Some common terms and concepts in the crypto ecosystem include DeFi (Decentralized Finance), CeFi (Centralized Finance), and GameFi (Game Finance). More recently, a new concept in the financial world has emerged that aims to revolutionize existing payment systems: PayFi.

PayFi, or payment finance, is an innovative technology that integrates blockchain technology. It focuses on and facilitates transaction time settlement, which refers to the time it takes for a transaction to be confirmed on a blockchain.

Unlike DeFi, which focuses on the overall financial services on decentralized platforms and applications, PayFi has a much narrower focus, focusing more on facilitating and completing immediate, high-stakes financial transactions.

The Origin of the Term PayFi

On July 8th, 2024, Lily Liu, the President of the Solana Foundation, delivered a keynote speech at the 7th EthCC Conference titled “The emergence of PayFi: realizing the vision of cryptocurrency.” In her keynote speech, Lily extensively discussed the concept of PayFi, highlighting its potential to revolutionize the payment industry.

Before this time, Lily Liu has subtly introduced this concept via her social media accounts numerous times this year. According to the president of the Solana Foundation, for PayFi to succeed, three core conditions must be met: speedy and cheap transactions, widespread adoption, and a solid developer community.

Notably, Lily Liu is not the only advocate of PayFi. Some projects like Ondo Finance, Huma Finance, and Karrier One now have use cases built around payment finance.

The Benefits of PayFi: Real-Time Settlement of Transactions, Increased Security, Reduced Cost, Wide Accessibility and Expansion of Traditional Payment System

Real-Time Settlement of Transactions

Time settlement refers to the duration it takes to complete a transaction. Unlike traditional financial systems, which may sometimes delay facilitating and completing transactions, PayFi allows for the immediate processing of transactions.

Thus, users can engage in transactions, confident there won’t be any delay. That is why PayFi will be crucial for businesses in the e-commerce ecosystem, which depends on the swift movement of funders.

Increased Security

Blockchain technology is the architecture on which PayFi is built. Thus, users can benefit from the high-level security of blockchains. Since transactions are usually recorded on the blockchain, users can benefit from the transparency features of blockchain networks.

In addition, the numerous cryptographic algorithms employed in building blockchains can help encrypt and protect users’ data, ensuring that this data is tamper-proof and immutable.

Reduced Cost

Unlike traditional financial transactions, which are facilitated by central authorities and intermediaries such as banks, PayFi leverages the peer-to-peer feature of blockchain, allowing users to transact directly without any intermediary to facilitate transactions, thereby reducing transaction costs.

Accessibility

The traditional financial system is characterized by geographic segmentation and other barriers. However, PayFi can reach the global market, allowing the unbanked or those that the traditional financial system might have fragmented to benefit.

So long as users have a mobile device and an internet connection, PayFi allows financial inclusion of all sorts of users, allowing them to access payment, savings, and lending services. Thus, users can achieve financial independence, inclusion, and socio-economic equality wherever they live.

PayFi: Tackling the Limitations of Existing Blockchain Payment Solutions

While PayFi’s vision is to use blockchain technology to revolutionize the currency payment system, leveraging blockchain technology to facilitate efficient and low-cost transactions, it also brings into reality Bitcoin’s vision: for Bitcoin to become a global mode of payment.

Let’s take a moment to discuss Bitcoin’s vision. On October 31, 2008, Satoshi Nakamoto, the pseudonymous personality behind Bitcoin’s creation, released the revolutionary whitepaper “Bitcoin: A peer-to-peer electronic cash system.”

In that whitepaper, Satoshi Nakamoto highlighted that Bitcoin was a cryptocurrency created for use as a decentralized payment. Hence, Satoshi wanted Bitcoin to be used as a global payment system that allowed users to transact directly in a peer-to-peer manner, bypassing the existing centralized intermediaries.

While Bitcoin has successfully spearheaded the cryptocurrency revolution, it has not fulfilled Satoshi’s goal of becoming a medium of everyday payment. Instead, it is seen more as a store of value than a currency for daily transactions.

The Emergence of StableCoins

Stablecoins are cryptocurrencies with a high degree of stability. To withstand the fluctuation and volatility of the cryptocurrency market, they are usually pegged to real-world assets, such as fiat currencies like the US dollar, gold, or other financial assets.

To bridge the gap between cryptocurrencies and the real-world financial system, Tether Limited, a company co-founded by Brock Pierce, Reeve Collins, and Craig Sellars, launched Tether USDT, the first stablecoin pegged to the US dollar. USDT was created to facilitate everyday transactions.

Since the launch of USDT, over 200 stablecoins have been created, including popular ones like the USD Coin and the Gate Dollar. Since 2014, stablecoins have witnessed exponential growth, supporting approximately $2 trillion in payments per year.

