PayFi - Trillion Track, a New Force in Global Financial Pattern Transformation?

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137 Labs2024/10/18 08:45

By:137 Labs

On October 17th, 2024, 137Labs, together with Polyflow, Ample FinTech, and Fiat24, jointly held the X Space event with the theme of " PayFi - Trillion Track, a New Force for Global Financial Pattern Transformation?" This event brought together many experts and industry veterans from the Web3 field to deeply explore the future development direction and innovation opportunities of the PayFi track.

Preface

PayFi, as a new concept in the field of financial technology, is gradually reshaping the global payment and finance landscape by combining decentralized finance (DeFi), encrypted payments, privacy protection and other technologies. In this discussion, Will from PolyFlow, BC from Ample FinTech, Fiat24 co-founder 902 and Zuo Ye shared their in-depth insights into encrypted payments, government digital currencies (CBDC) and stablecoin games, as well as the balance between privacy and compliance.

The guests discussed the technological innovation, future challenges, and participation opportunities for ordinary users in the PayFi ecosystem. Through the exploration of cutting-edge technologies such as Layer 2, privacy technology, and cross-border transfer solutions, this event provided us with in-depth analysis and revealed how PayFi occupies a place in the global financial ecosystem.

Through this article, you will learn how PayFi, as an important force in the future financial technology field, has made breakthroughs in technological innovation and global regulatory frameworks, and brought more opportunities for participation and change to ordinary users and enterprises.

The following is the content precipitation of this Space

What are the global acceptance and usage scenarios of stablecoins, and what are the advantages of stablecoins in cross-border transfers and remittances?

902 (Fiat24 Co-founder) stated that stablecoins have technological advantages in global applications, especially in cross-border transfers and remittances. Through Blockchain technology, payment efficiency has been significantly improved, and it has theoretical unlimited scalability without the need for a large amount of human maintenance.

However, the global acceptance of stablecoins is still low. Currently, only a few US dollar stablecoins (such as USDT and USDC) have reached global scale, while non-US dollar stablecoins (such as the euro) are far behind the US dollar in market share and trading volume.

An ideal stablecoin should have the following characteristics: real-time global transfer based on blockchain, interest income (such as the calculation of the Federal Reserve interest rate), and can be directly used in real-world payment networks such as Swift and Visa . Fiat24's stablecoin is an example, both based on ERC20 and available for real consumption.

BC mentioned that stablecoins have shown obvious efficiency advantages in cross-border transfers and remittances. Compared with the cumbersome processes of traditional payment systems such as Swift and intermediary lines, stablecoins have fast payment speed and low fees, solving many pain points in traditional cross-border transfers.

In terms of global acceptance and practical application, BC shared several real-life cases.

Stablecoins have been widely used in some fields, especially in Ukraine's foreign trade, where 30% of transactions are settled in stablecoins, and even self-published fiat stablecoins.

In trade between Russia and China, stablecoins have emerged as a solution to circumvent the Swift system due to Russia's sanctions, enabling cross-border transfers through third-party countries such as Singapore and Hong Kong.

On the regulatory level, BC mentioned that regulatory agencies in places such as the United Kingdom and Hong Kong have begun to promote the compliance of stablecoins. In the future, the use of stablecoins will not be limited to cryptocurrency speculation, but will also be used for practical applications such as trade and e-commerce, such as enterprise settlement and consumer payment.

Will highlighted four major advantages of blockchain-based stablecoins in cross-border transfers during the discussion:

Real-time settlement: the synchronization of fund flow and information flow can achieve second arrival, greatly improving payment efficiency.

Low cost: The cost of on-chain transfer is extremely low, especially compared to the high fees of the traditional banking system, it has obvious economic advantages.

Operating 24/7 : Blockchain can operate 24/7 without being restricted by bank business hours.

Global Reach: Blockchain technology can achieve global fund transfer, especially in cross-border trade has great application space.

In specific application scenarios, stablecoins can be used to bypass the Swift system, especially in the crude oil trade of sanctioned countries (such as Venezuela). Payment settlement through the US dollar stablecoin not only improves transaction efficiency, but also solves the limitations of traditional payment systems in these countries.

In addition, in regions with economic turmoil, such as Africa and Latin America, stablecoins in the US dollar are popular due to their advantages in combating currency depreciation. Will also mentioned that stablecoins with interest income (such as USDY launched by Ondo Finance) can not only participate in payments, but also provide US bond income, further enhancing the attractiveness of stablecoins.

Zuo Ye added the advantages of stablecoins in the payment field, especially the obvious improvement compared to the traditional Web2 Global Payment system.

Process simplification and cost reduction.

