Original title: "Web3 Payment 10,000-word Research Report: From Electronic Cash, Tokenized Currency, to the Future of PayFi"

Original author: Will Awang, independent researcher

If I were to imagine how finance would work in the future, I would undoubtedly introduce the many advantages that digital currency and blockchain technology can bring: 24/7 availability, instant settlement, fair access without permission, global liquidity, asset composability, and openness and transparency.

And this imagined future financial world, since it was proposed by Satoshi Nakamoto in the Bitcoin white paper in 2008, is now being gradually built through tokenization, and is expected to achieve Mass Adoption through PayFi in the future.

Since the advent of Bitcoin in 2009, the rise of digital currency has swept the world. But over the past decade, the focus on price speculation and boom-and-bust fluctuations has distracted people from the breakthrough innovations that digital currency and blockchain technology can bring.

As Chris Dixon, partner of a16z, said in his book Read Write Own: "Cryptocurrency is just one of the many applications that blockchain technology can bring. Digital currency (Token) built on the blockchain network can maximize the utility of Web3 value Internet."

Digital currency allows value to no longer be precipitated, but can be transferred anytime, anywhere, almost instantly and at a lower cost through the Web3 value Internet in an unlicensed manner, and anyone with an Internet connection can access it. The essence of payment is the transfer of value.

Today, with the annual development of the underlying blockchain infrastructure and the advent of the tokenization wave, it is shown that the biggest opportunity for digital currency may not be to regard it as digital currency, but as a new set of payment methods combined with blockchain.

This revolutionary paradigm shift heralds that people will break free from the constraints of the traditional financial system, bypass today's complex and outdated settlement system, and embrace the possibilities brought by digital currency and blockchain technology. This is just like Starlink directly lighting up the most essential communication needs of people deep in the Serengeti grasslands from space, rather than waiting for communications companies that will never come to lay the network.

Therefore, this article will combine my limited understanding of Web3 payments, RWA tokenization, and financial monetary systems, and through 13 latest Web3 payment cases, sort out the development context from the grand vision of Bitcoin to the current wave of tokenization, and further look forward to how PayFi will be implemented, opening the next chapter for Web3 payments.

If I had doubts about this when I was writing the 10,000-word research report on Web3 payment last year: "The full-scale attack of industry giants is expected to change the existing crypto market landscape", now I am convinced that the killer application of Web3 has arrived, and it is payment!

The full text is 25,000 words. Thank you for your collection and reading. Welcome to discuss.

I. Overview of Web3 Payment

1.1 Payment and Payment System

Let's first look at the definition of traditional payment: payment is the act of the payer transferring money or debt to the payee, and it is a process in which information flow and capital flow match each other to complete the delivery of money and goods. The essence of payment is the transfer of value (Exchange of Value).

According to the 2020 Annual Report of the Bank for International Settlements (BIS), a payment system refers to a set of tools, processes and rules established for the clearing and settlement of transaction payments between multiple transaction participants (including payment service providers). This type of payment financial infrastructure is usually divided into the "front end" and the "back end": the "front end" interacts with end consumers and merchants, with payment service providers as the main participants, processing the information flow of payment transactions, involving:

1) Source of funds;

2) Service channels for initiating payments;

3) Payment tools;

The "back end" processes the flow of funds for payment transactions, with financial infrastructure such as payment settlement networks as the main participants, involving:

1) Clearing, which refers to the process of transmitting and reconciling payment instructions, and sometimes also includes transaction confirmation before settlement;

2) Settlement, which refers to the transfer of funds to release the payment obligations between two or more parties.

（Central banks and payments in the digital era）

From the above figure, we can see the complexity of traditional payments, not to mention cross-border payments in the context of globalization, which involve domestic clearing systems in various countries (such as the large-value payment system Fedwire led by the US central bank, and the large-value payment clearing system CNAPS led by the Chinese central bank), cross-border payment and clearing systems for settlement currencies (such as the New York Clearing House Interbank Payments System CHIPS in the United States and my country's cross-border RMB clearing system CIPS), and international payment and settlement systems (such as the Society for Worldwide Interbank Financial Telecommunication SWIFT), not to mention the various banks involved in this system.

With the rise of cryptocurrencies represented by Bitcoin, which are known as "super-sovereign digital currencies" (although they are currently digital assets denominated in US dollars), the continuous exploration of tokenized currencies such as stablecoins issued by the private sector and central bank digital currencies (CBDCs) issued by central banks of various countries, new forms of currency and new ways of currency circulation are emerging.

Web3 payments based on blockchain are the carriers of this new form of currency and the operating mechanism of the new currency circulation method. Blockchain directly embeds digital currency into the Web3 value Internet as an underlying architecture for currency settlement, so that it can transmit value like the data form transmitted online in the early Internet era.

More importantly, digital currency and blockchain technology can also represent real-world assets in a unique (or irreplaceable) digital form on the Web3 value Internet through tokenization. Digital currencies and tokens representing real-world assets can quickly open up a free market for asset purchase, sale, financing and trading that can be participated in anywhere and by anyone at any time based on the properties of blockchain atomic exchange.

The endowment of blockchain is financial infrastructure, and its initial construction is used to solve the final consistency problem of payment and settlement. Digital currencies built on blockchain can give full play to the huge advantages brought to us by digital currencies and blockchain technology. These advantages are reflected in the nearly instant settlement, 24/7 availability, low transaction costs brought by the characteristics of blockchain, and the infinite possibilities brought by the programmability, interoperability and composability of digital currencies themselves and DeFi.

These are all what the traditional financial payment system desires and is difficult to achieve.

1.2 Old infrastructure, complex payment system

In order to further understand the fundamental driving force of Web3 payment, let us first understand some historical background of payment.

Today's payment channels and information transmission protocols (such as ACH, SEPA and SWIFT) constitute the global payment network - the international payment settlement system. They enable us to conduct large-scale transactions across regions and time zones and ensure the relative smoothness of payments.

However, these global payment infrastructures built more than 50 years ago are largely outdated and fragmented today. It is an expensive and inefficient system that operates within limited banking hours and relies on many intermediaries.

A significant problem with the current financial infrastructure is the lack of global standards and fragmented financial payment systems across countries, which hinder seamless international transactions and bring complexity to the establishment of a consistent payment system. This complexity can be best illustrated by the structure of a cross-border payment transaction (such as the following example of a remittance from the United States in US dollars to a European account in euros), which contains many practical multiple pain points:

(Galaxy Ventures: The Future of Payments)

Multiple intermediaries: Cross-border payments often involve multiple intermediaries, such as local banks and correspondent banks, clearing agencies, foreign exchange brokers, and payment networks. Each intermediary adds complexity to the transaction process, resulting in delays and increased costs. Lack of standardized processes and formats: Different countries and financial institutions may have different regulatory requirements, payment systems, and messaging standards, which makes it inefficient and challenging to streamline payment processes. Manual closed processing: Traditional systems lack automation, real-time processing capabilities, and interoperability with other systems, resulting in delays and manual intervention. Lack of transparency: The opacity of the cross-border payment process can lead to inefficiencies. Limited visibility into transaction status, processing times, and associated fees can make it difficult for businesses to track and reconcile payments, leading to delays and administrative overhead. High costs: Cross-border payments often incur high transaction fees, exchange rate markups, and intermediary fees. Cross-border payments typically take up to 5 business days to settle, with an average fee of 6.25%.

Despite these challenges, B2B cross-border payments are a rigid demand in the context of globalization, and the market size remains huge and continues to grow. According to FXC Intelligence, the total market size of B2B cross-border payments will be US$39 trillion in 2023 and is expected to grow 43% to US$53 trillion by 2030.

1.3 Urgent need for Web3 payment adoption

As Paypal said after launching its PYUSD stablecoin: "People want to pay as they please, and the current payment network is difficult to meet the demand. The payment network built by digital currency and blockchain technology can meet the demand and is practical. As a company committed to promoting payment innovation, we will launch a stablecoin payment solution to meet people's current arbitrary payment needs."

Today, digital currency and blockchain technology provide us with a brand new Web3 payment channel that can simplify the payment and settlement process, making payments fast, cheap and easy to access to meet the needs of today's increasingly globalized people.

Stablecoins built on blockchain, as a major form of tokenized currency, have now become an ideal solution to current challenges in areas such as cross-border payments. Let's review the previous complex cross-border payment example and look at the elegant solution of Web3 payment (as shown in the red box):

Instant settlement: Compared with most traditional payment methods that take days to settle, blockchain-based payments can settle transactions instantly around the world. Reduced costs: Due to the elimination of various intermediaries and superior technical infrastructure, blockchain payments can provide lower costs compared to existing products. Open and transparent: Blockchain provides a higher level of visibility in tracking the flow of funds and alleviating the administrative costs of reconciliation. Globally accessible: Blockchain provides a "high-speed rail" that can be easily accessed by anyone with an internet connection.