While stablecoins have done a great job promoting blockchain payments and trying to bridge the gap that once existed between blockchain and traditional payment, they still face many challenges, including poor user experience, transaction delays, and compliance issues.

These challenges have hindered the widespread application of blockchain payment as a mainstream payment medium. This is precisely where PayFi comes in.

PayFi is tailored for immediate operations, transforming invoice financing and reverse factoring processes. By enhancing transaction speed, security, and transparency through smart contracts and blockchain, PayFi improves the efficiency of financial dealings and provides a solid framework for businesses aiming to streamline their operations in a competitive marketplace.

The Core Principle of PayFi: The Time Value of Money

PayFi introduces a new approach to creating basic financial components and developing financial products that focus on the time value of money. The time value of money is a core concept in finance that highlights the difference between the value of money and time. It states that a given sum of money now is usually worth more than that amount in the future.

This is because current money can be used immediately for investment, income generation, or consumption, thus serving as a utility. PayFi utilizes blockchain, allowing users to get the most time value of their funds cheaply and efficiently.

Utilizing smart contracts and the power of decentralization, PayFi allows users to manage their funds directly, eliminating the need for intermediaries. This reduces transaction costs and shortens transaction settlement time.

Since users can easily transact (send and receive money), they have complete access to their funds, which allows them to enter the market for re-investment or other purposes. That is why PayFi will drive transformative innovations in speculative markets, where trades last only for a short period.

Examples of PayFi Projects: Huma Finance, Ondo Finance and Karrier One

Huma Finance

Source: Huma Finance’ Website

Huma Finance is a payment finance (PayFi) network that uses blockchain technology to tokenize real-world assets. Real-world assets are traditional or physical assets that exist in the real world and can be represented by crypto tokens on a blockchain.

Leveraging on tokenized real-world assets, Huma Finance aims to provide a Payment Finance (PayFi) solution that’s much faster than existing traditional financial systems, making it easy for users to perform fast and instant transactions on a global scale.

On September 12, 2024, Huma Finance secured $38 million in investment funding from Distributed Global, Hash Key Capital, and Folius Ventures, among others, to expand and scale up its operations on prominent blockchain networks like Solana and Stellar.

Utilizing these funds, Huma Finance will now be able to move forward with its PayFi goal of making financial transactions more seamless and accessible to all, regardless of demographic barriers or geographic locations.

Ondo Finance

Ondo Finance is a DeFi platform that tokenizes real-world assets. It offers institutional-grade blockchain-based financial products and services.

Nathan Allman, a Stanford graduate, founded Ondo Finance. Allman aimed to bring traditional assets on-chain, driving ground-breaking innovations in the financial industry.

One of its key innovative ideas is to bridge the gap between traditional and decentralized finance, allowing users to trade tokenized versions of real-world securities in a regulated environment. Ondo Finance has attracted several investors and raised more than $50 million. In 2023, it launched two financial products: OUSG and USDY.

OUSG

OUSG, short for Ondo US Government Treasuries, is an institutional-grade financial product backed by Blackrock’s tokenized fund, BUIDL. Cash, US treasury bills, and repurchase agreements back this fund.

USDY

USDY, short for US Dollar Yield, is a crypto token [a stablecoin alternative] offering yield to its holders. It is backed by short-term treasuries and bank demand deposits.

The USDY token allows its holders to own or hold their money and other financial assets in US dollars, allowing them to earn yield and profit in return. In essence, Ondo Finance leverages blockchain for payment, promoting the development of payment finance.

Karrier One

Karrier One is a carrier-grade decentralized blockchain network that integrates payment and a decentralized physical infrastructure network (DePIN). DePIN aims to connect the digital world with the real world, providing incentives and blockchain tokens to build infrastructures in the real world.

The combination of payment and DePIN makes Karrier One highly relevant in the telecommunication industry, providing companies with seamless coverage worldwide.

Utilizing its Karrier Number System (KNS), Karrier One allows users to get a Web3 wallet directly linked to their phone numbers. This integration is beneficial as it allows users to participate in different DeFi activities, whether sending or receiving cryptocurrencies.

By integrating PayFi into its current payment infrastructure, Karrier One makes transaction processes seamless and fast for its users. And as the number of mobile phone users interested in exploring Web3 continues to increase, PayFi will become more relevant.

Conclusion

PayFi can transform the financial landscape by offering innovative solutions prioritizing speed, security, and efficiency. Integrating blockchain technology into the concept means key challenges in traditional financial systems, particularly in supply chain finance. While regulatory hurdles and scalability remain, ongoing technological advancements suggest a promising future for PayFi.

PayFi has the potential to redefine how businesses conduct financial transactions, making them more accessible and reliable for a global audience. This new paradigm could enhance operational efficiency and pave the way for a more inclusive financial ecosystem.