two main concepts are:
- Tokenization of Real-World Assets: Since transaction and payment scenarios are rooted in real life, the key to realizing PayFi is tokenizing traditional payment scenarios on-chain. By tokenizing stable, low-risk assets, DeFi can provide transparent capital, high liquidity, diverse strategies, and high returns, while RWA offers a wider range of asset categories and stable, anchored yield sources.
- Unlocking the Time Value of Money: Another crucial concept of PayFi is maximizing the time value of money efficiently and at minimal cost using smart contracts and the decentralization of blockchain. For example, users can manage and invest funds without intermediaries, with applications like on-chain lightning lending markets, installment payment systems, and automated investment strategies. The goal of these applications is to reduce opportunity costs, allowing capital to quickly enter the market for reinvestment or other uses.
Here, we can quantify the value created by PayFi using a simple mathematical model, focusing on the opportunity cost lost due to returns on capital:
- Let P be the prepayment amount and r the interest rate. Assuming traditional cross-border payments take 3 days while crypto payments take 3 minutes, we can calculate the opportunity cost in both cases:
Opportunity cost (Traditional payment) = P × r × 3
Opportunity cost (Crypto payment) = P × r × (3/1440)
The difference between the two is the interest for those 3 days. From this simple reasoning, it’s evident that the gap in opportunity costs increases as prepayments and interest rates rise. This efficiency improvement is especially pronounced in high-frequency, large transactions, and in environments with rising interest rates.
Blockchain Options for PayFi Currently, many crypto payment projects are built on Solana, which has become the main platform for PYUSD with a market share of 64%, far surpassing Ethereum’s 36%. Stablecoins compliant with MiCA standards, such as EUROC and EURC, are also set to launch on Solana’s ecosystem.
So, why do both traditional finance and native crypto projects prefer Solana for development? After analysis, we summarized the following key factors: high-performance blockchain, capital liquidity, and talent flow.
- High-performance Blockchain: Solana’s core competitiveness lies in its high performance, with a recorded TPS (transactions per second) among the highest in the blockchain space. Its consensus mechanism and low gas fees give it a significant performance advantage over most Layer 2 solutions.
- Capital Liquidity: Solana’s ecosystem has garnered $61 billion in staked capital, and investments from top venture capital firms like a16z and Polychain Capital further strengthen market confidence and competitiveness.
- Rich Application Ecosystem: Solana boasts a wide range of consumer-facing applications, from Sanctum debit cards to Helium SIM cards and Solana’s official smartphone, surpassing the application ecosystems of other blockchains.
Most Layer 2 projects, such as Optimism, zkSync, and Lightning Network, or Layer 1s like Polygon, Monad (yet to be launched), and Aptos, claim to offer better TPS and scalability. However, according to data, most L1 and L2 projects’ peak TPS records don’t come close to Solana’s.
Despite Solana experiencing several major outages since its mainnet launch in 2020, ArkStream believes that no chain is likely to replace Solana in the short term. However, we also see Sui and TON emerging as potential contenders, offering unique advantages for the future of crypto payments.
Sui: Parallel Processing + Innovative Ecosystem Sui, as a next-generation blockchain, adopts a DAG architecture and parallel processing. Unlike Solana, which excels in high-frequency trading and DeFi, Sui focuses on addressing network bottlenecks in large-scale user interactions. This explains why GameFi and more complex contracts may benefit from Sui’s parallel computing capabilities and scalability.
Although Sui has yet to attract significant capital like Solana, and its peak TPS is less than half of Solana’s, its development team boasts extensive experience in payment systems and decentralized applications. In the future, it may attract more innovative projects to develop within its ecosystem. For PayFi, Sui’s parallel processing capabilities could be advantageous in applications requiring intense user interactions.
TON: Community + Payment Bridge TON originated from Telegram, optimized for large-scale community communication and micropayment transactions. Unlike Sui and Solana’s technical paths, TON focuses on low latency and high scalability. Its sharding architecture supports a large volume of small payment transactions and has already been integrated into Telegram’s user ecosystem.
TON’s greatest potential lies in its massive user base, with 900 million monthly active users and integrated mini-app functions. TON acts as a bridge between Web2 and Web3, offering PayFi projects a large ready-made market through social payments and micropayments.
Although Solana currently leads the PayFi market with its proven high performance, extensive DeFi ecosystem, and capital advantages, the future of crypto payments is likely to be multi-chain. Sui’s parallel processing capabilities and innovative application scenarios, combined with TON’s broad use in social payments, have the potential to disrupt the existing crypto payment landscape.
