X Space Review | Decrypting Huma and PayFi: The Next Engine on the RWA Track

On November 22, BlockBeats invited Huma Finance Co-Founder Richard Liu and Folius Ventures Founder Jason to discuss the topic "Decoding Huma and PayFi: The Next Engine of the RWA Track," exploring the new narratives of RWA+PayFi.

BlockBeats: Welcome, both of you. Please start with a brief self-introduction.

Richard Liu: I am very pleased to be online and share with everyone. I am Richard Liu, Co-Founder of Huma Finance. Previously, I worked in Web2 for a long time, mainly at Google. Later, I started my own AI company and was acquired by Facebook.

Later on, I worked as the CTO at Fintech giant Earnin, deepening my industry experience in payments and lending. I also developed a strong relationship with the company's CPO and risk management team. We realized that many Fintech and payment companies faced significant challenges in obtaining working capital. Two and a half years ago, the three of us decided to establish Huma Finance together, using blockchain technology to address these pain points in payment companies' working capital. In this process, we saw that blockchain technology could effectively solve many pain points faced by payment companies. That's why we decided to create Huma Finance, and the project has been running for about 2 and a half years now.

Thanks to the support of all parties, our development has been relatively fast. Especially this year, after acquiring Arf Finance, we have become a significant project in the PayFi track. So when Solana promoted PayFi, we naturally became their first choice. As an important partner, we are jointly promoting the formation and rapid development of the PayFi track.

Jason: Hello, everyone. I am Jason from Folius Ventures. Our company was established in September 2021, so it has been three years now. Our company is a first and second-tier mixed investment institution, especially in the first tier. Our main investment projects are concentrated in the Asia-Pacific region, especially among Chinese entrepreneurs. We have always liked to deploy and invest more in the B2C track. Huma Finance is one of our few investments in the payment and payment finance track.

BlockBeats: First, could you both share your understanding of PayFi? How would you describe the essence and scope of PayFi?

Richard Liu: Before discussing PayFi, let me first talk about Payment Finance. Payment finance is about bringing future money to today for immediate use. For companies, it's about advancing future receivables; for individuals, it could be advancing future wages or other forms of income, allowing you to enjoy the value of this future money in advance. The value of this to both companies and individuals is very clear, and this market is already very large today.

For example, in the credit card market, when I use a credit card today, I actually pay 30 days later, but the payment company may pay the merchant in just two or three days. This is a huge market. Another example is various trade finance in cross-border trade, whether in Hong Kong or Singapore, which are important hubs, with a global market size of $10 trillion. Additionally, there is pre-funding of cross-border payments. Many times, cross-border payments require pre-funding, and this pre-funding market is $4 trillion. Altogether, the existing market is at least $30 trillion in size.

PayFi uses blockchain technology to enhance the efficiency of Payment Finance. Through blockchain technology, financial payment methods can be further optimized, new opportunities can be created, and problems that traditional financial methods cannot solve can be addressed. For example, when I make a payment from European Amazon to a Chinese merchant, it usually takes at least two days to arrive, but with these technologies, it could arrive on the same day. This is impossible with current technology, but PayFi can achieve it.

PayFi uses blockchain technology to optimize various financial financing. The essence of PayFi is the practical use I mentioned. For PayFi to make substantial progress, it not only needs to excel itself but also needs to excel in the various functional applications it supports, such as credit card payments, pre-funding of cross-border payments, and other functions. To truly excel in PayFi, the support of infrastructure is also needed, whether it's the underlying public chain, improvements in stablecoins, compliance, custody, or other aspects of infrastructure.

This is why we have released the PayFi Stack. If you haven't heard of this concept, you can visit our official website, where you can find a description of the PayFi Stack on the homepage. This is our understanding of the entire PayFi ecosystem.

The momentum behind PayFi as a whole was actually driven by a special contribution from Jason. In April of this year, Lily Liu, Chair of the Solana Foundation, gave a speech mentioning the term "PayFi," and the next day, I happened to meet her. Jason invited me to a special dinner where Lily Liu was also present. Lily and I exchanged ideas, and I mentioned that we have been working on payment finance and have already achieved a certain scale. Lily Liu said, "This is the best use case of payment finance I have seen." In fact, it was Jason who brought us together, Solana was willing to promote it, and with our project already having a product in place, a partnership was formed.