The traditional Global Payment system has a cumbersome process, while Web3 payment is developed on the chain with a simple architecture and only relies on the network's gas fee. With more and more public chains exploring gas fee-free transactions, the cost of stablecoin transfers will be further reduced in the future.

Solution to foreign exchange shortage problem:

Zuo Ye shared his experience in African lending business, pointing out that many regions lack foreign exchange (such as the US dollar) and face currency shortages when trading with foreign countries. Stablecoins have become an effective alternative to help these regions achieve convenient settlement in global trade.

What is the current application status of encrypted payment in the Web3 ecosystem, and what are the technical foundations and innovative trends in the payment finance track?

902 (Fiat24 Co-founder) shared the application status of blockchain-based payment system in the Web3 ecosystem from the case of Fiat24, and pointed out its technical foundation and innovation trend:

Successful application cases of encrypted payment:

Fiat24 applies blockchain technology to a system similar to traditional bank accounts, where all ledger data is recorded on the blockchain, greatly reducing back-end operating costs, especially the complexity of ledger reconciliation. The use of blockchain technology makes payment systems more efficient and provides users with more product and service choices.

Technical foundation and innovation trends:

Fiat24 was first developed on the Stellar blockchain, but because it did not belong to the EVM ecosystem, it was eventually transferred to the EVM-compatible Layer 1 network. However, the high gas fees and slow transaction speeds of Layer 1 (such as NFT minting fees of up to $200 and transaction confirmation taking 15 minutes) make it difficult to achieve commercial-level performance.

It was not until the emergence of the Layer 2 solution that Fiat24 was truly able to achieve commercial-level encrypted payments, especially through this year's Ethereum Cancun upgrade, which reduced gas fees and improved transaction processing speed. The future 7702 upgrade will further optimize the ecosystem, allowing users to avoid paying gas fees.

BC 's answer focused on the application scenarios of encrypted payments in the real world, especially the use of stablecoins in developing countries such as Africa. He pointed out that although some countries (such as Ghana) have launched central bank digital currencies (CBDCs), stablecoins are more popular in practice because local currencies are often unstable, and many people prefer to use US dollar stablecoins for transactions.

In terms of technological foundation and innovation trends, BC mentioned the potential importance of privacy payment technology. Although it is not difficult to achieve privacy payment technically, compliance remains a key challenge. BC proposed a compromise solution that can achieve payment privacy while allowing regulatory agencies to access records when necessary, which is crucial for practical applications.

In addition, BC emphasized the need for privacy protection for enterprises. For enterprises, public e-commerce transaction information may be exploited by competitors, so he expects breakthroughs in privacy payment technology to better meet real-world business needs. This is also an important development direction for the future encrypted payment field.

Will emphasized the importance of architecting payment processes on the blockchain with the Polyflow project. Compared to centralized encrypted payment solutions, on-chain deployment can bring stronger transparency and security, especially in fund custody and integration with DeFi.

Advantages of on-chain deployment:

Seamless integration with DeFi and encrypted wallets: On-chain deployed payment systems can directly interact with decentralized finance (DeFi), making payment processes more flexible.

Transparency and Security: Centralized institutions' encrypted payment cards rely on custodial bank accounts, which poses a risk of funds being misappropriated or running away. On-chain custody ensures that all transactions are open and transparent, and users can view the flow of funds in real-time, reducing trust issues.

Innovation scenarios and compliance:

Polyflow's on-chain hosting solution not only improves fund security, but also alleviates compliance pressure on payment projects. On-chain hosting can better adapt to regulatory requirements and provide safer fund management for PayFi.

On-chain assets can also seamlessly integrate with DeFi scenarios, promoting innovation in the payment field and driving the emergence of new payment scenarios, such as automated Financial Services or smart contract payment solutions.

Zuo Ye 's addition mentioned privacy issues and the practical application of Lightning Network in encrypted payments:

Technological progress in privacy protection:

Zuoye mentioned that privacy protection is a key challenge when institutions go on the chain. Full homomorphic encryption (FHE) technology can hide transaction information on the chain, thereby addressing institutions' concerns about data privacy. This is very attractive to institutions involved in real-world assets (RWA) and PayFi, providing them with new possibilities when going on the chain.

Practical Applications of Lightning Network:

Currently, the most widely used Web3 payment is the Lightning Network, especially in off-chain payment scenarios. For example, Argentina and Latin America have already implemented extensive payment applications through the Lightning Network. Zuo Ye also mentioned that the payment system used by Trump when selling beer in New York in September is based on the Lightning Network payment product.

The game between government digital currency and decentralized stablecoins

902 discussed the competition and cooperation between national bank digital currencies (CBDC) and decentralized stablecoins, and put forward the following insights:

The Evolution and Challenges of Currency Forms:

The current monetary system includes three forms: cash, coins, and digital currency in electronic banks. Decentralized stablecoins (such as ERC20 tokens) are considered the fourth form of currency, posing a huge challenge to the existing monetary system. Governments around the world attach great importance to coinage rights because they are closely related to national interests and control.