By using the payment track built by blockchain, the payment process can be greatly simplified and the number of intermediaries can be reduced. Compared with traditional payment methods, the flow of funds can be visible in real time, the settlement time is faster, and the cost is lower.

We urgently need Web3 payment solutions to help people transfer value around the world instantly and cheaply, solving the legacy problems of traditional payments: 1) slow settlement time; 2) high transaction costs; and 3) incompatibility with areas around the world that are not covered by the current financial system (Under-banked and Unbanked).

（Galaxy Ventures: The Future of Payments）

1.4 Web3 Payment Stack

（Galaxy Ventures: The Future of Payments）

When we look closely at Web3 payments, we can see that there are four main layers of the technology stack:

1.4.1 Blockchain Settlement Layer

Blockchains are financial infrastructures, and they were originally designed to solve the problem of final consistency in payment settlements. Blockchains will serve as the underlying infrastructure for payment transactions. Layer1 blockchains such as Bitcoin, Ethereum, and Solana, as well as general Layer2 environments such as Optimism and Arbitrum, are selling block space to the market. They compete on speed, cost, scalability, security, distribution channels, etc. Over time, the payment use case will become a significant consumer of block space.

1.4.2 Asset Issuers

Asset issuers are entities responsible for creating, maintaining, and redeeming financial transactions and payment media. For example, stablecoins are designed to maintain a stable value relative to the underlying reference asset or a basket of assets (most typically the US dollar). Stablecoin issuers such as Tehter-USDT, Circle-USDC, and Paypal-PYUSD usually adopt a balance sheet-driven business model similar to that of banks. They absorb customer deposits and invest them in higher-yielding assets such as US Treasury bonds, and then issue stablecoins as liabilities to profit from the spread or net interest margin.

1.4.3 Currency Acceptance (Deposit and Withdrawal)

Currency acceptance providers play a key role in increasing the availability and adoption of stablecoins as the main tools for financial transactions and payment media, and promote the large-scale application and popularization of Web3 payments. Fundamentally, they act as a technical layer that connects digital currencies on the blockchain with fiat currencies in traditional bank accounts. Their business models tend to be traffic-driven, and they take a small commission from the amount of dollars flowing through their platforms.

For example, GatePay is able to provide users with a smooth Web3 payment solution based on the liquidity of the exchange, while facilitating the opening of on-chain and off-chain payment paths. Meanwhile, Switzerland's Web3 bank Fiat24 directly builds the bank's business logic on the blockchain, providing users with a seamless connection from wallet (digital currency) to bank account (fiat currency).

1.4.4 Front-end Applications

Front-end applications are ultimately customer-facing software in the Web3 payment stack that provides a user interface for supporting Web3 payments and leverages other parts of the stack to enable such transactions. Their business models vary, but are often some combination of platform fees plus traffic-driven fees generated through front-end transaction volume.

1.5 Multiple attributes of Web3 payment

So for Web3 payment, in simple terms, it refers to a payment method based on digital currency and blockchain technology. However, due to the token attributes of digital currency itself and the characteristics of the blockchain infrastructure it relies on, Web3 payment cannot be simply understood as a new payment method.

For example, Bitcoin, which is built on the Bitcoin blockchain network, has multi-dimensional attributes. It is not only a form of payment and a medium of exchange, but also a store of value and a financial infrastructure. It can also be used as a unit of account to mark value in transactions.

Therefore, Web3 payment cannot only focus on the properties of the payment medium payment token itself (cryptocurrency, tokenized currency and other digital currencies), but also needs to be combined with the properties of the blockchain network (as a financial infrastructure) that carries the payment transaction to see how they make full use of blockchain technology to achieve cost reduction and efficiency improvement, and build a new business model.

Just like when talking about US dollar payments, we can't just look at the US dollar, but also look at the overall huge US dollar payment clearing and settlement network. It is very important to understand this, let's look at the case of Paypal launching PYUSD.

Case Study A: The logic of Paypal's Web3 payment

On August 7, 2023, US payment giant Paypal announced the launch of its stablecoin PayPal USD (PYUSD) on the Ethereum blockchain. The PYUSD stablecoin is 100% fully collateralized by US dollar deposits, short-term US Treasury bonds and similar cash equivalents, and qualified US users can exchange it for US dollars 1:1 through Paypal. As a result, Paypal became the first technology giant to issue a stablecoin.

The reason why Paypal turned its attention to Web3 payments is simple: it meets the needs and is practical.

The settlement time of online payments in the past is still very long (in the United States, an average of 2 to 3 days), and markets, banks and service providers need to be open on weekdays, further extending the settlement time; employers have difficulty paying an increasingly distributed workforce; and an increasingly globalized population has difficulty making cross-border remittances in a cheap and efficient way. In short, people today cannot pay the way they want.

Today, Web3 payments based on digital currency and blockchain technology can bring people closer to realizing their desire to pay: fast, cheap, and global payments. This new next-generation financial/payment infrastructure will help PayPal better serve its 40 million users, allowing everyone to pay as they wish.

Therefore, more than a decade after the emergence of digital currency and blockchain technology, PayPal has once again come to a critical moment in payment history, a moment that is as full of potential and opportunity as the Internet in the early 2000s. Just as Paypal previously brought payments online, Paypal is now bringing payments to the chain.

PYUSD has been tepid since its launch on Ethereum, like an experimental product, running more in Paypal's Supper App. At this stage, PYUSD has reached early adopters, that is, holders of cryptocurrency - this group accounts for about 15% of the world's population, ensuring the awakening of cognitive awareness of early adopters.

(PayPal launches Solana-based USD stablecoin: a new chapter in blockchain payments)

Until May 31, 2024, PayPal announced the launch of PYUSD on the Solana high-performance blockchain, which can cover the most active and active people in the crypto ecosystem and let the world know that "PYUSD is really here." At this stage, Paypal is to truly realize payment utility, that is, to transform the initial ideological cognitive awakening into payment utility in real life.

Solana brings PYUSD much faster settlement speed than other blockchains, lower transaction costs, stronger scalability, interoperability, programmability, and global network support. After combining the advantages of Solana, users can truly realize payment utility in the process of using PYUSD, such as in various scenarios such as cross-border peer-to-peer remittance (C2C), inter-business transfer (B2B), and global payment (B2C).

In this Web3 payment case of Paypal, we can see that Paypal and Paxos, as issuers of stablecoin assets, have issued PYUSD, the only stablecoin supported in the PayPal ecosystem. PYUSD combines the high efficiency, low cost and programmability of the Solana blockchain (as a settlement layer), and will be used to connect 431 million users of all front-end applications in the Paypal ecosystem, providing a bridge for Web2 consumers, merchants and developers to seamlessly connect legal currency and digital currency.

Traditional payment and Web3 payment are not separated, but present a two-way situation. Fiat currency and digital currency are constantly interacting and gradually merging into various real-life use cases such as stablecoins, tokenized deposits, and central bank digital currencies. Web3 payment is redefining our payment methods and financial systems.

2. From the beginning of Bitcoin electronic cash

Before continuing to explore the specific content of Web3 payment, we must first review the "Bible" of digital currency and blockchain technology-the Bitcoin White Paper, to explore the origin of Web3 payment, the significance of the blockchain network, and understand that Paypal's Web3 payment form is not the ideal payment form in the Bitcoin White Paper (centralized trust, unlimited inflation of payment currency, etc.).

It is important to understand that Bitcoin and its blockchain network built by Satoshi Nakamoto represent a new solution to the currency problem born in the digital age. It is not only intended to solve the eternal problem of human society: how to make economic value flow across time and space, but also to solve the problem of trust in third parties in payment transactions.

2.1 The Origin of Bitcoin

The traditional financial system in the real world relies heavily on the endorsement of intermediaries as trusted third parties. Although this intermediary transaction model endorsed by trusted third parties can provide some convenience, it often has many defects, such as unnecessary transaction costs, transaction reversibility, and centralized evil. The most realistic and tragic lesson is the global financial crisis in 2008.

So is there a brand new way that allows any two parties to trade directly without a trusted third party, just like cash transactions?

This is exactly what Satoshi Nakamoto wanted to achieve. In 2008, Satoshi Nakamoto published the Bitcoin white paper Bitcoin: A Peer-to-Peer Electronic Cash System, proposing a peer-to-peer electronic cash payment system, that is, electronic cash can be based on blockchain technology, using distributed ledgers, asymmetric encryption technology, and combined with consensus mechanism to achieve decentralized peer-to-peer transactions without the endorsement of any neutral, trusted third party.

The Bitcoin white paper, by combining a variety of innovative technologies and the design of changes in social production relations, hopes to change the centralized financial system with traditional banks as the core, solve the centralized trust problem in the current financial system, and provide users with a safer, more convenient and low-cost payment method (a peer-to-peer version of electronic cash (system) would allow online payments to be sent directly from one party to another without going through a financial institution).

