Article Hash (SHA 1): 8656ff83d95af1de9dab2b925597cf72c6f63c66
Number: Lianyuan Security Knowledge No.032
With the continuous development of blockchain technology, the financial industry is undergoing an unprecedented transformation. In this context, an emerging concept has gradually emerged: PayFi (Payment Finance). This term was first proposed by Lily Liu, Chairman of the Solana Foundation, at the 2024 EthCC conference to explore an innovative payment and financial model. PayFi's vision is not only a payment system based on cryptocurrency, but also hopes to provide users with safer, faster and lower-cost financial services through decentralized technology combined with the time value of currency.
1. PayFi’s core concept: the time value of money and decentralized finance
What is PayFi
Lily Liu mentioned that the core motivation of PayFi is to realize the original vision of Bitcoin payment, that is, to apply blockchain technology to the payment field and build an open, transparent, and intermediary-free financial system. Compared with **DeFi (decentralized finance)**, PayFi focuses on creating new financial primitives around the "time value of money." The time value of money (TVM) is a basic concept in finance, emphasizing that current currency has a higher value than future currency. PayFi's goal is to enable users to maximize the time value of currency and achieve fast and efficient financial operations through smart contracts and decentralized technology.
PayFi’s Vision
The ultimate vision of PayFi is not only to realize Bitcoin's "peer-to-peer electronic cash system", but also to build an open financial system that allows users to have economic sovereignty and self-custody capabilities. Through smart contracts, the use of currency will no longer be limited to traditional payment methods, but can automatically perform complex financial operations according to set rules. For example, with PayFi, users can automatically complete payment, lending, investment and other operations without the intervention of a third party, greatly improving the efficiency and transparency of financial activities.
2. Application scenarios and technical principles of PayFi
1. Buy Now Pay Never: Maximize the Time Value of Money
When discussing PayFi, Lily Liu often mentioned three key application scenarios: "Buy Now Pay Never", "Creator Monetization" and "Account Receivable". Among them, the concept of "Buy Now Pay Never" is particularly eye-catching, which represents how to maximize the purchasing power of users through the time value of money.
This model is different from “Buy Now Pay Later”, which allows users to pay in installments through credit loans, but they have to pay a certain amount of interest. In the “Buy Now Pay Never” model, users deposit funds into DeFi or PayFi products and use interest-bearing income to pay for goods or services. For example: When you buy a $5 cup of coffee, you can choose to deposit $50 into an interest-bearing account. When the interest in the account accumulates to $5, the cost of the cup of coffee will be automatically paid. This process does not require active user operation. All transactions are automatically executed by smart contracts, and users do not need to sacrifice too much cash flow for this.
Case Study: Compound and Aave’s DeFi Model
Take DeFi platforms Compound and Aave as examples. These platforms allow users to deposit assets into liquidity pools and earn interest through lending agreements. Users can deposit funds on these platforms and use the interest generated to pay for consumption. This "Buy Now Pay Never" model not only improves the efficiency of fund use, but also reduces the financial burden on users.
2. Creator Monetization: Creator’s self-financial management
In the field of content creation, PayFi provides creators with a new monetization model. Traditionally, creators earn income through advertising, sponsorship or subscriptions, but these models often require the participation of intermediaries (such as YouTube, Patreon and other platforms), resulting in the creators' income being deducted by the platform. With PayFi, creators can interact directly with fans and build a payment system based on smart contracts. Fans' rewards, subscriptions or purchases will interact directly with the creator's digital wallet without going through an intermediary. More importantly, creators can choose to deposit a portion of their income into interest-bearing products based on the time value of money so that they can continue to earn income in the future and form long-term passive income.
Case Study: Steemit and Mirror Protocol
Platforms such as Steemit and Mirror Protocol have already achieved success in this area. Steemit directly links user-generated content with token rewards through blockchain technology, while Mirror Protocol allows creators to earn income by tokenizing their content. The success of these platforms proves the effectiveness of the decentralized financial model in content creation.
