What is PayFi?

A New Frontier for On-Chain Yield

Payment Financing (PayFi) represents the market for providing short-term capital to facilitate high-volume, cross-border payment transactions. This is a multi-trillion dollar industry that has traditionally been dominated by banks and large financial institutions. Nara is bringing this market on-chain, creating a new and powerful source of sustainable, real-world yield for the DeFi ecosystem.

How PayFi Works

At its core, PayFi involves bridging the time gap between when a payment is sent and when it is received. In a typical cross-border transaction, it can take several days for the funds to clear through the traditional banking system. During this time, the payment provider needs liquidity to continue its operations. PayFi providers step in to offer this short-term financing, charging a small fee or interest rate for the service.

The process can be broken down into the following steps:

Transaction Initiation: A payment is initiated from one country to another, such as a remittance from the United States to the Philippines.

Liquidity Need: The payment provider requires immediate capital to fund the transaction while waiting for the original funds to clear through the SWIFT system or other traditional channels.

Financing: A PayFi provider (such as Nara's partners) provides the necessary liquidity, typically for a period of a few days to a week. This is often done using stablecoins like USDT for instant settlement.

Transaction Settlement: The original funds clear, and the payment provider repays the financing with a small premium.

Yield Generation: This premium represents the yield generated from the financing activity, which is then passed on to the investors in the Nara protocol.

Market Opportunity

The demand for PayFi is immense and growing. With the rise of global commerce and remittances, the volume of cross-border payments is expected to continue its upward trajectory. According to industry research, stablecoin usage for cross-border payments is growing at 35% year-over-year, but penetration is still only 1% of the global FX payment flow ($1.9 trillion annually out of an estimated $194 trillion FX payment market).

This creates a consistent and expanding need for short-term financing, making PayFi an attractive and sustainable source of yield. By tokenizing these payment flows, Nara is able to offer DeFi users access to a market that was previously out of reach. This not only provides a high-yield opportunity for investors but also brings greater efficiency and liquidity to the global payments industry.

Why PayFi is Ideal for DeFi

The PayFi market has several characteristics that make it a perfect fit for a DeFi protocol like Nara:

Short Duration: The short-term nature of the financing (typically under 7 days) aligns well with the liquidity needs of DeFi users. This is in stark contrast to traditional private credit products that often require capital to be locked up for years.

High Volume: The high volume of transactions provides a consistent and scalable source of yield. With billions of dollars in cross-border payments happening every day, there is no shortage of opportunities.

Low Correlation: The returns from PayFi are not correlated with the volatility of the crypto markets, providing a stable and reliable source of income. This makes it an ideal diversification tool for crypto investors.

Strong Credit Quality: The financing is backed by real-world payment flows, which have a historically low default rate. Payment service providers and remittance companies have strong incentives to repay their financing to maintain their operations.

By tapping into the PayFi market, Nara is able to offer a truly unique and sustainable yield product that is poised to become a cornerstone of the DeFi ecosystem.