Jason: The term PayFi did not exist last year. Its emergence was actually defined by Huma Finance along with the entire industry chain. To summarize what Richard mentioned about cross-time, cross-border, ultra-short account periods, potentially cross-national stablecoin payment exchanges, and the resulting short-term borrowing needs, there are many pain points that could reduce the cost of peer-to-peer transfers. After regulatory and infrastructure alignment, utilizing blockchain payments could reduce costs by 5-10 times. I believe there is a great opportunity, and I look forward to seeing Huma Finance make great strides.

BlockBeats: Going back to Huma Finance itself, what are the advantages and positioning of Huma Finance?

Richard Liu: If you want to do payment finance, you must have a very powerful financial engine. The Huma Protocol itself serves this purpose. But having just one protocol is not enough because in the Web3 field, many protocols do not make money themselves, and building a sustainable business model is very difficult. We have learned that in Web2, many companies have a strong platform, such as Google, but what really makes money is its applications, such as the Google Search App, YouTube App, or third-party apps.

So we realized early on that we need to provide apps on a powerful platform, whether this app is our own or third-party. Later, we decided to first acquire a strong application, Arf, so we formed a platform plus application combination. It's like building a large complex and opening a very good supermarket inside to attract customers and other merchants; this is our strategy. Our platform has great potential for imagination, with the support of Arf. We expect the project to be profitable in the first half of next year, which gives us many advantages compared to other Web3 projects.

Next, our on-chain transaction volume has exceeded 2 billion US dollars, which is rare in RWA projects. From an investor's perspective, many RWA projects have only 1-2 investors at the million-dollar level or above, while we have at least 20 million-dollar level investors, with wallet addresses close to 1000. In the RWA project space, both the project itself and the level of investors are among the forefront. Solana focuses on promoting the PayFi track, and we also closely cooperate with Solana. The PayFi Summit held in Singapore in September was very successful, and next year we plan to co-host 5 PayFi Summits with Solana. Throughout the entire ecosystem, the public chain, Solana, and Circle have provided us with strong support. In addition, our investors are also very powerful. Our main investors are mainly from the United States and Europe, with very few Asian investors, only two, Folius Ventures and HashKey. We are very grateful for their support of the entire ecosystem.

Jason: I can briefly introduce how I met Richard and how we got involved, and why I have always been very optimistic about Richard and the project he is talking about.

I met Richard when I was conducting a background check for another company. Richard had worked at the company I was interested in investing in, so I reached out to him, and we hit it off. At that time, Richard had just started to delve deeply into Web3. After getting to know each other, we had multiple discussions about DeFi and the entire Web3 space. During this process, he gradually became firm in his idea of starting a venture in the Web3 field. Through our discussions, from initially being determined to enter the DeFi track, to later changing direction and ultimately choosing the current PayFi and cross-border payment niche, our approval of what he and his team are doing has been continuously strengthening.

Why are we optimistic about Huma Finance? Firstly, Richard and the team have a strong background in Silicon Valley, and both Richard and another co-founder have outstanding cognitive and execution abilities. They have made significant contributions to their previous companies, both in terms of execution and strategy. When doing things in Payment Finance or such a niche track, there is a process from 0-100. From 0-1, you need to find components that meet the track's requirements, and from 1-100, what you ultimately need to do is compete with traditional Web2 companies. It is indispensable to have a strong network, cognitive ability, whether in identifying pain points or making the project as competitive as the top web2 companies in the world.

The first impression this team gave me was both transcendent and worldly. When they first came to understand the industry, they did not look down on it or hold biases. Instead, they were very careful and humble in their approach to learning, delving deep into the industry. Furthermore, their past professional knowledge in the payment field, business management skills, and experience dealing with large traditional ToB companies ensure that they can steadily advance the project. Traditional Web2 teams have at least a basic sense of ethics, and I believe they can ensure the rights of shareholders, investors, and token holders. 95% of the Web3 entrepreneurs disappear after launching their tokens. Their team is very different from these entrepreneurs. Overall, we highly appreciate Richard's team's abilities.