Policy differences between the US and other countries:

The US is very torn in dealing with stablecoin issues. On the one hand, USDC and Tether hold a large amount of US government bonds, which is in line with the US's vested interests; on the other hand, stablecoins bypass the US's long-established Anti Money Laundering regulatory system and challenge the global dominance of the US dollar.

US policy may encourage the private sector to develop stablecoins, especially if Trump promises not to promote CBDC. This can maintain the global hegemony of the US dollar and allow the US to continue to control the global financial system.

Unlike the US, China chose to ban the private sector from publishing stablecoins and instead launched a government-led CBDC (digital RMB). The different strategies of these two countries demonstrate the game between two political systems in the stablecoin field.

The key to the global game:

902 believes that the game of global stablecoins is mainly concentrated in the US and China, and the influence of other countries is relatively small. The competition between the US and China in the field of stablecoins and CBDC will determine the future development direction of the global financial landscape.

BC had an in-depth discussion of this issue, pointing out several key points:

Different forms of CBDC technology:

The implementation methods of CBDC vary from country to country. China's CBDC is basically a centralized system, similar to a database, without truly utilizing blockchain technology. Australia's pilot project is based on Ethereum's published ERC20 token, which can interact with smart contracts, which is closer to a decentralized stablecoin. In addition, the Hong Kong Monetary Authority has designed a dual-layer architecture, with the first layer being a centralized database and the second layer being a UTXO-based blockchain system.

The relationship between CBDC and decentralized stablecoins:

Currently, CBDC and decentralized stablecoins are gradually transitioning from a confrontational relationship to a cooperative one. In the future, many countries may allow CBDC and stablecoins to be exchanged in a compliance environment. Although from a credit perspective, CBDC enjoys the highest level of credit (endorsed by the central bank), while stablecoins have latent risks such as defaults, the two may coexist through some kind of cooperative mechanism, especially in specific compliance scenarios.

Stablecoins vs. CBDC vs. Swift System:

China is not only promoting CBDC domestically, but also developing the cross-chain currency bridge mBridge through cooperation with other countries such as Hong Kong, Thailand, and the UAE. This initiative is aimed at building a cross-border transfer network to replace the Swift system through blockchain technology (ERC20 CBDC), further promoting the internationalization of the RMB.

Impact on PayFi:

BC pointed out that PayFi faces many challenges in practice, such as compliance with on-chain financing and the recovery of corporate revenue accounts. These all require government and central bank promotion, such as improving the regulatory system through CBDC or tokenization of bank deposits. In the future, there may be two parallel payment systems: one based on traditional banks and interest groups, and the other purely Web3 model, providing liquidity to enterprises through global users.

Overall, with the gradual integration of CBDC and decentralized stablecoins, PayFi is expected to find a new development path in this process, but it also faces regulatory and compliance challenges.

Will 's answer highlighted the use cases of both and their application in different systems:

Limitations and application scenarios of CBDC:

Will believes that the application scenarios of CBDC are mainly focused on specific scenarios such as international trade and cross-border remittances, such as the mBridge project in cooperation between China, Thailand, UAE, and Hong Kong, which aims to promote cross-border remittances and trade settlements between these countries. However, the application of CBDC in the decentralized blockchain ecosystem is limited, especially when they are put on the chain, they may not operate as efficiently as expected.

The role of decentralized stablecoins:

In contrast, stablecoins such as USDC and USDT play the role of on-chain dollars on the blockchain, similar to the on-chain settlement layer of Web3. They are very active in payment, transaction, and DeFi scenarios, becoming important tools in the digital economy. These stablecoins are not only widely used in daily transactions and payments, but also further promote the development of on-chain Financial Services by combining with decentralized finance (DeFi).

Combination point of PayFi:

Regarding the payment finance track of PayFi, Will explained that it is actually a combination of payment and decentralized finance (Payment + DeFi). By using stablecoins as payment media, PayFi can seamlessly interact with DeFi protocols on the chain, such as directly using pledged income for payment scenarios. Only by placing payments on the chain can interaction between smart contracts be achieved, promoting the automation and efficiency improvement of payment finance.

Privacy vs. compliance: How does PayFi balance privacy and regulatory requirements in crypto payments?

902 emphasized the view that privacy does not equal anonymity in crypto payments. He pointed out that although many people in the community enjoy the anonymity of crypto payments, complete anonymity is not feasible in the global financial system and compliance field.