（Bitcoin: A Peer-to-Peer Electronic Cash System）

2.2 Collapse of the intermediary trust system

Cash payment is the oldest way of transaction. There is no delay and no third party can effectively intervene and hinder it. However, with the development of communication technology, cash transactions are difficult to meet people's payment requirements in different places, time zones and scenarios, thus giving rise to intermediary payment.

Intermediary payment requires a trusted third party, such as banks, Paypal and other payment service providers, to provide people with innovative payment methods such as credit cards, debit cards, bank wire transfers, cross-border transfers, etc. However, the biggest problem is that people need to fully trust the intermediary as a third party in the transaction. This trust often has many defects, such as unnecessary transaction costs, transaction reversibility, and centralized evil.

Bitcoin was proposed in 2008, when the US real estate market bubble burst. Many financial institutions' large investments in real estate mortgage securities caused huge losses to themselves, and those financial institutions and banks that were once unattainable were on the verge of bankruptcy. This directly led to people losing confidence in the traditional trust system and triggered a global financial crisis.

The most fundamental reason for the financial tsunami and the evaporation of huge wealth is that people are forced to trust the current financial system unconditionally, trusting centralized banks and other financial institutions to control, trust, and dispose of our assets.

If banks only provide customers with a means to save cash, then using banking services will only involve the bank's own counterparty risk (Counterparty Risk), which is relatively controllable, but this is not the case. Money never sleeps, and banks are greedy. They earn income by lending people's hard-earned savings to buy government bonds or other investments. Sometimes, banks may lend too much, resulting in the inability to maintain sufficient liquidity to redeem, and thus go bankrupt.

This is why Silicon Valley Bank, the 16th largest bank in the United States, collapsed in 2023. The forced closure of Signature Bank and Silvergate Bank afterwards is also the most vivid and bloody example.

Not only that, the traditional financial system is subject to the strictest regulation. Although information technology can subvert the limitations of geography and time, payments are still under the strict control of the government and state-owned banking monopolies. National and local regulations restrict how individuals use their hard-earned wealth through the traditional financial system, which is particularly serious in countries with strict capital controls. This restriction on intermediary payments greatly reduces the performance of currency. Currency is not strong when accumulated, and currency can only play its greatest value in an environment of free circulation.

Due to the development of the modern communications industry, physical cash transactions are in fact no longer feasible. The shift in payment methods to digital payments is weakening people's control over monetary sovereignty, making people subject to third-party intermediaries, with no choice but to trust.

Banks and other financial intermediaries have collapsed before, and there is no doubt that they will collapse again in the future.

2.3 Blockchain Reconstructs Trust

In order to avoid the uncertainty of this black box of trust/fund custody, and the risk of a single point of collapse of an intermediary third party, Satoshi Nakamoto gave guidance through the Bitcoin white paper, that is, to reconstruct a payment network that does not require any neutral, trusted third party through digital currency and blockchain technology.

Satoshi Nakamoto built Bitcoin very thoroughly on the basis of proof and verification, using a distributed ledger, asymmetric encryption technology, and a consensus mechanism to achieve decentralized peer-to-peer transactions, eliminating the need for a trusted third party, allowing each member on the network to verify the authenticity of each transaction without the need to trust each other.

Only by fully verifying can the reliance on trust be completely eliminated. Don't Trust, Verify it.

The Economist published an article about Bitcoin in 2015, The Trust Machine, telling us that the technology behind Bitcoin will change the way the economy works. Blockchain allows people without a trust basis to cooperate without having to go through a neutral central trust endorsement.

In short, it is a machine that creates trust. In Trustless We Trust.

Blockchain is a powerful technology. In essence, it is a shared, trusted, public ledger that can be checked by anyone, but no single user can control it. Participants in the blockchain system jointly maintain updates to the ledger: it can only be modified according to strict rules. Bitcoin's blockchain network prevents double spending of transactions and keeps track of the ledger. This is the key to achieving a currency without central bank control.

Admittedly, early Bitcoin has always been notorious for its illegal uses, but we cannot ignore the extraordinary potential of the blockchain technology behind Bitcoin. The significance of this technological innovation goes far beyond the cryptocurrency itself.

（The Economist: Bitcoin - The trust machine）

2.4 Bitcoin and Payment

Let us imagine a world where people no longer need to rely on the traditional financial intermediary system to hold, dispose of and manage our assets. People can truly control their own wealth and achieve financial sovereignty by using digital wallets and blockchain technology.

This is the gist of the Bitcoin white paper.

Although the 9-page Bitcoin white paper in 2008 was not enough to provide a complete solution for a peer-to-peer electronic cash payment system, it was undoubtedly a beacon of hope in the dark storm at the time, guiding the direction and illuminating the way forward for those who lost faith in the financial tsunami.

16 years later, in this era characterized by innovation and disruption, the financial landscape is undergoing a significant transformation. Billions of dollars have been invested in the development of the underlying blockchain infrastructure over the past decade. It was not until the past few years that we have a blockchain network that can carry "payment-level scale", making blockchain-based payments increasingly feasible and popular.

With the popularity of digital currencies represented by Bitcoin (according to a recent report released by Tripple-A, about 562 million people in the world will own cryptocurrencies in 2024, accounting for 6.8% of the world's population) and the gradual acceptance of digital currencies and blockchain technology by traditional Wall Street finance, such as the approval of BTC/ETH ETF and the launch of tokenized fund BUIDL by BlackRock, everything has changed.

The concept of Bitcoin Electronic Cash is becoming a reality with the efforts of early idealists, just like the seeds sown at the beginning, which are now thriving.

We can see that the grand vision in the original Bitcoin white paper can be met in today's underlying blockchain technology facilities. The blockchain-based Web3 payment can achieve the functions of instant settlement and global access. At the same time, the large-scale real use cases of stablecoins can show that the biggest opportunity for digital currency may not be to regard it as a digital currency, but a new set of payment methods combined with blockchain.

Third, the wave of tokenization has arrived

Although Bitcoin was originally positioned as electronic cash, at one stage, people expected it to become a new global currency and assume the three major functions of currency - medium of exchange (for example, using Bitcoin to purchase goods and services), value storage (investing in Bitcoin for long-term returns), and unit of account (pricing the value of goods and services).

In the past ten years of development, due to its scarcity design, Bitcoin's value storage function has highlighted its advantages in the fight against global inflationary currencies. The purpose of creating cryptocurrencies represented by Bitcoin is to reward people who confirm blockchain transactions. Due to its large price fluctuations and unstable value, it is not suitable as a payment unit of account for goods and services.

Therefore, a new type of digital representation of currency, especially stablecoins, was born - tokenized money, which is usually anchored 1:1 with legal currency (especially the US dollar) as a new medium of exchange on the blockchain network. Tokenized currency aims to solve the payment accounting problem of goods and services by maintaining a stable value, and has been widely used in the Web3 payment market.

We have been able to see the explosive rise of the stablecoin market in this wave of tokenization, but before we go deep into the Web3 payment market, which is currently dominated by stablecoins, we must understand what tokenization is and the huge advantages that currency can bring to us after tokenization.

3.1 What is tokenization?

"Tokenization" refers to the process of recording the ownership of financial or real assets (Claims on Financial or Real assets) existing in traditional ledgers onto the blockchain programmable platform to create a digital representation of the asset. These assets can be traditional tangible assets (such as real estate, agricultural or mining commodities, analog artworks), financial assets (stocks, bonds) or intangible assets (such as digital art and other intellectual property).

The resulting "token" refers to the ownership certificate (Claims) recorded on the blockchain programmable platform for trading, helping to ensure authenticity and traceability. Tokens are not just a single digital certificate. Tokens also usually bring together the rules and logic that govern the transfer of underlying assets in traditional ledgers. Therefore, tokens are programmable and customizable to meet personalized scenarios and regulatory compliance requirements.

(Tokenization and Unified Ledgers - Building a Blueprint for the Future Monetary System)

The world's second largest stablecoin USDC is currently issued by the American private institution Circle, which uses the US dollar as collateral and anchor currency to issue a tokenized currency product - the US dollar stablecoin USDC.

Due to the global currency of the US dollar, USDC can not only serve as a medium of exchange for currency and a unit of account for goods and services, but also highlight the huge advantages of tokenization on the blockchain. These advantages are often difficult to achieve in the traditional financial system.

3.2 Advantages of Tokenization

Tokenization allows assets to gain the huge potential brought by digital currency and blockchain technology. Broadly speaking, these advantages include:

1) Advantages of blockchain: 24/7 availability, data availability, and so-called instant atomic settlement;

2) Advantages of the token itself: programmability - the ability to embed code in the token, and the ability of the token to interact with smart contracts (composability), thereby achieving a higher degree of automation and the ability to access decentralized finance (DeFi).

