Research on the PayFi Sector: Tapping into the New Blue Ocean of Web3 Payments

I. Introduction

The advancement of blockchain technology and the popularization of Web3 have ushered in a profound transformation of payment methods. Traditional payment systems depend on centralized institutions, such as banks and payment processors, while Web3 payments leverage decentralized technologies to make transactions more transparent, convenient, and efficient. Concurrently, the PayFi (Payment Finance) sector has emerged as a rapidly growing field in the Web3 space, gradually integrating payments with DeFi (Decentralized Finance) to deliver a new payment experience for users. The rise of this sector is not accidental but stems from the fast progress of blockchain technology, the widespread adoption of stablecoins, and the steady growth of the crypto market. PayFi is more than just an alternative to traditional payments; it encompasses a suite of innovative financial products and services, including real-time settlements, streaming payments, on-chain foreign exchange, cross-border transactions, and DeFi yield integration. As the global demand for cryptocurrency payments continues to grow, the prospects for Web3 payments and the PayFi sector are extremely promising.

II. The Concept of Web3 Payments and Comparison with Traditional Payments

1. Structure of the Traditional Payment System and the Challenges It Faces

The traditional payment system consists of intricate networks established by centralized financial institutions, including banks, credit card companies, and payment processors. Each transaction must navigate multiple intermediaries, including those responsible for payment verification, clearing, and settlement. Although this payment method has been well-established and widely used since the 20th century, it still faces numerous challenges in practical application.

High Transaction Costs: Traditional payment methods typically involve multiple intermediaries—such as banks, payment gateways, and clearinghouses—each charging service fees. As a result, transaction costs, especially for cross-border payments, can be quite high.

Transaction Delays: Cross-border transactions often take several days to settle, adding pressure and uncertainty for both businesses and consumers regarding their cash flow.

Financial Exclusion: The traditional payment system often imposes high barriers to entry, preventing many individuals without bank accounts or proper identification from accessing the conveniences offered by the global financial system.

2. Web3 Payments: Concepts and Advantages

Web3 payments utilize blockchain technology to enable peer-to-peer direct payments, bypassing intermediaries in traditional payment systems. These transactions are executed automatically through smart contracts and decentralized networks, boosting both efficiency and transparency.

Lower Costs: By using decentralized technology, Web3 payments can substantially reduce transaction fees. This is particularly beneficial for cross-border payments, where users avoid high intermediary charges.

Higher Transaction Efficiency: Transactions on a blockchain typically take only minutes or even seconds to complete, greatly increasing payment speed.

Global Accessibility: With an internet connection, users can engage in Web3 payments from anywhere at any time, overcoming the geographical and financial limitations of the traditional payment system.

3. Technical Framework of Web3 Payments

The core framework of Web3 payments includes the following key components:

Blockchain Networks: Transactions are recorded and validated on either public or private blockchains, ensuring transparency and immutability. Public blockchains like Ethereum, TRON, and Solana are commonly used as payment networks.

Smart Contracts: Smart contracts serve as automated execution engines in Web3 payments, ensuring that payment transactions are automatically completed when specific conditions are met, without human intervention. This capability allows Web3 payments to manage complex scenarios, such as recurring payments and installment plans.

Stablecoins: To mitigate the high volatility of cryptocurrencies, stablecoins have emerged as the primary medium for Web3 payments. Stablecoins like USDT, USDC, and DAI are pegged to fiat currencies, providing relatively stable payment value and reducing exchange rate risks for both parties involved in the transaction.

Wallets and Payment Gateways: Users make payments through cryptocurrency wallets (such as MetaMask, TokenPocket), while payment gateways act as a bridge between merchants and the blockchain network, enabling merchants to receive cryptocurrencies and convert them into fiat currency.