Whether PayFi project teams choose to build on Sui or TON may ultimately depend on their product needs, market positioning, and go-to-market (GTM) strategies. However, the future richness of multi-chain and application scenarios undoubtedly offers PayFi projects more opportunities.
Business Model and Application of PayFi
PayFi, first introduced in April 2024, currently has a limited number of projects. We categorize the existing PayFi projects into two main areas: cross-border trade and credit finance.
Huma Finance — Product Overview Huma Finance is currently a focal point in the PayFi sector. Its primary business focuses on PayFi applications for both consumer (B2C) and small-to-medium-sized enterprises (SMEs). Huma recently acquired Arf, a company aimed at solving the liquidity and timing issues of pre-funded capital in cross-border payments.
Arf’s vision is to address the liquidity challenges of pre-funded capital and timing in cross-border payments. Through Arf’s platform, trust between buyers and sellers is secured without the need for banks’ prepayments or traditional instruments like letters of credit. Arf provides peer-to-peer services, building an on-chain liquidity network that supplies stablecoins to businesses in advance, eliminating the need for prepayment. Companies using Arf’s services simply pay fees and repay Arf within the agreed timeframe.
Huma Finance’s core business revolves around the “Buy Now, Pay Never” concept, as described by Lily Liu. The key idea is that customers can use their accounts receivable as collateral. Huma tokenizes these receivables through its protocol, allowing clients to borrow from a loan pool, with enforcement handled by smart contracts on-chain. Potential areas for expansion include trade finance, 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
- Application Layer
These layers cover everything from transaction processing to asset management, financing, and compliance, ensuring that the entire process — from loan application to payment — is completed within a single ecosystem. By automating and decentralizing various layers, PayFi significantly simplifies the complex processes of lending and payments, enhancing efficiency and reducing costs.
Data Analysis To date, Huma Finance has facilitated $1 billion in total loans without any defaults. As the leader in the PayFi sector, Huma Finance has raised $38 million in funding.
The Future of PayFi and Its Market Potential After introducing PayFi-related projects, we have also explored its potential application across regions. ArkStream believes that PayFi has the potential for global mass adoption, with promising opportunities not only in developed markets but also in emerging markets.
- Developed Markets Strategy: In developed countries, PayFi can leverage its DeFi innovations to supplement existing digital payment systems. With clearer regulatory frameworks and policy support (e.g., USDC, PYUSD, EUROC), these countries have already widely adopted stablecoins. Identifying suitable entry points, such as partnerships with retailers, e-commerce platforms, or cross-border financial platforms, could help accelerate the adoption of PayFi in these markets by building low-cost, high-efficiency payment channels.
- Opportunities in Emerging Markets: In regions lacking traditional financial services, PayFi can offer products such as crypto microloans and lightning loans. The decentralization and cross-border convenience of crypto payment systems can provide financial services to the “unbanked.” For example, in regions like Africa, Southeast Asia, and Latin America, or in countries with high inflation (e.g., Nigeria, Argentina), where traditional financial infrastructure is lacking, PayFi products could achieve large-scale adoption faster than in developed markets.
ArkStream concludes that PayFi should pursue a dual-track development strategy:
- In developed markets, focus on iterative improvements to existing applications and building partnerships.
- In developing markets, drive adoption of crypto payments and PayFi applications, as well as penetrate cross-border remittance markets.
Market Outlook Although the concept of PayFi is relatively new and the number of projects is still limited, ArkStream believes PayFi holds significant potential for future growth. Both the development of crypto payment projects and external economic factors are highly favorable to PayFi.
Over the past few years, rising interest rates in the U.S. have drawn attention to bond-related products, with many crypto users moving their funds into tokenized bond markets due to the stability, liquidity, and relatively high returns offered by these assets.
According to data from RWA.XYZ, the market for tokenized U.S. Treasury bonds has grown from $770 million at the start of 2024 to $1.916 billion as of August 1, 2024, a 248% increase.
As the U.S. begins to lower interest rates, reducing reliance on Treasury yields, investors are looking for new, sustainable, and stable sources of returns. PayFi, in conjunction with the rise of the RWA model, is perfectly positioned to meet this demand. The total value locked (TVL) in the RWA sector currently stands at $6 billion and continues to rise. The essence of RWA is to bring real-world assets (e.g., bonds, receivables, supply chain finance) on-chain via tokenization, offering investors more diverse options while enhancing asset liquidity.