Especially when asset tokenization is promoted on a large scale, in addition to proof of concept, the following advantages will become increasingly prominent:

3.2.1 Improve capital efficiency

Tokenization can significantly improve the capital efficiency of assets in the market. For example, the redemption of repurchase agreements (Repo) or money market funds after tokenization can be completed instantly in a few minutes T+0, while the current traditional settlement time is T+2. In the current high-interest market environment, shorter settlement time can save a lot of money. For investors, these savings in funding rates may be the reason why recent tokenized U.S. Treasury projects have been able to have a huge impact in the near term.

Case Study B: Blackrock’s Tokenized Fund BUIDL

On March 21, 2024, Blackrock and Securitize jointly launched the first tokenized fund BUIDL on the public blockchain, Ethereum. After the fund is tokenized, it can achieve instant settlement of the unified ledger on the chain, greatly reducing transaction costs and improving capital efficiency. It can achieve (1) 24/7 all-weather fund subscription/redemption of fiat currency USD. This instant settlement and instant redemption function is something that many traditional financial institutions are very eager to achieve; at the same time, in cooperation with Circle, (2) 24/7 all-weather instant exchange of stablecoin USDC and fund token BUIDL at a 1:1 ratio.

This tokenized fund that can connect traditional finance and digital finance is a milestone innovation for the financial industry.

(Analysis of Blackrock’s tokenized fund BUIDL, opening up a beautiful new world of DeFi for RWA assets)

3.2.3 Saving operating costs

Asset programmability can be another source of cost savings, particularly for asset classes whose servicing or issuance is often highly manual, error-prone, and involves numerous intermediaries, such as corporate bonds and other fixed-income products. These products often involve custom structures, imprecise interest calculations, and coupon payment expenses. Embedding operations such as interest calculations and coupon payments into smart contracts in tokens will automate these functions and significantly reduce costs; system automation through smart contracts can also reduce the cost of services such as securities lending and repurchase transactions.

Case Study C: Tokenized Bond Project Evergreen

The Bank for International Settlements (BIS) and the Hong Kong Monetary Authority launched the Evergreen project in 2022 to issue green bonds using tokenization and a unified ledger. The project makes full use of the distributed unified ledger to integrate the participants involved in bond issuance on the same data platform, supports multi-party workflows and provides specific participant authorization, real-time verification and signature functions, which improves the efficiency of transaction processing. The bond settlement realizes DvP settlement, reduces settlement delays and settlement risks, and the platform's real-time data updates to participants also improve the transparency of transactions.

(Tokenization of Hong Kong Bond Market)

Over time, the programmability of tokenized assets can also create benefits at the portfolio level, enabling asset managers to automatically rebalance their portfolios in real time.

3.2.2 Unlicensed Democratic Access

One of the most touted benefits of tokenization or blockchain is the democratization of access. This permissionless entry barrier may increase asset liquidity after the characteristics of token fragmentation (i.e., dividing ownership into smaller shares to lower the investment threshold), but the premise is that the tokenized market can be popularized.

In some asset classes, simplifying intensive manual processes through smart contracts can significantly improve unit economics, thereby providing services to smaller investors. However, access to these investments may be subject to regulatory restrictions, which means that many tokenized assets may only be available to qualified investors.

Case Study D: Tokenized Private Equity Funds

We can see that the well-known private equity giants Hamilton Lane and KKR have cooperated with Securitize to tokenize the Feeder Fund that manages their private equity funds, providing investors with a "parity" way to participate in top private equity funds. The minimum investment threshold has been significantly reduced from an average of US$5 million to only US$20,000, but individual investors still have to pass the qualified investor verification of the Securitize platform, and there is still a certain threshold.

(RWA 10,000-word research report: the value, exploration and practice of fund tokenization)

3.2.4 Enhanced compliance, auditability and transparency

Current compliance systems often rely on manual inspections and traceability analysis. Asset issuers can automate these compliance checks by embedding specific compliance-related operations (e.g., KYC/AML/CTF, and rules such as transfer restrictions) into tokenized assets. In addition, the 24/7 data availability of blockchain-based systems creates opportunities for simplified consolidated reporting, immutable record keeping, and real-time auditability.

3.2.5 Cheaper and more flexible infrastructure

Blockchain is essentially open source and continues to develop under the impetus of thousands of Web3 developers and billions of dollars in venture capital. Business entities engaged in Web3 payments can directly choose to operate on public permissionless blockchains, or public/private hybrid blockchains, where innovations in blockchain technology (such as smart contracts and token standards) can be easily and quickly adopted, further reducing operating costs.

（Tokenization: A digital-asset déjà vu）

3.3 The critical point of large-scale adoption

The previous stage of asset digitization can be fully rolled out with the maturity of technology and measurable economic benefits, but the large-scale and widespread adoption of asset tokenization will not happen overnight. The most challenging point is that in the strictly regulated industry of financial services, the infrastructure of traditional finance is transformed, which requires the participation of all players in the entire value chain.

Despite this, we can already see that the first wave of tokenization has arrived, mainly benefiting from the investment returns in the current high interest rate environment and the actual use cases of the existing scale (such as stablecoins, tokenized US bonds).

Blackrock CEO Larry Fink emphasized the importance of tokenization to the future of finance in early 2024: "We believe that the next step in financial services will be the tokenization of financial assets, which means that every stock, every bond, and every financial asset will run on the same general ledger."

Similarly, the Bank for International Settlements (BIS) also showed great concern about tokenization in its previous research report, saying: "The global monetary system is on the cusp of a historic leap. After digitalization, tokenization is the key to the leap. Tokenization greatly enhances the capabilities of the monetary and financial system by changing the way intermediaries serve users; breaking through the barriers of information transmission, reconciliation and settlement. Tokenization will build new economic activities that are difficult to achieve in the current inherent monetary system."

Today’s movement of tokenized assets is just the beginning of this brave new frontier of tokenization. The history of the Internet in the past has been marked not only by radically reinventing existing industries, but also by creating entirely new business models that were impossible or even unimaginable before advances in technology and connectivity.

One of the biggest breakthroughs of blockchain is that it enables “real world assets” (like homes, cars, office buildings, factories, concert tickets, customer loyalty points, stock certificates, etc.) to be represented online in the form of uniquely identified digital tokens. These tokens allow you to easily track, transfer, and store proof of ownership of the corresponding assets online in a digital wallet.

Embedding ownership of these assets in the form of digital currencies into the Web3 Internet of Value (directly alongside the accompanying flow of funds) could open up a potential future where virtually anything can be tokenized, financed, and traded by anyone, anywhere, at any time, without the need for traditional financial intermediaries.

And it is Web3 payments that enable these flows of value.

Fourth, tokenized currency - a new way of currency circulation

After understanding tokenization, we can understand that the stablecoins, tokenized deposits, central bank digital currencies and other digital currencies that Web3 payments rely on are all forms of currency after being tokenized. This kind of digital currency represents a new way of currency circulation based on blockchain, rather than a new way of creating currency.

With the continuous development of human society, the concept and form of currency have been constantly changing. From the earliest simple barter of stone coin shells on Yap Island to the invention of coins and banknotes, trade has been completely changed. Since then, the advent of globalization and the increasing complexity of economic activities, the demand for more efficient and secure payment methods has promoted the rise of Internet digital payments and the emergence of digital currencies, laying the foundation for improving the efficiency, access barriers and global integration of financial services.

(Tokenization and Unified Ledger - Building a Blueprint for the Future Monetary System)

Although the current form of currency is still dominated by fiat currency trusted by the state, innovative forms of currency such as stablecoins, tokenized deposits, and central bank digital currencies (CBDCs) are all innovative ways of currency flow under the background of the era of change under the guidance of digital currency and blockchain technology.

4.1 Central Bank Digital Currency (CBDC)

The International Monetary Fund (IMF) defines it as "a digital representation of sovereign currency issued by the monetary authority of a jurisdiction, appearing on the liability side of the monetary authority's balance sheet." CBDCs vary in design, especially between wholesale CBDCs designed for large-scale interbank transactions for financial institutions and retail CBDCs for public use, the latter of which aims to replace traditional cash payments and modernize payments in the form of digital cash.

Of the pilot projects of international clearing banks, national regulators, and leading private sectors, 15 out of 26 focus on exploring CBDCs and digital currencies. This reflects global recognition of this development trend. These pilots demonstrate the stability, programmability, liquidity and efficient asset transfer potential of tokenized digital currencies.

Countries have their own motivations and interests to explore CBDC pilots. The Monetary Authority of Singapore (MAS) has proposed an open, interoperable digital asset network framework and is conducting pilot projects in asset management, fixed income and foreign exchange. The European Central Bank (ECB) has stressed the need for central banks to remain technologically advanced to make cash or central bank money attractive for transactions and stable in financial innovation. The European Commission has proposed creating a legal framework for a digital euro, indicating progress in the EU towards a potential CBDC. Hong Kong has also demonstrated similar motivations, focusing on the acquisition of practical cases and the exploration of potential features of CBDC, such as programmability to unlock new types of transactions and the development of tokenized markets. Meanwhile, other markets such as Brazil, India and Kazakhstan are committed to using CBDC to promote financial inclusion, such as Visa's pilot project with Brazil's Agrotoken using CBDC to provide farmers with access to digital finance, by tokenizing crops as collateral and automating payments through smart contracts to reduce costs and risks.