3. Account Receivable: Blockchain solution for accounts receivable
Accounts receivable financing is an important area in traditional finance, especially for small and medium-sized enterprises, which can alleviate cash flow pressure through accounts receivable financing. However, the traditional accounts receivable financing process often involves complex review, mortgage and liquidation processes, which makes it difficult for companies to obtain funds in a timely manner. The emergence of PayFi provides an efficient solution for accounts receivable financing. Through blockchain technology, accounts receivable can be "tokenized", that is, accounts receivable are converted into digital assets that can be traded on the chain, so that companies can quickly obtain funds while reducing credit risks. This process not only accelerates the financing efficiency of enterprises, but also improves the transparency and security of the financial system.
Case Study: Tradle and InvoiceFair
Platforms such as Tradle and InvoiceFair have achieved initial success in this field. Tradle digitizes and automates accounts receivable through blockchain technology, while InvoiceFair allows companies to convert accounts receivable into working capital through blockchain technology. The cases of these platforms demonstrate the application potential of blockchain in the traditional financial field.
3. PayFi’s security challenges and solutions
Although PayFi has great potential in theory, it also faces a series of security challenges in practical applications. Especially in a decentralized financial environment, how to ensure the security of users' assets, how to prevent hacker attacks, and how to ensure the security of smart contracts are all issues that need to be explored in depth.
Security of Smart Contracts
PayFi’s operation is highly dependent on smart contracts, and security vulnerabilities in smart contracts may lead to serious financial losses. In the past few years, there have been many hacker attacks in the DeFi field due to smart contract vulnerabilities, and users’ assets have been stolen in an instant. Therefore, in the application scenario of PayFi, it is crucial to ensure the security of smart contracts.
In order to reduce the risk of smart contracts, the development team must follow a strict code audit process to ensure that smart contracts are fully tested and audited before going online. In addition, the PayFi platform can consider introducing technical means such as multi-signature mechanisms and time locks to further enhance the security of assets. For example, when users make large payments or transfers, the system can automatically trigger a time lock, requiring users to confirm the transaction within a specified time to prevent assets from being maliciously transferred.
Case Study: Balancer Vulnerability Attack Incident
In August 2023, the DeFi platform Balancer suffered a smart contract vulnerability attack. The attacker exploited the system's contract vulnerability and stole about $900,000 in funds. Although the platform quickly responded to the incident, it also highlighted the potential risks in smart contracts. Such incidents have prompted the DeFi industry to continuously improve security audits, monitoring and response mechanisms to prevent possible future attacks.
The Challenges of User Self-Hosting
In a decentralized financial system, users need to keep their own private keys, which means that if the private keys are lost, users will not be able to recover their assets. In order to help users better manage their private keys, the PayFi platform can develop a series of user-friendly wallet management tools, such as hierarchical deterministic wallets, mnemonic backup tools, etc. In addition, the PayFi platform can also launch security measures such as multi-factor authentication (such as fingerprints, facial recognition) to ensure that users can recover their assets through other authentication methods when they lose their private keys.
Case Study: BitGo and Ledger
Companies such as BitGo and Ledger have been successful in improving the security of user assets. BitGo provides multi-signature wallet services, while Ledger provides hardware wallet solutions. These tools effectively improve the security of user assets and reduce the risk of private key loss.
Hacker Attacks and Protection
As the PayFi ecosystem continues to develop, the risk of hacker attacks is also gradually increasing. In order to effectively prevent hacker attacks, the PayFi platform must continuously improve its technical protection capabilities. For example, the platform can respond to hacker attacks by establishing firewalls, DDoS protection mechanisms, and real-time monitoring systems. At the same time, the PayFi platform can cooperate with professional blockchain security companies to conduct regular system security tests to promptly discover and fix potential security vulnerabilities.
Case Study: Poly Network Attack
In 2021, Poly Network suffered a record-breaking $60 million attack. This incident exposed the potential security risks of decentralized cross-chain protocols and prompted the industry to increase its investment in security protection.
4. International compliance: PayFi’s path to globalization
As an emerging payment and financial model, PayFi is gaining more and more attention around the world. However, with the rapid development of blockchain technology and decentralized finance, regulatory pressure is also increasing. In the process of promoting the globalization of PayFi, how to ensure compliance is an important issue.