III. Application Scenarios of Web3 Payments

Web3 payments have been widely adopted across various sectors. Below are some of the most notable application scenarios:

1. Native On-Chain Payments

Payments in DeFi: DeFi platforms allow users to invest, lend, and stake cryptocurrencies. Transactions are typically executed automatically through smart contracts, ensuring both efficiency and security in payment processes.

Payments in NFT Marketplaces: NFT (non-fungible token) marketplaces like OpenSea and Magic Eden allow users to buy and trade digital art or virtual assets using cryptocurrencies. Web3 payments streamline the cross-border purchasing experience and enhance liquidity within the NFT market.

2. Cross-Border Payments and Remittances

Traditional cross-border payments often take several days to complete and incur high fees, while Web3 payments can enable almost instant cross-border fund transfers. By leveraging stablecoins and cryptocurrencies, users can bypass banks and other intermediaries, executing global payments and remittances directly. This use case is particularly significant for developing countries and regions with limited financial infrastructure.

3. Real-World Consumer Payments

With major payment giants like Visa and Mastercard entering the space, Web3 payments are becoming increasingly integrated into day-to-day transactions. There is a growing demand for consumers to use cryptocurrencies for daily purchases. Payment providers like MoonPay and BitPay offer crypto-to-fiat conversion services, making cryptocurrency payments more convenient and feasible in real-world scenarios.

4. Gaming and Virtual Worlds

In blockchain games and virtual worlds, Web3 payments have become indispensable. Players can purchase virtual items or pay for game-related fees using cryptocurrencies. For example, in virtual worlds like The Sandbox or Decentraland, users can buy land and items, or access paid services using Ether (ETH) or other tokens. Web3 payments eliminate geographical barriers and reduce the high fees associated with traditional payment methods.

5. Business Payments and B2B Transactions

Web3 payments are not only widely used at the consumer level but are also gaining traction in business-to-business (B2B) transactions. Cross-border B2B payments are often limited by traditional banking systems, but Web3 payments streamline the process, improving cash flow efficiency and reducing the time needed for clearing and settlement.

6. Streaming Payments and Real-Time Payments

Streaming payments is an innovative application scenario of Web3 payments, particularly suitable for scenarios that require continuous or real-time payments, such as hourly wages, long-term service subscriptions, etc. Solutions like Sablier and Superfluid allow users to pay wages or service fees by period, transforming the traditional monthly payment model.

IV. Business Models of Web3 Payments

Web3 payments are not only reshaping payment technology but also unlocking new opportunities for innovative business models. Here are several common revenue models:

1. Fee-Based Model

Web3 payment platforms generate revenue by charging transaction fees. While these fees are typically lower than those of traditional payment methods, platforms can still benefit from high transaction volumes. For example, crypto payment gateways typically charge between 0.1% and 1% of the transaction amount as a service fee.

2. Fund Management and Currency Exchange

As cross-border payments involve the exchange between different fiat currencies and cryptocurrencies, Web3 payment platforms can profit from foreign exchange spreads and rate fluctuations. For example, some platforms allow users to choose favorable exchange rates during the conversion process, with the platform earning income from the spread.

3. Merchant Solutions and White Label Services

Web3 payment providers offer integrated payment solutions to merchants and charge fees for customized services. For instance, platforms like Alchemy Pay provide API interfaces that help merchants incorporate cryptocurrency payment capabilities, along with risk management and compliance support. White label services are also a popular model, where platforms provide payment infrastructure to corporate clients, allowing them to operate payment businesses under their own brands.

4. Staking and Liquidity Provision

Some Web3 payment platforms enable users to stake crypto assets when making payments, thereby contributing liquidity to the network. This model enables users to make payments while also earning returns from their staked assets. For example, DeFi payment platforms typically encourage users to stake crypto assets in liquidity pools, distributing rewards based on trading volume.

V. PayFi: Integrating Payments and DeFi

1. What Is PayFi

PayFi (Payment Finance) refers to the integration of payments and DeFi. This concept goes beyond the mere act of payment; it expands the boundaries of payment behaviors and financial services. With PayFi, users can not only complete on-chain payments but also access services such as investment, lending, and yield farming automatically as part of the payment process.