BlockBeats: We have gained a preliminary understanding of Huma Finance. Next, let's talk about the specific business of Huma. Huma acquired the cross-border payment company Arf this year. So, what is the cooperation between Huma and Arf like? How do both of them leverage each other in the PayFi track?

Richard Liu: Huma Finance, as a financial platform, mainly serves investors and borrowers, allowing investors to provide funds and receive returns, while enabling borrowers to borrow and repay. Arf, unlike financial platforms like Huma, mainly provides funding services for cross-border payments. For example, when a user needs to remit money from Singapore or Hong Kong to South Africa, the traditional Swift method is both time-consuming and expensive. Therefore, many people choose to transfer money through various remittance companies such as Western Union, which can arrive on the same day. These remittance companies have a partner in South Africa and do massive on-site funding, where 20%-25% of the company's monthly revenue is funding the local company. So when a customer needs to remit money, they inform the local partner, allowing them to settle with the funding. However, this method is very burdensome for these remittance companies because they may have to deal with many countries worldwide, needing different fiat currencies to fund substantial amounts. Many times they are unable to provide funding.

Arf can accomplish this task by abstracting the funding service and using a stablecoin to provide funding services to payment companies. When a user approaches a payment company in Hong Kong to remit 1 million dollars to South Africa, Arf ensures that the user's million dollars is already deposited in a regulated account, and no one can access the funds before settlement. Before settlement, we have conducted due diligence on the company to verify its reliability. The payment company swiftly transfers the million dollars to us, and we transfer the equivalent of 1 million dollars in U to the partner in South Africa, who is responsible for completing deposits and withdrawals and ultimately transferring the funds to the user. After completing the above operations, we then notify the remittance company in Hong Kong that the funds have been settled. After the Hong Kong remittance company confirms the settlement, they can access the 1 million dollars stored in the regulated account. Throughout the process, we lend out stablecoin and receive back stablecoin, without intervening in deposit and withdrawal operations.

Looking at the entire process, our service targets licensed financial institutions, the vast majority of which are in developed countries such as the United States, the United Kingdom, France, and Singapore. Funds before lending will be held in regulated accounts, and only in this scenario do we engage in lending with the counterparty, hence our risk is extremely low. Moreover, the entire lending cycle is very short, ranging from 1 to 6 days, so everyone on the chain can see where the money is going. The fund turnover is very fast, resulting in a $2 billion turnover with zero bad debts.

Huma Finance acquired Arf, where you can think of Huma as a DeFi platform, with RWA assets placed on the platform to allow investors to participate and earn returns. In the entire partnership, Huma is responsible for bringing in funds, and Alf is responsible for utilizing these funds in actual business operations. Arf's annualized return is already close to 20%, and we can provide investors with returns in the tens of percentages; this is the relationship between the two.

BlockBeats: What are the main sources of revenue for Huma? Can you also discuss how the HUMA token captures value in the ecosystem?

Richard Liu: Huma's revenue model has several aspects. Firstly, as a platform, we charge platform fees. We charge platform fees for the revenue generated by Arf or other projects on the platform. Secondly, Arf is our first First-Party App, but it won't be the only one. Currently, Arf can bring us relatively high revenue. In the future, we will incubate other First-Party APPs, which are FinTech themselves and can bring in higher revenue. Thirdly, on our platform, there are many other applications. Since we conduct strict risk control and have a deep understanding of their underlying conditions, we can participate as LP in these protocols. We may participate in some higher-risk projects, which in Chinese we call "subordinated," because the vast majority of users who do not understand well may prioritize, but we are fully capable of understanding the project comprehensively, hence, we can play the "subordinated" role to achieve higher returns.

In summary, our revenue model mainly includes platform fees, which is a common revenue method for all RWA platforms. Our own First-Party APP, the revenue it generates may far exceed that of the platform itself. When our funds reach a certain scale, we can participate as LP in platform projects, which can also bring in higher revenue. Most of these revenues will be converted into returns for investors. Even in unfavorable market conditions, we believe we can provide returns that are on average more than 7% to 8% higher than the market.