In the traditional financial system, the Travel Rule is a key component of Anti Money Laundering (AML), which requires all transaction information to be traceable by regulatory agencies. However, the anonymity in stablecoins and encrypted payments breaks this rule. When using encrypted addresses for transactions, regulators can only see the transaction amount and address information, but cannot identify the actual owners of these addresses, which opens the door to illegal activities such as terrorist financing and bribery.

Therefore, regulatory agencies in various countries are playing games on how to deal with this issue, especially in places like the European Union, where regulators hope to maintain travel rules to ensure fund transparency. However, the globalization of encrypted payments makes it difficult for countries to develop a unified regulatory framework. In the coming years, this issue may still be in a gray area, and global regulatory agencies will continue to explore appropriate balance points.

BC pointed out that achieving both privacy protection and regulatory compliance on public chains is an extremely challenging task. The decentralization and permissionless nature of public chains make it difficult to effectively control behavior on public chains even if a country enacts laws. BC believes that consortium chains may be a feasible alternative in the future.

He analyzed the past consortium chains in Chinese mainland, believing that they were only used as databases and failed to truly realize the potential of blockchain. However, he envisions future consortium chains being operated by national-level institutions, and funds can flow on the chain, which can ensure the privacy of transactions (confidentiality from competitors) and meet the government's regulatory needs.

Overall, BC believes that it is difficult to achieve both privacy and regulation on public chains, and consortium chains and government-led systems may be a more realistic path.

Will mentioned that achieving a balance between privacy and regulation in encrypted payments is a challenge. He gave an example that although users can protect their privacy through zero-knowledge proof (ZK) technology, such as displaying only their information that they are over 21 years old when purchasing alcohol, rather than all personal information, this method may not be friendly to regulation. Regulatory agencies need to obtain complete information to ensure compliance, and ZK technology shields a lot of information, which limits regulatory access to information. Therefore, it is difficult to achieve a win-win solution.

What are the future trends and challenges of PayFi, as well as opportunities for ordinary users to participate?

902 believes that in the long run, regulation will evolve with changes in productivity, and productivity is the primary factor driving change. Although regulation will lag behind the development of productivity in the short term, especially in the financial field, technological innovation has great resistance. The financial industry has always maintained a high degree of regulation due to its close relationship with the national lifeline and interests involved. Therefore, the trend of PayFi in the next 3-5 years will be in a "chaotic" state.

BC is optimistic about the future of PayFi, believing that full compliance with legal stablecoins may be achieved globally before 2027. This speculation is based on his in-depth understanding of government plans. The G20 formulated a plan for cross-border transfer as early as 2020, with the clear goal of significantly reducing the cost of cross-border transfer before 2027, and stablecoins are one of the key routes. In addition, the concept of "Financial Internet (Fintenet) " proposed by the Bank for International Settlements is also promoting the transformation of the global financial system towards tokenization. Through the project Project Agora, central banks from multiple countries are working with payment giants to create a unified global ledger and achieve financial interoperability.

For the participation opportunities of ordinary users, Bocai suggests focusing on leading projects in the PayFi track, especially those that issue coins. Although it is not necessary to consider their actual application scale too much, history has shown that leading projects are often the biggest winners in market trends, so investing in these projects may be an effective way to obtain profits.

Will remains cautiously optimistic about the future development of PayFi. He mentioned that although the concept of PayFi has just been proposed and many projects are still in the exploration stage, with the token publishing of more PayFi projects in the middle of next year, this field will gradually mature. He emphasized the importance of infrastructure and pointed out that Polyflow, as the infrastructure project of PayFi, will provide landing support for the entire track. Therefore, he suggested that everyone pay attention to Polyflow. As a key part of the development of the PayFi ecosystem, it will provide technical support and guarantee for the practical application of related projects.

Conclusion

Through in-depth discussions on the PayFi track, guests explored the current situation and future development direction of this innovative field from different perspectives. From the application scenarios of encrypted payments to the game between decentralized stablecoins and national-level digital currencies, to the balance between privacy and compliance, PayFi is promoting the transformation of the global financial landscape with its unique technology and business model.

With the gradual clarification of global regulatory frameworks and the continuous advancement of technology, the PayFi track will usher in wider applications and breakthroughs in the next 3-5 years. Ordinary users also have the opportunity to share the dividends of this trillion-dollar market by participating in leading projects, technological innovation, and new Financial Services platforms.

With more companies and countries gradually accepting encrypted payments, the potential of PayFi will be further unleashed. For investors and developers, keeping up with the technological trends in this field and laying out in advance will be the key to seizing future opportunities. PayFi is gradually becoming an important driving force for global financial transformation, helping to build a more efficient, transparent, and decentralized future financial ecosystem.

The article is for sharing and communication only and does not constitute investment advice.

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Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.

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