Here are three potential RWA projects:
- MakerDAO RWA: Provides traditional assets like real estate and receivables, combined with MakerDAO’s DAI stablecoin, effectively linking off-chain capital demands with on-chain liquidity. It’s currently the top-ranked RWA protocol in terms of TVL.
- Tether Gold: Offers a gold-backed token, allowing investors to invest in gold via cryptocurrency without physically holding the asset.
- Ondo Finance: Provides risk-tiered financial assets on-chain, such as U.S. Treasury bonds and corporate bonds, where investors can allocate funds based on their risk tolerance. With falling Treasury yields, Ondo’s corporate loan offerings could be more attractive to investors.
Conclusion At present, the number of projects in the PayFi sector is extremely limited, and most are still in their early stages. Therefore, we are focusing more on the innovative solutions offered by PayFi projects.
From a business model perspective, PayFi combines elements of crypto payments (e.g., Ripple, Stellar), DeFi lending (e.g., AAVE, Compound), and RWA (e.g., MakerDAO RWA, Ondo Finance). These sectors have already proven the feasibility of their business models, demonstrating both market demand and growth potential. By looking at the market capitalization of these sectors, it’s reasonable to predict that PayFi, as a composite innovation business model, could see even greater growth. Considering that the market leaders in crypto payments, credit financing, and RWA already have market capitalizations in the tens of billions to hundreds of billions of dollars, we can speculate that with the unlocking of more scenarios — such as cross-border payments, supply chain finance, and corporate financing — the overall market capitalization of the PayFi sector could surpass even those figures.
From a product perspective, future PayFi development should focus on specific payment scenarios, optimizing efficiency and user experience in these areas. Without a doubt, PayFi represents one of the few remaining blue ocean markets, but there is still a lack of significant application projects. We call for more developers to leverage existing crypto payment technologies, address global market demands, and innovate based on real-world needs.
For example, at this year’s TOKEN2049 conference, we saw TADA’s collaboration with Ton Network, which uses crypto payments and profit-sharing to lower ride-hailing commissions, giving it an edge over other ride-hailing platforms. We also observed that
is developing a crypto payment card, with their Cash product offering not only traditional crypto payment functionality — allowing users to spend their crypto assets — but also enabling users to use staking rewards to repay their spending.
These real-world breakthroughs showcase PayFi’s enormous global potential. Project teams shouldn’t focus solely on finding the next high-yield “liquidity pool” for on-chain capital. Instead, they should focus on how to bring the convenience of PayFi to traditional industries, further increasing crypto market penetration by addressing pricing, product offerings, and user-centric approaches.
In the future, we may see financial products that traditional financial systems cannot offer, such as:
- Instant Loans: Through PayFi, users could secure loans with crypto collateral faster and at better rates than through traditional channels.
- Advance Consumption & Investment: Without incurring debt, users could make purchases or investments before their income cycle begins.
- High-yield Liquid Capital: With staking and liquid staking, users could enjoy yields of 10% or more while maintaining liquidity.
- Advance Payment of Interest on Fixed-term Financial Products: Users could use future interest earnings as liquid capital before financial products mature.
All these innovative products embrace the core principle of “time is money,” maximizing the value of time. We understand that PayFi is neither an impractical fantasy nor just a “crypto insider’s party.” From both a practicality and innovation perspective, PayFi is gradually bridging the gap between crypto and traditional finance. ArkStream, as a long-term investor, recognizes PayFi’s potential and even envisions a future where banking services are no longer necessary.
These innovations, combining DeFi and real-world applications, further demonstrate PayFi’s immense potential to unlock capital efficiency. ArkStream believes that the long-term prospects for PayFi are limitless.
Reference
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https://www.feixiaohao.com/news/12951184.html
https://l2beat.com/scaling/activity
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https://app.rwa.xyz/treasuries
ArkStream Capital is a venture capital firm specializing in early-stage investments in Web3 unicorns.
Founded by crypto experts with pedigrees from MIT, Stanford, Tencent, Google, and BlackRock, ArkStream leverages eight years of deep Web3 expertise to drive the zero-to-one growth of its portfolio companies.
ArkStream Capital is managing a portfolio of over 100 companies, including Aave, Flow, Sei, Manta, Fhenix, Merlin, Particle Network, and Space and Time.