Jason: The above mentioned is the LP's yield. What is the current equity split of Huma Finance, the future equity split, and the share of token investors? How do you distribute them?

Richard Liu: All of our investors receive both equity and token warrants. In the future, we plan to issue tokens, so the exit for our investors is more through the Token channel. How does Huma's token capture value in the ecosystem? I think there are two points: the project itself can be profitable, so there is a lot of flexibility to bring value to token holders, whether it's creating a VE model where stakers can earn more rewards, or through token buybacks.

Actually, some people have questioned us, believing that our project has so many favorable conditions that we should have more innovation in terms of the Token, hoping that we can create a unique coin. I've taken this advice to heart. Currently, I am discussing with Jason and the team. In addition to the VE model and deflationary model, we may also introduce some new elements to bring innovation to the token.

Jason: The LP's USD placed on the Huma platform is actually withdrawn from the pool, then goes through a round of rolling, and then returned. Can we understand it this way?

Richard Liu: Actually, that's correct. The early stage of LP will generate relatively high returns. Now, through our own project, we can generate returns. Later on, we will integrate with other projects to nest eggs and bring even higher returns to everyone.

Jason: Currently, as an LP, depositing USDC into Huma, the USDC in this staked portion is non-transferable, so for now, there is no way to enjoy the staking rewards, such as potential rewards on Pendle or AAVE. Can you explain further?

Richard Liu: Right now, through Huma and Arf alone, we can generate over ten percent of actual returns unrelated to the token. Additionally, we will issue tokens and introduce a point reward mechanism. Since we have built a robust infrastructure, the next natural step is to integrate with platforms like Pendle. Due to our relatively high yield, I believe many projects will be willing to integrate with us, allowing LPs to earn even more rewards by participating with us.

BlockBeats: How is Huma Finance's PayFi revenue model designed in this sector to be more sustainable and resilient to market fluctuations?

Richard Liu: When we founded this company, we believed that with our background and support from many outstanding investors, we were confident in creating a decent project. Right from the beginning, we set a clear goal that we must establish a sustainable, cross-cycle project. If a project can only last for one cycle, it dies after the hype, and that's not what we want to do.

Today, the revenue we bring to users is achieved by investing capital in real-life scenarios, where the returns are tangible. This kind of revenue is very robust and can withstand market fluctuations. Typically, as we grow our business with clients, the customer base usually increases rather than decreases, and as the customer base expands, revenue continues to rise. So, for me, this is a sustainable business.

From an investment perspective, if we can consistently provide good returns, investors will continue to support us. Especially when the cryptocurrency market is in a downturn, and many don't know where to put their money, if at that time our project can still generate relatively high returns, I believe the majority of funds will come to us. During a bull market, we strive to obtain funds from traditional funds, but in a bear market, I believe a lot of cryptocurrency funds will also flow to us.

Jason: Through this cross-border payment method, users are not exposed to peer-to-peer risk but rather to the risk between financial institutions. I would like to understand the credit ratings of these financial institutions. During the transfer process, what level do the receiving and sending parties belong to? There might be a misconception that Luna's promise of a 20% return ultimately failed. Does that mean any project promising a 15% or 20% return is a scam? How many times exactly does LP's fund transfer occur? How much money needs to be set each time for the expected return rate to be achieved? Could you briefly answer these questions?

Richard Liu: Our clients are all licensed financial institutions. According to Standard & Poor's statistics on financial institutions over the past 20 years, the default rate between these financial institutions is 0.25%, and it is expected to remain at this level in the future. This data is comprehensive globally, covering both developed and developing countries. Currently, our main borrowing targets are financial institutions from developed countries such as the UK, US, France, and Singapore. The default rate in these countries or regions is usually lower than the global average. Furthermore, our payment terms are basically 1 to 6 days, gradually shortening to 1 to 3 days. We charge on a daily basis, and in this model, the default rate is very low, statistically much lower than 0.25%. Currently, it is 0, and we expect it to remain at a very low level in the future.