4.2 Tokenized Deposit

Tokenized deposits are digital certificates of commercial bank deposits issued on the blockchain, combining the familiarity and reliability of bank deposits with the advantages of blockchain technology, such as programmability, instant settlement and enhanced transparency.

Tokenized deposits can be designed in the same way as regular bank deposits. Like regular deposits, they are liabilities of the issuer. Tokenized deposits cannot be directly transferred, and the clearing liquidity provided by the central bank will still ensure the normal operation of the payment function.

Tokenized deposits are likely to become the cornerstone of innovation at the application level in the traditional banking and financial system, providing innovative momentum for the business of the traditional banking and financial industry.

Case Study E: JPMorgan Chase Onyx Network

JPMorgan Chase started experimenting with blockchain early on, and the essence of its tokenization business is based on tokenized deposits. The institutional-level blockchain payment network Onyx it built can currently handle $2 billion in transactions per day. Onyx's trading volume can be attributed to JPMorgan Chase's "Coin System", which focuses on solving customers' cross-border payment and liquidity financing needs, using JPM Coin as a digital currency for cross-border transaction settlement.

At the same time, JPMorgan Chase launched an asset tokenization platform (Digital Asset), launched an intraday repo solution in cooperation with Goldman Sachs, launched a tokenized collateral network in cooperation with BlackRock and Barclays, and issued bonds in cooperation with local municipalities. In addition, JPMorgan Chase's application innovation through tokenization also includes: After participating in the BIS Project Guardian project last year, Onyx plans to launch a tokenized fund. Onyx is enabling its JPM Coin tokenized deposit solution for on-chain settlement of the Broadridge platform (DLR).

(Onyx by J.P.Morgan)

Case Study F: Visa's tokenized deposit case

In addition, in a research report on tokenized deposits led by the Hong Kong Monetary Authority and piloted by Visa, HSBC and Hang Seng Bank, some use cases were also given, achieving end-to-end atomic settlement of the payment process, demonstrating the potential to improve the efficiency of existing settlement processes and support application innovation.

First, tokenized deposits can fully leverage the advantages of blockchain's unified ledger to reduce settlement risks, achieve instant settlement, and improve the efficiency of funds transfer. For example, in an interbank use case (acquirer-merchant settlement), the acquirer hopes to simplify the settlement process by using tokenized deposits to make it more transparent and seamless for merchants.

In the existing interbank workflow, the acquirer processes credit and debit card transactions on behalf of merchants. When the customer completes the transaction, the acquirer initiates the settlement process and ultimately transfers the funds to the merchant's account. This process can take from several hours to a day to settle, and merchants lack real-time visibility into the settlement status, making it difficult to manage cash flow and reconciliation.

（Visa, e-HKD and the future of global money movement）

With the tokenized e-HKD and Visa solutions, settlements between acquiring banks and merchants are almost real-time. Merchants receive settlement notifications in real time, which enables better transaction reconciliation and reduces the risk of disputes. The immutability of blockchain also provides tamper-proof audit records, enhancing the overall transparency and trust of the settlement process.

Secondly, tokenized deposits built on blockchain can be used as a transaction medium to realize the blockchain atomic settlement function with other categories of on-chain tokenized assets (such as real estate, securities, commodities, etc.), real-time transactions and instant settlement. This logic also applies to other banking and financial system businesses, such as mortgages and pledges.

Finally, in addition to the advantages brought by blockchain, tokenized deposits can further enhance payment functions by realizing the programmability of tokens through smart contracts. These functions allow for the automation of complex business logic. Settlements between trading parties can be more efficient and potentially reduce the number of intermediaries, because ownership transfer and payment can be processed simultaneously through smart contracts.

For example, in a real estate transaction, the buyer can use a tokenized deposit to secure the property and initiate the payment process. Smart contracts can automatically execute the remaining transaction steps and can be triggered immediately once predefined conditions are met (such as completing due diligence or transferring property ownership). In this way, the use of tokenized deposits and smart contracts can minimize the need for escrow services and reduce manual intervention, thereby reducing transaction costs and settlement time.

4.3 Stablecoin

In the past decade, the explosive rise of stablecoins has been particularly noteworthy. A stablecoin is a tokenized currency (digital currency) anchored to a fiat currency (usually the US dollar) that aims to maintain price stability and avoid the volatility of cryptocurrencies represented by Bitcoin. This feature makes stablecoins an important financial instrument and medium of exchange, playing an increasingly important role in crypto asset transaction settlement, cross-border payments, international trade, etc. Fiat stablecoins occupy more than 90% of the stablecoin market, and the following discussion will revolve around fiat stablecoins.

4.3.1 Stablecoin data is growing explosively

According to SoSoValue data, as of July 2024, approximately $165 billion of tokenized currencies will be in circulation in the form of stablecoins. According to Coinmetrics, the total transaction volume of stablecoins reached nearly $7 trillion in 2023, of which USDT accounted for about two-thirds.

Stablecoins are experiencing an explosive rise around the world, which is clearly a long-term trend. Visa recently launched a public on-chain stablecoin data platform (Visa Onchain Analytics), which gives us a glimpse into the growth trend of stablecoins and shows how stablecoins and underlying blockchain infrastructure can be used to facilitate global payments.

The volume of stablecoin transactions in the entire market has increased by about 3.5 times year-on-year (Year over Year). When focusing the analysis on transactions directly initiated by consumers and businesses (excluding automated high-frequency trading, large institutional capital flows, smart contract operations, etc.), the transaction volume of stablecoins reached US$2.5 trillion in the 12 months ending May 2024. From this perspective, it is 1.5 times PayPal's full-year transaction volume in 2023 (the 2024 annual report shows that Paypal's full-year transaction volume is US$1.53 trillion and Mastercard's full-year transaction volume is US$9 trillion), which is equivalent to the GDP of India or the United Kingdom.

(Visa Onchain Analytics)

4.3.2 Advantages of Stablecoins

Fiat stablecoins have the best of both worlds: they are able to maintain low daily volatility while providing the advantages of blockchain - efficient, economical and globally applicable, which makes it the main transaction medium for Web3 payments and the accounting unit for goods and services. These blockchain-based advantages have been mentioned many times before. In addition, the characteristics of being anchored to the US dollar also make it reflect the unique value of the US dollar.

1) Relieve the pressure of currency depreciation - value storage

Currency fluctuations have had a profound negative impact on the economies of emerging market countries, causing 17 emerging market countries to lose a total of US$1.2 trillion in GDP between 1992 and 2022, an average of 9.4% of these countries' GDP. The US dollar stablecoin helps these countries cope with the uncertainty and economic losses caused by currency fluctuations by providing a stable value pegged to the US dollar.

2) Improve the accessibility of the US dollar - settlement currency

The US dollar is stable, widely accepted and dominates global trade. In 2022, the US dollar accounted for 88% of all foreign exchange transactions and more than 40% of cross-border payments. The direct use of the US dollar as a medium of exchange is restricted in some countries and regions. As a digital alternative to the US dollar, the US dollar stablecoin can be sent instantly to all parts of the world through the blockchain Internet, operating 24/7, accessed with only an Internet connection, and convenient transactions.

According to BVNK & Cebr's research report The decade of digital dollars, emerging economies have a great demand for US dollar stablecoins, which is manifested as a "stablecoin premium". Businesses and consumers in the 17 countries surveyed paid a premium to obtain US dollar stablecoins: an average of 4.7% higher than the standard US dollar price, and in countries such as Argentina, this proportion rose to 30%. It is estimated that by 2024, these 17 countries will pay a premium of $4.7 billion just to obtain stablecoins, and this figure will rise to $25.4 billion by 2027.

（The decade of digital dollars）

3) Global accessibility - financial reach

According to the World Bank, about a quarter of the world's population still does not enjoy banking services (especially in Asia, Africa and Latin America). Increasing electronic payments, Internet access and mobile phone use can improve financial inclusion.

Stablecoins are the best solution. Stablecoins allow anyone with an Internet connection to use them without the need for traditional bank accounts and identity verification. This is a mechanism to improve global financial inclusion, and the low entry barrier also supports the demand premium for US dollar stablecoins.

Global accessibility is key to the adoption of stablecoins in regions such as Asia, Africa and Latin America, because in these regions, as a digital/tokenized version of cash, stablecoins can both safely store value and be transferred at any time. Wherever the US dollar is used, stablecoins can act as a digital version and become a way to capture more value in business.