2. Core Elements of PayFi

Cross-chain Payments and Exchange: Many PayFi solutions utilize cross-chain technology to enable seamless payments and exchanges across multiple blockchains, thereby breaking the limitations of a single chain.

Automated Financial Services: PayFi platforms allow users to invest idle funds into DeFi protocols automatically during the payment process to maximize returns. For example, when a user makes a payment, the system automatically invests a portion of the payment amount into a yield farm, earning a return before finalizing the transaction with the merchant.

Decentralized Finance Infrastructure: PayFi projects are typically built on decentralized finance infrastructure such as automated market makers (AMMs) and lending platforms.

3. Differences Between PayFi and Traditional Finance

Compared to traditional payments and financial services, PayFi greatly improves efficiency and reduces costs through decentralized technology. Its core advantages include:

Seamless Integration: In the PayFi ecosystem, payments and financial services are seamlessly integrated. Users can access investment or lending options without needing to visit banks or other financial platforms separately. For example, users can automatically invest a portion of their payment amount into high-yield DeFi protocols during shopping without additional operations.

Global Interoperability: PayFi's features, such as cross-chain payments and support for multiple assets, enable users to make payments and investments with various cryptocurrencies worldwide. In contrast, traditional finance places restrictions on cross-border payments and multi-currency transactions, typically requiring banks or payment processors that incur high fees and lengthy processing times.

Smart Financial Management: Traditional financial wealth management requires active user participation in selecting investment products and assessing risks. However, PayFi leverages smart contracts and automation tools to deliver intelligent wealth management services. This synchronization of payment behavior and investment products minimizes the time commitment for users.

Disintermediation and Transparency: The traditional financial system relies on intermediaries like banks and clearinghouses, which charge fees and may intervene in transactions. In the PayFi system, all transactions and financial services are conducted openly and transparently on the blockchain, reducing the risk of human intervention.

4. Notable PayFi Projects

Request Finance: A decentralized payment platform that allows users to create, receive, and pay invoices on-chain, supporting multiple cryptocurrencies and stablecoins. It offers automatic exchange rate conversion and on-chain bookkeeping, streamlining crypto payments and fund management for businesses.

Superfluid: Superfluid is a PayFi platform that provides streaming payment services, allowing users to achieve real-time cash flow via on-chain smart contracts. It allows users to make continuous payments (e.g., salaries or service fees) by the second, greatly enhancing liquidity and financial efficiency.

Sablier: Sablier is another PayFi tool focused on streaming payments, allowing users to distribute funds over specific time periods. This is particularly useful for salary payments, subscription services, and other similar scenarios.

VI. Market Size and Prospects of Web3 Payments and PayFi

1. Market Size and User Growth

According to market research reports, the global payment market is projected to grow at a compound annual growth rate (CAGR) of over 15% in the next five years, with the growth rate of crypto payments far exceeding that of the traditional payments market. By 2025, the global crypto payments market is anticipated to exceed hundreds of billions of dollars, particularly in cross-border transactions and regions facing financial exclusion, where Web3 applications hold substantial promise. Additionally, the rising popularity of stablecoins has further catalyzed the development of Web3 payments. Data from Chainalysis reveals that global stablecoin transaction volume reached $3 trillion in 2023, accounting for more than 80% of all blockchain transactions. This trend highlights a growing number of users and businesses adopting cryptocurrencies for payments and fund transfers.

2. Expansion of Application Areas

As Web3 payment technology matures, its application areas will further expand. Currently, Web3 payments are mainly utilized in cryptocurrency trading, NFT purchases, and cross-border payments. In the future, the integration of traditional payment giants like Visa and Mastercard with blockchain technology will facilitate the widespread adoption of crypto payments in retail, e-commerce, supply chain payments, and other sectors.