Jason: You take the LP investor's money out and distribute it to various financial institutions, each financial institution holds the funds for 1-3 days and then returns it. This can happen 50 to 100 times in a year. Each time, you only need to charge around 10%, 20%, or 30% as a fee to achieve a 13-15% return.

Richard Liu: The actual return should be higher than what you mentioned. Many of our current clients are quite stable; borrowers pay daily interest in the range of 1.5% to 1%, and the annualized interest rate could reach up to over 20%. However, our funds are not always fully deployed, especially when there is a large inflow of funds, the short-term fund utilization rate may drop to 70%. Normally, the fund utilization rate is around 80% to 90%, making it hard to reach 100%. Hence, the actual annualized return can be around 20%. Luna's high yield is achieved through financial leverage, whereas our returns do not involve any leverage; the earnings are straightforward fees collected daily. The clients' fund utilization rates have a certain stability and are committed to in the agreements. For example, if we provide a $10 million credit line, you need to pay the corresponding fee. Even if only $8 million is used, the fee must be based on $10 million.

Jason: This is somewhat like an international financial institution issuing you an encrypted credit card that allows you to borrow and repay at will.

Richard Liu: When a party borrows money today, the corresponding bill settlement is completed, and the borrower must repay promptly, so there is borrowing and repayment every day. This is different from a credit card where the repayment period is 30 days, posing much higher risks as within 30 days, I cannot see the fund inflow. We ensure that each fund movement is very transparent. Additionally, we mint each transaction into an NFT on the chain for tracking and viewing.

Jason: This is one of the reasons we are so excited. In fact, Luna's approach seems like robbing Peter to pay Paul. However, Richard's product addresses a significant demand in the traditional Web2 financial system, which can be magnified. As long as their BD is well executed, there is a very high demand from traditional finance for this product, and the potential seems almost limitless. So, the only bottleneck is how fast they can scale.

Richard Liu: If you participate as an LP, you will find the entire SPV structure particularly clear. Regarding the allocation of internal funds within the SPV, we have set many agreements. For example, every month our net profit must be positive. We do not use next month's funds or the next investor's money to cover the current expenses. Each month, after deducting operating expenses and investor fees, we retain 2.5% of the earnings; otherwise, our SPV would be considered in default. Therefore, our SPV has strict rules in place, leaving no room for any robbing Peter to pay Paul. Every month's funds are real.

BlockBeats: For ordinary investors, what are the ways for them to participate in PayFi?

Jason: If it is specifically targeted at short-term cross-border value conversion investment, the simplest way for ordinary investors is to complete KYC, and then stake within Huma. For the vast majority of people, there is no most direct way to participate. Currently, the RWAs we are talking about involve several aspects. One is to onboard real-world, more popular assets onto the chain, such as wine. Another is to use on-chain money to invest in popular assets, which you can participate in through Ethena. Apart from these, if you use on-chain funds to invest in offline long-term credit products, especially uncollateralized, it may lead to bankruptcy within one cycle. We have seen many such cases in the previous cycle.

I feel that currently in the Crypto ecosystem, besides holding the coins of Ehena or ONDO, staking in the Huma product is the best way. If you have the opportunity to come into contact with quasi-equity of companies like Twitter, you might buy a bit, betting that they can enter the PayFi track. Or you can buy the tokens of public chains that highly value the PayFi track.

Richard Liu: We will open a fund pool approximately once a month, with a scale between 10 to 20 million US dollars. There are certain requirements for participation, and you also need to see if the product meets your needs. Besides Arf on our platform, we have other products as well. When we collaborate with others on early-stage products, we usually conduct experiments with our own funds first. Once my product is up and running, then we will promote it. There will be more products launched in the next few months.

BlockBeats: From the perspective of the Solana Foundation, what is the position of PayFi in its strategic layout? Does the Foundation see PayFi as an important direction to drive Solana's ecological breakthrough? Can you share some practical support measures or future plans observed by the Foundation?