Case Study G: Circle USDC - The Next Form of the US Dollar

Circle's mission is to promote global economic prosperity through seamless exchange of value, and to build a new Internet Financial System by making full use of the openness and interoperability of the Internet. Circle is committed to using the breakthrough innovation of the next generation Web3 value Internet to help funds flow freely and make the world more fair and prosperous.

In 2018, Circle launched USDC, a stablecoin anchored by the US dollar. It is currently the second largest stablecoin in terms of market value, with a circulation of more than US$33 billion, accounting for about 20% of the stablecoin market. In 2023, the scale of USDC raised/redeemed for the financial system and blockchain ecosystem will reach US$197 billion, and it will support the use of more than 190 countries and regions around the world.

When Circle CEO Jeremy Allaire invented USDC five years ago, he had a vision for the digital currency form of legal tender, calling it a legal tender token (not called a stablecoin at the time), which can run on a blockchain network, and anyone can build an interoperable value exchange application based on this open network.

So Circle positions itself as An Open Platform for Money on the Internet, but I think it is better to understand it as: the USD API on the Web2 Internet, the USD settlement layer on top of the Web3 Internet of Value. This is a well-regulated open source building block that can be easily integrated into other fintech, traditional banking and financial entities, and digital currency projects to enable the pricing and trading of the world's most widely used currency (the US dollar).

Web2's Internet infrastructure has achieved frictionless and nearly free information flow, but the value in it has not circulated. Web3's Internet of Value can provide a carrier for these values, tokenize them into digital currencies and circulate on the blockchain, and the USDC stablecoin is to price this value, facilitate transactions, and ultimately achieve seamless free circulation of value.

Now, people can send value through the Web3 Internet of Value in the same way as emails, video files, and JPEGs, which is ubiquitous, global, instant, and cheap, eliminating the significant economic friction that exists in today's complex, outdated and old payment systems. In the future, real-world assets (RWAs) such as cars and real estate can be tokenized and widely held, financed, and traded on the chain, creating deeper liquidity and reducing the time, effort, and cost required for such transactions.

In short, Circle USDC can be summarized as: the dollar prices value, the blockchain allows value to circulate, and the Internet promotes openness and circulation. USDC is the next form of the dollar.

Of the $2.2 trillion in cash in circulation worldwide, 80% is $100 bills, reflecting that this cash is mainly used as a store of value. Blockchain-based stablecoins can have anonymous features, similar to cash, but stablecoins can provide more value than cash.

Blockchain enables stablecoins to power ordinary dollars with programmability and have the same cost and speed advantages as other forms of Internet data. Whether it is the programmability of stablecoins or the programmability of payments, stablecoins are more imaginative.

Because USDC uses open source code on the smart contract blockchain, anyone can easily program it to adapt to simple "if/then" business conditions. These programmable Internet-based payments represent a major breakthrough in the way businesses transfer value.

For example, Cirlce spoke with a Kenyan company that provides agricultural seed insurance to farmers, which incorporates local weather data into smart contracts to automatically pay insurance premiums using USDC. There are also some remittance companies that program USDC payments that can only be used to cash in medical supplies at pharmacies. There are many such scenarios, and the current stablecoin payments have only touched the surface.

This approach of adding programmable logic to payments/stablecoins at the USDC stablecoin settlement layer helps USDC essentially become a new global currency operating system, opening up unlimited space for the future of digital currency.

Case Study H: GatePay's Landing Web3 Payment Solution

If Circle is building a new global currency operating system, then payment service providers like GatePay are further promoting the landing of Web3 payments, providing a more realistic and feasible Web3 payment solution for traditional payment networks.

GatePay is a Web3 payment solution created by Gate.io, designed to help cryptocurrency holders flexibly and conveniently send and receive cryptocurrencies worldwide, supporting real-time transactions of more than 300 major cryptocurrencies.

In the early days of the Web3 payment market, due to the need to improve the blockchain network and the education cycle of emerging things, Web3 payments were mainly centered around the Crypto Native population to solve their currency acceptance and daily consumption needs.

Therefore, the cryptocurrency payment gateway launched by GatePay is designed to meet the needs of merchants and individual users for Web 3 payment scenarios. GatePay has access to a variety of payment scenarios and supports cryptocurrency payment services including online and offline shopping malls. Users can easily connect to more than 300 mainstream merchants and more than 300 cryptocurrencies to choose from by connecting wallets/accounts and paying through QR code scanning.

(Gate Pay cryptocurrency payment system can be used by you and me)

In addition, in order to meet the needs of Web3 payment, GatePay is cooperating with traditional cross-border payment service providers to provide them with the ability to pay and receive cryptocurrency to meet the needs of their customers' diverse and personalized scenarios.

GatePay's ability rooted in Crypto Native is not available to most traditional cross-border payment service providers. The ability to handle cryptocurrency, the types of cryptocurrency supported, the depth of liquidity, and the most important compliance supervision are not something that current traditional cross-border payment service providers can achieve overnight.

As FZ, the head of GatePay, said: "The most important thing in this industry is not the construction of the technology stack, but the expansion of scenario channels and meeting the diverse needs of users. Welcome everyone to find GatePay to cooperate."

V. PayFi - The Next Chapter of Web3 Payment

Although the Web3 payment industry has grown to a certain scale in recent years, the current value of Web3 payment lies in the instant settlement, 24/7 availability, and low transaction costs brought by the characteristics of blockchain. So how can the interoperability, programmability, and compatibility with DeFi of Web3 payment be reflected? The answer is PayFi.

The integration of Web3 payment and DeFi gave birth to PayFi. Lily Liu, chairman of the Solana Foundation, proposed the concept of PayFi at the Hong Kong Web3 Carnival and gave a wonderful explanation of it: "PayFi is a new financial market created around the time value of money. This on-chain financial market can achieve new financial paradigms and product experiences that traditional finance cannot achieve."

To understand PayFi, you first need to understand a few concepts:

1) Time Value of Money is a basic concept in finance. It means that the value of money will change over time. The value of money now is higher than the value it will have in the future because inflation and investment returns need to be considered. If people want to get money now, rather than in the future, they should pay extra fees for these funds - interest.

If the current Web3 payment is mainly to use the money we have now and on hand to make transactions, then PayFi allows us to use tomorrow's money to make transactions. In financial transactions, time is money, my friend.

2) Tokenization of real-world assets (RWA). Considering that payment itself is rooted in real-world life scenarios, in order to realize PayFi, it is necessary to tokenize the logic of real-world assets and tokenize the entire payment scenario and business process and move it to the chain of Web3 payment logic, so as to capture the monetary time value of real-world payment scenarios.

PayFi can not only reshape the grand vision of the Bitcoin white paper-point-to-point electronic cash payment without the intervention of a trusted third party, but also use tokenized money represented by stablecoins as the transaction medium and accounting unit for goods and services, and finally realize efficient and fast global payments on a high-performance blockchain network.

More importantly, PayFi can integrate DeFi, give full play to its interoperability, programmability and composability, and create a new paradigm of on-chain finance.

Thus, the next chapter of Web3 payment is opened.

Combined with the multiple attributes of Web3 payment explained earlier, PayFi's business model can be divided into four categories:

A. Payment tokens Tokens themselves, such as the time value of US debt captured by tokenized US debt/interest-bearing stablecoin projects;

B. Payment financing RWA, using DeFi borrowed funds to solve the financing needs in real payment transaction scenarios, and realize the on-chain payment financing yield;

C. Web3 payment innovation business integrating DeFi;

D. Move the traditional payment business logic to the chain to realize the complete Web3 payment logic. This is actually a form of RWA tokenization.

5.1 The Time Value of Money of Payment Tokens - Tokenized U.S. Bonds

The current high interest rate environment has made the use cases of tokenization based on U.S. bonds attract widespread attention in the market. Such products can not only achieve risk-free, high circulation, and scalable U.S. bond returns, but also greatly improve capital efficiency for many payment/financial application scenarios due to the transaction medium characteristics of cash equivalents.

The underlying assets of such tokenized U.S. bonds are U.S. Treasury bonds, which are essentially the interest paid to us by the U.S. government for using our current funds. Therefore, such tokenized U.S. bond tokens themselves have the time value of money.

According to RWA.XYZ data, the market size of tokenized U.S. debt has risen from $770 million at the beginning of 2024 to $1.916 billion today (as of August 1, 2024), an increase of 248%.

(RWA.XYZ)

Case Study I: Ondo Finance Tokenized U.S. Debt

Ondo Finance is an RWA tokenized U.S. debt protocol dedicated to providing institutional-grade investment opportunities to everyone. Ondo Finance brings zero/low-risk, stable interest-bearing, scalable fund products (such as U.S. Treasuries, money market funds, etc.) to the chain, providing on-chain investors with an alternative to stablecoins - allowing stablecoin holders rather than issuers to earn returns.