Diversity of the global regulatory environment:
Countries around the world have different regulatory attitudes towards cryptocurrencies and decentralized finance. Taking the United States as an example, the U.S. Securities and Exchange Commission (SEC) has put forward strict regulatory requirements for cryptocurrency trading platforms and DeFi protocols, requiring these platforms to comply with securities laws and conduct KYC (know your customer) reviews. In contrast, some European countries (such as Switzerland) have a more open attitude towards cryptocurrencies and decentralized finance, allowing these platforms to operate freely under a certain regulatory framework.
In the process of promoting globalization, the PayFi platform must fully consider the regulatory requirements of different countries to ensure that its services are legal and compliant in different jurisdictions. For example, the PayFi platform can cooperate with financial regulators in various countries to ensure that its products comply with local anti-money laundering (AML) and counter-terrorism financing (CFT) regulations.
Compliant technical solutions:
In order to meet global compliance needs, the PayFi platform can introduce a series of technical solutions. For example, the platform can ensure that the user's identity information is verified and monitor suspicious transactions by integrating the identity verification system (KYC) and anti-money laundering tools. At the same time, the PayFi platform can use the transparency of blockchain technology to conduct automated compliance reviews to reduce manual intervention and operational errors. In addition, the PayFi platform can also develop compliance reporting tools, regularly generate compliance reports, and submit them to regulators to ensure continued compliance with regulatory requirements.
5. Case analysis: PayFi’s application in reality
To better understand the practical application of PayFi, we can refer to the following specific cases:
Case Study 1: DeFi Payment Innovation
A well-known coffee chain has introduced the PayFi payment system in many countries around the world. Instead of paying cash, users deposit part of their funds into the platform's DeFi product and use the interest to pay for goods. Through PayFi, the chain has reduced user payment costs and increased customer stickiness.
Case Study 2: Monetization Plan of Creator Economy
A well-known content creator interacts directly with his global fans through PayFi, and users' rewards and purchases go directly into his digital wallet without going through the commission of the intermediary platform. This new monetization model makes creators' income more transparent and obtains higher returns in the long run.
Case Study 3: Accounts Receivable Financing for Small and Medium Enterprises
A small and medium-sized enterprise used the PayFi platform to tokenize accounts receivable and obtain financing quickly, which reduced the time and procedures for traditional bank audits, lowered credit risks, and helped the company solve the problem of capital turnover.
6. Future prospects of PayFi
As an important innovation in the payment and financial fields in the blockchain era, PayFi has broad development prospects. In the future, with the continuous evolution of blockchain technology, the maturity of decentralized finance (DeFi), and the improvement of the global compliance system, PayFi is expected to achieve major breakthroughs in many aspects. The following are possible development directions and trends of PayFi in the future:
Wider application scenarios
At present, PayFi's application scenarios are mainly concentrated in the fields of payment, accounts receivable financing and content creator monetization. However, as its technical architecture improves, PayFi is expected to play a role in more industries and fields. For example, traditional financial industries such as cross-border trade, supply chain finance, insurance and real estate can improve efficiency, reduce costs and reduce intermediary dependence through the decentralized characteristics of PayFi.
Especially in the field of cross-border payments, PayFi can provide small and medium-sized enterprises with convenient, fast and low-cost solutions. Through the automation process of smart contracts, users can make barrier-free payment operations around the world, eliminating traditional problems such as exchange rate fluctuations and payment delays. This is undoubtedly a huge convenience for companies and individuals expanding their global business.
Deep integration with the traditional financial system
As blockchain technology becomes more popular, PayFi may not only be limited to the decentralized financial system, but will also be deeply integrated with the traditional financial system. PayFi can serve as an extension of the traditional banking system, helping banks to improve the automation level of payment and financial services. By integrating PayFi, banks and financial institutions can provide innovative financial products such as decentralized savings accounts, automated loans and investment tools, and further enhance the user experience.
For example, banks in the future may provide customers with financial products based on PayFi, where users can deposit assets into an account that combines the time value of money, earn interest through decentralized protocols, and automatically pay bills or purchase goods when needed. This seamless combination will not only improve the efficiency of financial operations, but will also bring a new business model to the traditional financial industry.
Improve payment efficiency and liquidity
PayFi is expected to significantly improve the efficiency and liquidity of payments in the future. Through smart contracts and decentralized technology, capital flows will be faster and more efficient, and transaction costs will be further reduced. In a globalized market, PayFi has the potential to become an important tool in promoting liquidity in financial markets, providing flexible and efficient payment and fund management solutions for businesses and individuals around the world.