E-commerce and Retail: In the future, Web3 payments will be deeply integrated with global e-commerce platforms, allowing users to directly pay for daily goods and services using cryptocurrencies, and even achieve instant cross-border shopping.

Supply Chain Payments: Web3 payments are expected to streamline transactions within supply chains, particularly in international trade and logistics, achieving automated multi-party settlement and smart contract-driven payment processes through decentralized technology.

Cross-Border Financial Services: With the growing demand for cross-border payments, PayFi will play a crucial role in providing real-time settlements and low-cost remittances, especially in regions with underdeveloped traditional banking services.

3. Investment Opportunities and Development Potential

Web3 payments and the PayFi sector are poised to attract significant attention from venture capital and corporate investments in the coming years. Currently, blockchain payment infrastructure and DeFi services have attracted a large amount of capital. PayFi projects, due to their innovation and efficiency, have gradually become the focus of investors.

From an industry perspective, three core development directions are emerging as the primary growth points for Web3 payments:

Infrastructure Development: By offering low-latency and high-scalability on-chain payment solutions, such as Layer 2 scaling technology and cross-chain payment protocols, infrastructure development will be crucial for the advancement of Web3 payments. Infrastructure projects that enhance the on-chain payment experience are expected to attract substantial investment.

Expansion of Payment Scenarios: As cryptocurrency payments become increasingly integrated into daily consumption and cross-border trade, Web3 payment service providers will launch more payment products tailored to different scenarios, while deeply engaging with the traditional financial system.

Compliance and Adoption: In the coming years, governments worldwide are likely to implement more regulatory policies regarding cryptocurrency payments and DeFi. How to promote the compliance and adoption of Web3 payments under the regulatory framework has become an important challenge and opportunity for the PayFi sector. Projects that successfully balance compliance with innovation are poised to lead the market.

VII. Challenges Faced by Web3 Payments and PayFi

While Web3 payments and PayFi hold immense market potential, they still face numerous challenges in achieving widespread promotion and adoption.

1. Regulatory and Compliance Issues

The regulation of cryptocurrencies varies significantly across the globe, with some countries enforcing strict policies on crypto payments. This lack of uniformity creates uncertainty for the international promotion of Web3 payments and PayFi. Additionally, how to maintain the efficiency of decentralized payments while complying with regulatory requirements such as Anti-Money Laundering (AML) and Know Your Customer (KYC) remains a critical challenge for platforms.

2. Volatility of Stablecoins and Cryptocurrencies

Although stablecoins are widely used in Web3 payments, they are still subject to some regulatory restrictions, especially in terms of fiat redemption and reserve audits. Some countries remain cautious about the issuance and circulation of stablecoins, and stricter future regulations could impede the growth of crypto payments. Furthermore, while stablecoins generally experience less volatility than fiat currencies, other cryptocurrencies remain highly volatile, raising risks for both users making payments and merchants receiving funds.

3. User Education and Technical Barriers

The user experience of Web3 payments is more complex than traditional payment methods, and users need to master related knowledge such as crypto wallets and private key management. This technical complexity can deter potential users, especially those unfamiliar with the crypto space. Therefore, how to reduce the entry barrier for users through simple and intuitive user interfaces and educational measures is the key to promoting the adoption of Web3 payments and PayFi in the future.

VIII. Summary and Outlook

The Web3 Payments and PayFi sector represents the future of payments and financial services. Through the combination of blockchain technology and decentralized finance, this field is gradually reshaping the landscape of the global payment industry. Although it faces challenges such as regulatory compliance and technical barriers, its advantages in cost efficiency, global interoperability, and financial innovation will fuel its rapid growth in the coming years.

As infrastructure improves, use cases expand, and more businesses and users participate, the potential market size for Web3 payments and PayFi will continue to grow. In the future, this sector will not only be integral to the crypto community but will also increasingly integrate with the traditional financial system, becoming a crucial part of the global payment network.