Ondo Finance previously launched OUSG for US residents by tokenizing US debt funds, and launched USDY interest-bearing stablecoin, a tokenized note project backed by short-term US debt for non-US users in August 2023. As of August 1, 2024, the TVL of $OUSG and $USDY reached $570 million.

Compared with traditional stablecoins, USDY is innovative in that it provides global investors with an investment method that can store dollar-denominated value and generate dollar income without permission. More importantly, the transaction medium function and status of this interest-bearing stablecoin as a settlement currency are becoming more and more prominent.

USDY=USDC + 5% U.S. Treasury yield

（Case Study: Bringing Utility to Payments with USDY）

In December 2023, Ondo Finance launched USDY on the Solana blockchain, supporting its ecosystem to push the boundaries of Web3 payment innovation. To date, multiple payment platforms on Solana have integrated USDY into their products.

For example, Helio, a leading Web3 payment platform on Solana with over 450,000 unique active wallets and 6,000 merchants, has integrated USDY as a native payment option. With its Solana Pay plugin, millions of Shopify merchants can now settle payments in cryptocurrencies and convert USDY to other stablecoins such as USDC, EURC, and PYUSD in real time. Sphere, a payment technology provider on Solana that was originally designed with stablecoins at its core, has integrated USDY to enable merchants in emerging markets to make secure, cost-effective, and near-instant cross-border payments while earning a yield backed by U.S. Treasuries.

In addition to its utility as a payment medium of exchange, USDY can also provide additional capital efficiency utility and composability in DeFi scenarios, such as using USDY as collateral when borrowing. On July 31, 2024, USDY was launched on the Aptos blockchain and integrated with multiple DeFi platforms within its ecosystem.

5.2 Payment Financing RWA

As the crypto ecosystem continues to look for assets with sustainable value and stable sources of income since 2023, the tokenization of real-world assets has naturally emerged.

We can see the explosive growth of tokenized US bonds, but unfortunately, this growth is likely to be temporary. If we think about 2-3 years ago, we are still in an era of zero interest rates. As US bond yields decline in the future, crypto capital will look for other high-yield and low-risk assets to allocate. This is the origin of PayFi Payment Financing RWA.

The logic of PayFi Payment Financing RWA is simple: use DeFi borrowed funds to solve the needs in real payment scenarios and realize the on-chain of payment financing yields.

（PayFi - The New Frontier of RWA）

Payment financing is an important foundation of the global financial/trade ecosystem, such as credit cards ($16 trillion), trade financing ($10 trillion) and global payment pre-financing ($4 trillion). PayFi payment financing can serve as an important asset class of RWA assets to achieve:

· Bring trillions of payment transaction volumes to the chain, better optimize the time value of money, and promote the adoption of stablecoins;

· Provide yields for different risk preferences, from single-digit risk-free yields to attractive double-digit yields in the private credit sector;

· Rapidly scale up with extremely low systemic risk;

· Due to the short-term nature of the underlying assets in payment financing transactions, it is more conducive to liquidity allocation.

We have seen that Huma Finance has raised funds on the chain to support the payment financing needs of the chain, such as the advance payment needs in cross-border payments, the financing needs of supply chain finance, etc.

5.3 Innovative Web3 payment business integrating DeFi

（PayFi, How Solana Enables the Original Vision of Blockchain Lily Liu, Solana Foundation）

Lily Liu mentioned the concept of Buy Now Pay Later in her sharing, which can be transformed by PayFi into Buy Now Pay Never. Here is an analysis, imagine a scenario where a user Kevin spends $5 to buy a cup of coffee, and PayFi payment service provider collects the payment.

1) PayFi payment service provider needs to open up the DeFi lending agreement,

2) User Kevin happens to be the LP of the DeFi lending agreement and can obtain lending income from the agreement;

3) PayFi payment service provider obtains authorization from user Kevin to use the lending income to pay for coffee;

4) Then Kevin does not have to actually pay for the coffee, but uses the income generated by his DeFi lending agreement to pay for US$5.5, and US$0.5 is used as the service fee of PayFi payment service provider;

5) PayFi payment service provider can eventually accept DeFi income as currency and settle with merchants in fiat currency.

This is the simplest and most intuitive PayFi use case of Web3 payment superimposed on DeFi. The income of DeFi is used to cover the payment fee, and the utility of token economy can be superimposed.

The Web3 payment scenario integrated with DeFi is beyond your imagination. Just like Fiat24 constructs itself as a bank fiat currency protocol layer, bringing the business logic of the fiat currency banking system to DeFi, and Ether.Fi can use staking crypto assets as collateral, exchange for stablecoins and realize fiat currency payment through Crypto Payment Card.

Case Study J: Web3 Bank Built on Blockchain - Fiat24

Fiat24 is a financial technology company regulated by Swiss banking law. It is the world's first decentralized application (DApp) that completely builds banking logic on a public blockchain (Arbitrum) and is driven by smart contracts. It provides users with a series of Web3 banking services such as currency acceptance, Web3 payment consumption, savings, transfers, and legal currency exchange. Fiat24 is trying to build a bridge between the crypto world and traditional finance through the Banking Protocol, bringing innovation to traditional banking, finance, and payment systems.

（X @Fiat24Account）

Fiat24's innovative blockchain banking architecture will be able to seamlessly integrate traditional banking services and Web3 payment innovations, enhancing convenience while also strengthening security and avoiding the risk of single point failure. Unlike any other traditional bank, Fiat24 is aimed at a large number of non-custodial wallet users. Fiat24 can be thought of as an additional Fiat Layer for DApps, such as the Fiat Layer Banking Protocol under Uniswap.

At the fiat currency protocol layer, Fiat24 is a Swiss bank account (Cash Account) for users who have passed KYC. On the one hand, it can integrate Web3 payment services into it, enabling currency acceptance and Web3 payment; on the other hand, Fiat24's Swiss bank account is directly connected to the Swiss National Bank, the European Central Bank and the VISA/Mastercard payment network, enabling traditional banking services such as fiat currency savings, currency exchange, merchant settlement, etc.

（Fiat24.com）

“Just like the infrastructure positioning of Chainlink decentralized oracle network, Fiat24 is positioned as decentralized digital banking network infrastructure-the fiat currency protocol layer of DApps.” Fiat24 Co-founder Yang said, “We believe that DEX will replace CEX in the future. However, compared with CEX’s ability to realize currency acceptance through its own payment channels, the biggest disadvantage of DEX lies in this. As a protocol, traditional banks cannot be compatible with a protocol, nor can they open APIs or open accounts for a protocol. Fiat24 can connect DeFi on the chain through the protocol, and connect traditional finance through banks off the chain, providing a perfect solution to make up for the lack of fiat currency services in many DApps.”

Therefore, as a Fiat Layer Banking Protocol, Fiat24 can provide a perfect solution for DeFi. Bringing the business logic of fiat currency. These are exactly the PayFi scenarios described by Lily Liu:

1) Collateralized lending: Bob provides ETH as collateral to borrow stablecoins on the DeFi platform, and the DeFi protocol can directly call the Fiat24 bank protocol to form USD fiat currency lending;

2) Investment/staking interest: Alice provides ETH for staking interest, and the DeFi protocol can directly call the Fiat24 bank protocol to issue interest-bearing assets in the form of fiat currency, which can really achieve a win-win situation in real life.

3) Investment and financial management: Will uses ETH to invest in the tokenized securities Coinbase of the DeFi protocol, then the DeFi protocol can directly call the Fiat24 bank protocol and use fiat currency to buy stocks on Nasdaq. This is being realized by Ondo Fiance's Global Makerts.

Case Study K: Ether.Fi's Crypto Payment Card

Ether.Fi is an innovative project in the DeFi ecosystem that focuses on Ethereum staking and liquidity re-staking. By providing a non-custodial staking solution, EtherFi enables users to earn staking income while maintaining asset liquidity, thereby solving the problem of locked funds in traditional staking.

I will not explain staking and re-staking here, but I will talk about Ether.Fi's Cash business. Cash business is essentially the most common Crypto Payment Card business, that is, users pay through cryptocurrency (Cyrpto Payin), use payment service providers to make currency acceptance and connect with traditional payment channels V/M to achieve legal currency settlement (Fiat Payout) with merchants.

（Introducing Ether.fi Cash）

And Ether.Fi’s Cash business can be directly combined with its pledge/re-pledge business to form the characteristics of PayFi:

1) Ether.Fi Cash is a combination of digital mobile wallet + Visa credit card, which can be used anywhere in the world;

2) Prepaid card consumption (Pre-Paid/Debt Card) with regular USDC deposits can be realized;

3) Ether.Fi’s assets can also be used as collateral in exchange for USDC for consumption, and repaid with the income from Stake and Liquid.

Thus, Ether.Fi helps users save, invest and consume cryptocurrencies by integrating its products.