Especially in terms of liquidity management, PayFi will help enterprises optimize capital allocation and maximize the time value of money. For example, enterprises can use the PayFi platform to deposit funds into interest-bearing accounts and use the income to carry out daily payments and operations management. This not only reduces cash flow pressure, but also improves capital utilization.
Promoting innovation in decentralized finance
As an extension of DeFi, PayFi will continue to drive innovation in decentralized finance. Through the concept of the time value of money, PayFi can create entirely new financial instruments and products. For example, smart contracts can automatically perform complex financial operations such as time-weighted portfolio management, automatic reinvestment plans, etc. These innovations will provide more flexibility and possibilities for the financial market, further subverting the traditional financial operating model.
In addition, PayFi can also promote the development of cross-chain financial instruments and realize asset interoperability between different blockchains through cross-chain technology. For example, in the future, users can make seamless payments and fund transfers on different blockchain networks through the PayFi platform without being restricted by the chain. This will greatly promote the interconnection of financial markets around the world and bring more cooperation opportunities to the blockchain industry.
Socioeconomic effects and inclusive finance
PayFi will not only have a profound impact on the financial system, but will also contribute to the global socio-economic development. Especially in areas with weak financial infrastructure, PayFi can become the infrastructure of inclusive finance, helping more groups without bank accounts or without access to financial services to obtain payment, deposit and loan services.
Through a decentralized financial service model, PayFi is able to eliminate the restrictions imposed by intermediaries on users, allowing everyone to participate in the global financial market. This innovation will help millions of users gain financial autonomy and provide more opportunities for wealth appreciation, ultimately promoting social and economic equality and development.
Challenges and opportunities
Although PayFi has a bright future, it still faces many challenges in its development. First of all, technical security is the basis for its continued development. As the complexity of blockchain technology increases, the risks of hacker attacks and smart contract vulnerabilities will continue to exist. Therefore, strengthening the security audit of smart contracts and the overall protection of the platform will be an important issue for the development of PayFi.
Secondly, the uncertainty of the global regulatory environment is also an important variable for the future development of PayFi. Different countries have different regulatory attitudes towards blockchain payments, and the PayFi platform needs to find a balance between compliance and decentralization. In the future global expansion, PayFi must not only meet the regulatory requirements of various countries, but also build a compliance mechanism that can flexibly adapt to different market environments.
Despite these challenges, PayFi’s development opportunities cannot be ignored. With the continuous evolution of blockchain technology, the security and stability of smart contracts will be improved, and more innovative financial products and application scenarios may emerge in the future. At the same time, the PayFi platform will further promote the compliance development of decentralized finance by cooperating with global regulators, and will also lay a solid foundation for its globalization.
Enhance user experience and security
In the future, PayFi will also see significant improvements in user experience. The process of users managing funds and making payments will be more convenient and intelligent. For example, through more intuitive user interface design and smarter contract interaction processes, users can have a seamless experience in complex financial operations. PayFi may also introduce higher-level privacy protection and security tools, such as zero-knowledge proof technology, to ensure that users’ transaction information is better protected on the chain.
At the same time, as decentralized technology matures, the risk of users managing digital assets will also be reduced. PayFi may help users more safely self-custody assets and reduce asset losses due to operational errors or hacker attacks by developing more complete private key management and recovery tools.
Conclusion
PayFi provides an innovative path for the payment and financial industries by combining the decentralized technology of blockchain with the concept of the time value of currency. Looking to the future, PayFi is not only expected to solve the pain points in the traditional financial system, but will also have a profound impact on inclusive finance, payment efficiency, and capital liquidity. However, the platform's technical security, global compliance, and user experience still need to be continuously optimized in order to occupy an important position in the blockchain financial market. With the development of technology and the maturity of the market, PayFi is expected to become the core driving force for changes in the global payment and financial industries, leading a new round of financial innovation trends.
Lianyuan Technology is a company focusing on blockchain security. Our core work includes blockchain security research, on-chain data analysis, and asset and contract vulnerability rescue. We have successfully recovered many stolen digital assets for individuals and institutions. At the same time, we are committed to providing industry organizations with project security analysis reports, on-chain traceability and technical consulting/support services.
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