The largest hindrance to the growth of blockchain technology is the presence of a large number of siloed chains, which can barely transfer assets to one another. Though there have been several solutions like Chainlinks Cross Chain Interoperability Protocols (CCIP), they saw limited success.
Here, PayFi can play a critical role in establishing a demand for cross-chain communications and help interconnect at least major blockchains.
In this article, we shall briefly discuss how PayFi can bring a revolution in crypto adoption with its demand for cross-chain transfers. We will also take a look at India’s UPI technology which solved a similar crisis in Indian payment networks between 2015 to 2020.
Blockchains Desperately Need Cross-Chain Transfers
The current blockchain space is riddled with blockchains that are not interconnected with other chains, which stops the growth of the entire industry. Further it also hampers the user’s capacity to transfer assets to other chains based on their needs.
The reason for these “siloed” blockchains is the lack of a proper demand that could drive projects to innovate further.
Ethereum has the highest liquidity and hence is the preferred DeFi blockchain, BNB chain has the lowest fees and hence is used for asset transfers, payment settlements, etc. Solana has a resilient chain with low fees and is therefore used to launch meme coins.
All these chains are used by the same users but for different purposes. If any user buys a Solana memecoin, then to transfer it to his BNB wallet, he has to go through an arduous and often risky process of wrapping and bridging.
With PayFi, blockchains could be forced to explore more cross-chain solutions or risk losing their relevance. This seems likely because
Lessons from United Payment Interface (UPI)
India’s indigenous payment system, UPI which currently rivals Visa and Maestro payment channels, addressed a similar environment that we currently see in the crypto space.
Although there were payment apps in India by 2016 (the year of the much debated “Demonetization”), none of them worked with each other. Further, there was no consensus in creating a common layer. Unlike blockchain technology, developing on Web2 systems was more risky and less transparent which added to the clutter.
The same year (i.e., 2016), under a government mandate, several banks, RBI and payment processing companies joined hands to create a common technology called United Payments Interface (UPI). This UPI then served as the base layer of inter-bank transfers and all other payment solutions (apps) would be built on this layer. By 2020, almost all issues with intercompatibility were driven out.
A similar technology already exists for Web3 called the Inter-Planetary File System or IPFS. This IPFS is used by several blockchains to store data, images, videos, applications, and a lot of other things. For example, the whole NFT culture was dependent on IPFS for easy management of NFT multimedia.
For creating a cross-chain asset transfer mechanism, there is a need for such partnerships where the base blockchain (not Base chain of Coinbase), lets call it zero layer, would be created with the help of a blockchain consortium.
Such a project has already been active in the crypto space but with a limited reach. Chainlink’s CCIP now connects over 60 blockchains through its inter-chain transfer protocol.
You can study it in depth with the links provided in this official tweet.
However, smaller blockchains still resist adoption fearing the loss of their own independence in terms of technology.
Will This Drive Crypto Adoption?
A reliable cross-chain solution would definitely drive crypto adoption as users are already looking for ways to spend directly in crypto. Though the entry of crypto-based Visa and Master Cards are getting common, yet these are centralized solutions and violate the basic principle of decentralization.
For better decentralized control, blockchains need a viable solution which is driven by financials. The financial need for a cross-chain payment protocol can only arrive when there is sufficient demand which is only possible with the growth in the PayFi market.
Did you know that Shardeum was one of the pioneers of PayFi?