This PayFi story has just begun, as Ether.Fi said: "Relying on traditional payment channels still poses significant censorship risks and user experience nightmares. Relying on the US dollar as a settlement currency, it is ridiculous to link cryptocurrencies to the inflated shitcoin minted by the Federal Reserve. Both of these problems need to be solved in the next few years, and they constitute an important part of our next stage roadmap."

5.4 PayFi's future vision

PayFi has brought huge imagination space for Web3 payments. What we can see is just a small part. There is still a huge market and space for us to explore and transform. This is not only about the Web3 payment innovation that integrates DeFi, but also the Web3 transformation of traditional payment business logic and payment system.

5.4.1 On-chain credit system

Our current Web3 payments are all cash transactions based on stablecoins. You must have the corresponding cash stablecoins on hand to pay for goods. However, think back to the fact that in real life, in addition to cash transactions, we also have credit cards, credit loans, installment payments and other credit-based payment methods. Can these be implemented in Web3 payments?

One feature of Web3 payments is that both parties need to do identity verification such as KYC/KYB, and the transaction records will be recorded on the blockchain. This rigid requirement is the prerequisite for the formation of an on-chain credit system. Once the information can be effectively integrated (such as on-chain transaction records, stablecoin salary payment information, on-chain collateral information, KYC/KYB information, compliance information, etc.), and cooperate with some necessary information collection off the chain, can we create an on-chain credit system to further promote the development of PayFi?

In the following case, PolyFlow's Payment ID can be bound to the encrypted user's privacy-protected KYC/KYB information, and the VC (verifiable credentials) of the associated user who has done KYC/KYB on multiple platforms can be well integrated with the necessary information of Web3 payment on multiple different platforms, which can not only achieve user compliance access, regulatory compliance requirements, and data sovereignty, but also is a key link in establishing an on-chain credit system. In addition, its Payment Liquidity Pool builds an on-chain payment fund pool to support various needs, such as payment financing RWA, or PID-based credit.

Case Study L: PolyFlow - Building the PayFi Crypto Payment Network

As the infrastructure layer for on-chain digital asset management, PolyFlow aims to integrate traditional payments, crypto payments and DeFi in a decentralized manner to handle real payment scenarios in the real world. PolyFlow will serve as PayFi's financial infrastructure to establish a new standard for the financial payment industry.

Through modular design, PolyFlow has launched two key components, Payment ID (PID) and Payment Liquidity Pool (PLP), which can abstractly separate the information flow and capital flow of payment transactions and extract value from them. PID is associated with information flow, and is a powerful tool for identity recognition, compliance access, data sovereignty, and AI data analysis. PLP is associated with capital flow, and smart contracts manage the funds used for payment, thereby realizing an overall regulatory compliance and custody-free crypto payment network.

(PolyFlow)

PolyFlow, an innovative encrypted payment network, provides a secure and compliant framework for the circulation, custody and issuance of digital assets in a decentralized manner. At the same time, PolyFlow can also ensure the security of individual user assets and user privacy, and further introduce the diversity and scalability of the DeFi ecosystem.

As a result, AI can intervene to help analyze rich payment information flow data and return this data sovereignty to its original owners (these key payment transaction information is no longer controlled only by fintech giants), while also integrating our daily payment activities into the chain, creating a new, payment-based real-world asset (RWA) income category for DeFi.

More importantly, as the financial infrastructure of PayFi, PolyFlow can form on-chain credit capabilities through PID, supporting consumer loans, buy now pay later, credit cards and other functions paid by individuals in daily life, as well as corporate loans and supply chain financing for commercial entities. It is important to understand that combining with real-life scenarios can truly promote the development of PayFi, which is the key for Crypto to move towards mass adoption.

This powerful capability can help exchanges, payment service providers, banks, supply chain financial services and settlement networks expand and enhance their operations in the era of digital assets, while also allowing network participants (consumers, merchants, and liquidity providers) to share the dividends brought by network effects and realize the true value of Web3.

5.4.2 Traditional payment business logic on-chain

Current Web3 payments are still relatively small in size and have limited influence compared to traditional payments, mainly because the traditional payment and settlement system still dominates the circulation of global funds. Digital currency and blockchain technology provide us with the technical background conditions to completely unify information flow and capital flow, but the current Web3 payment architecture has only developed to the stage of early payment with point-to-point transfer as the core clearing rule, and has not yet formed a set of clearing and settlement standards that can cope with various complex payment scenarios and multiple participants.

"We believe that in the Web3 world with blockchain as the underlying platform, the unification and non-custody of information flow and capital flow will eventually be completed. At present, CEX is actively promoting the exploration of using digital currency as a payment currency. The implementation of this direction is more similar to the centralized wallet logic of Alipay, which is relatively mature and has precedents in terms of cost and efficiency. However, this approach also destroys the two characteristics of digital currency itself, non-custody; the unification of information flow and capital flow. If based on the full-chain transaction execution, there is currently no set of clearing rules on the chain that can correspond to the distribution of interests of multiple payment participants and complex payment scenarios." Lilin Sun, founder of PlatON blockchain, said, "Therefore, we believe that a set of chain-based clearing and settlement system standards will inevitably appear in the future." This is also the opportunity for the birth of TOPOS, a tokenized open payment operating system.

PlatON is a privacy and intelligent computing public chain that uses multi-party secure computing (MPC). With the technical support of PlatON, the TOPOS payment system launched has shown excellent privacy protection, efficient processing and decentralization. TOPOS is committed to breaking down the barriers between Web2 and Web3, helping financial institutions connect real-world assets (RWA) with tokenized currencies, and building a global open Web3 payment and clearing system.

TOPOS defines the standards for operating the underlying blockchain and provides corporate users with a complete solution including the issuance, management and application of tokenized currencies. Through smart contracts and upstream and downstream institutions, TOPOS ensures that payments are transferred from stablecoin issuers to merchants. TOPOS also provides digital currency acquiring solutions and a blockchain-based cross-border remittance open network to provide more flexible and reliable payment and clearing services to global users.

Case Study M: PlatON puts ocean bill of lading business logic on the chain

Recently, TradeGo, in cooperation with PlatON, a fully digital public infrastructure, successfully completed a pilot (PoC) in an isolated production environment to trigger cross-border payments in digital currencies using electronic bills of lading (eBL) based on a Southeast Asian rubber import business worth US$1.17 million.

This pilot verified the combined application of blockchain electronic bills of lading, digital currency and smart contracts in international trade, and significantly optimized the trade process, settlement methods and payment costs. While the payment was settled, it not only avoided the impact of market risk and credit risk in the transaction process, but also achieved a direct and indirect payment cost savings of up to 90%.

(TradeGo and PlatON successfully piloted electronic bills of lading to trigger digital currency payments)

The ocean bill of lading is an important document in international trade. As an alternative to paper ocean bills of lading, blockchain electronic bills of lading (eBL) not only have the same effectiveness and functions as paper bills of lading, but also have the characteristics of data structuring, tamper-proof, traceability, and programmability, which can better realize data verification and automatic execution, and combine with digital currency.

This pilot project uses smart contracts combined with TradeGo electronic bill of lading (eBL), based on the Web3.0 encrypted payment and settlement system TOPOS provided by PlatON, to automatically trigger digital currency payment between the two trading parties after the bill is handed over. It truly realizes the new settlement model of "one hand for money, one hand for goods", greatly reducing the trust cost of the trading parties.

This pilot project is not only a breakthrough in technology, but also an innovative demonstration of international trade payment methods. Through the verification of actual business scenarios, it provides the industry with a feasible and efficient cross-border payment solution, leading the industry to develop in the direction of lower cost and higher efficiency.

Sixth, Write at the end

Digital currency and blockchain technology will not have an "iPhone" moment like AI, but its impact on the transformation of traditional architecture (especially traditional financial architecture) will be far-reaching, although this is a long-term path of change.

While the Bitcoin white paper set out the grand vision of building a decentralized, peer-to-peer electronic cash payment system as early as 2008, it was not until the past few years that blockchain-based payments have become increasingly feasible and popular. Billions of dollars have been invested in the development of the underlying blockchain infrastructure over the past decade, and now we finally have a blockchain network that can support "payment-level scale."

This path will start with financial payments, from Bitcoin's electronic cash, to the initial outbreak of tokenized currencies, and then to the innovative financial paradigm brought to us by the rise of PayFi. How many more paths there are to go is unknown, but I can see the end of Go Bankless.

As Professor Tonya M. Evans said: "In this exploration, we embarked on a journey to unveil the mystery of the unbanked phenomenon and reveal its profound impact on financial sovereignty."

The concept of digital currency and blockchain technology may not sound so revolutionary or attractive, but the same is true of double-entry accounting and joint-stock companies. However, like these great innovations, digital currency and blockchain technology, a seemingly mundane change in production relations, has the potential to change the trust relationship and cooperation mode between people, and will bring about major social changes in the future.

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