Jason: In terms of infrastructure, when the cost of each transaction and the user admission threshold are low enough, the entire Web 3 will enter a new era of ecosystem competition and BD. In this era, public chains that excel in these aspects will stand out. The tokens behind these three companies, Solana, Telegram, and Coinbase, are very interesting. Solana has always been more focused on landing and consumer-facing applications. For example, AI Agent, meme, and the past STEPN are all the results of Solana's strong replication, and they have provided a lot of support in terms of infrastructure. They are actually highly related to high-frequency payment scenarios. If they can significantly lower the user threshold in payment or payment financing, it is clearly beneficial for the sustainable development of the public chain itself.

Richard Liu: In fact, within the Solana ecosystem, there is not only the Foundation but also a very strong team. The Solana ecosystem collaborates closely with many top projects. So, I would like to talk about some of our collaborations within the Solana ecosystem.

Personally, I am very pleased with our collaboration within the Solana ecosystem. In the past few months, I feel that they have accomplished everything I could think of. First, in terms of marketing, we jointly organized the PayFi Summit. Throughout the entire process, Solana has been very supportive and respectful towards us, without controlling the narrative. Not only was it held this year, but next year we will also jointly host it five times, their commitment is very strong.

In the development process, my team mainly focuses on EVM-related matters, and I am also a very skilled Solidity engineer, but Solana's architecture is in a completely different realm for us. So during the development process, we clearly expressed the need for help, and they arranged for two very excellent engineers to follow up in real-time, ensuring that our direction was correct, which I am very grateful for, and the entire development process went smoothly. Liquidity is the biggest pain point in the entire RWA. During the launch process, Solana recommended many LPs (Liquidity Providers), a significant portion of the funds invested today was introduced by Solana, and some funds will be in place next month. I hope to have some smaller investors participate as well, so that not all shares are held by large holders.

PayFi is an emerging project, and I am very passionate about it. I believe it is a product that the entire crypto community is looking for, a product that can truly land and have a huge impact on real life, and PayFi is such a product. But this process requires a lot of publicity. Many people in the Solana ecosystem are writing articles about PayFi for promotion. Top projects in the Solana ecosystem are also in close contact with us, discussing how to collaborate. Recently, Jupiter has expressed support for our launch on Solana and has made it clear that they will collaborate with us. The entire Solana ecosystem is actually very positive about PayFi, from the Foundation to the team to the top projects in the ecosystem.

BlockBeats: What are the upcoming development plans for Huma?

Richard Liu: Our top priority is to enhance the competitiveness of the Arf product and, on top of that, ensure that the entire Huma team and related communities are profitable. There are few projects that can achieve this quickly. Secondly, why did I decide to transition from Web2 to Web3. I believe that Web3 is developing very well, and we hope to at least theoretically allow early users and the ecosystem to benefit from the success of the project. I hope that more small holders can participate, and I am very positive about this. Therefore, we are actively preparing for the TGE, which is also an important task for the coming months.

The development of PayFi relies not only on the Solana Foundation or Human Protocol but also on the collective efforts of many other projects. We are actively promoting the development of other projects within the ecosystem. Currently, we have five to six pools, and we expect this number to double in a few months. At the same time, we will continue to drive the development of the PayFi Summit. Although this does not directly impact our business, it is very valuable for the overall ecosystem.

In the next phase, we hope to have more integrations with additional DeFi projects. As I mentioned before, our yields are very high, putting us in a strategically advantageous position. But how do we build a product that everyone truly expects and admires? In this process, we need a lot of feedback from the community to create a product that truly meets everyone's expectations.

Jason: We briefly mentioned an issue earlier that the USDC staked into Huma itself cannot be restaked because Huma has made many security adjustments in its design to ensure the overall product's security. However, will the assets staked later be restakable like in other protocols? Is there a plan for this in the future?

The answer is Yes. Our team has been actively looking for a solution. We do this because I prioritized security from the beginning and set three principles for the team: minimize administrator privileges, even if you have the private key, you can steal Huma Finance's money, but you absolutely cannot steal users' money; achieve 100% test coverage for the contract, testing every branch comprehensively; minimize reliance on other products, so we have not done any external integrations at this stage.

Due to the significant amount of work done on security, integration is somewhat weakened. However, our system has been running stably for over a year, and its security has withstood the test. Next, we will do more integrations, possibly collaborating with projects like Pendle, so that users can participate in Huma Finance and other projects through Huma.

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