The global payments industry churns through a substantial USD 1.8 quadrillion in transactions each year. But much of this enormous flow relies heavily on outdated systems and trillions of dollars sitting idle in pre-funded accounts.
PayFi, also known as Payment Finance, was first introduced by Solana Foundation President Lily Liu, as a response to these inefficiencies by merging stablecoins, tokenised real-world assets (RWAs) and DeFi with legacy payment rails.
Lily Liu also highlighted Solana’s scalable infrastructure as a natural home for PayFi, and its potential to unlock substantial value in a newly constructed financial system.
Time value of money
PayFi is rooted in the principle of “Time Value of Money” (TVM), which essentially means that a dollar today is worth more than its value in the future. This is true because money available now has the potential to generate higher financial returns, whereas if the money remains idle, the impact of inflation will decrease its purchasing power over time.
In other words, delaying payment or receipt of money carries an opportunity cost.
For years, businesses have had little choice but to accept inefficient payment systems where financial institutions tie up enormous sums in nostro/vostro accounts. These clunky systems still form the backbone of our economy, handling most of the transactions in cross-border payments, trade finance, commerce and credit/lending services.
But locking up huge amounts of capital and forcing financial institutions to advance the cash and recoup it later with fees is just a work around to manage these delays. It does not solve the underlying issue and leaves capital sitting idle when it could be put to better use.
The PayFi stack attempts to break this cycle with a unique six-layer approach:
- Blockchain layer – uses high-performance blockchains like Solana and Stellar to handle transparency, throughput and transaction costs.
- Currency layer – use stablecoins such as USDC and PYUSD to provide liquidity and price stability.
- Custody layer – includes solutions like Fireblocks or Cobo to securely manage on-chain assets and private keys.
- Compliance layer – includes companies like Chainalysis and PolyFlow to automate regulatory checks (KYC and AML) and enforce standards.
- Financing layer – projects like Huma Finance connect lenders and borrowers through tokenised RWAs (i.e using tokenised debt securities, USDC-stablecoin credit lines).
- Application layer – leverages all lower layers to offer PayFi solutions to businesses and consumers.
The benefits of PayFi
PayFi is all about moving money smarter and more securely through the entire value chain. When funds move in real-time and are actively put to use, they are no longer bleeding value to inflation or losing out on investment opportunities.
Lily Lui’s “Buy Now, Pay Never” model illustrates this potential quite nicely, where users can deposit their funds in a yield-bearing protocol so that day-to-day expenses can be covered by interest alone, instead of relying on fixed savings or credit lines.
The PayFi stack also brings multiple layers of functionality under one umbrella. Integrating stablecoins, tokenised RWAs, automating compliance and liquidity, removes the many intermediaries and manual processes that drive up costs and slow everything down. For businesses, that means healthier cash flow and leaner overhead, and the freedom to invest capital where it can do the most good.
PayFi’s underlying blockchain infrastructure can also support advanced settlement methods such as T+0 (same day settlement). Even highly liquid RWAs like Treasury bills can take a few days to fully clear, but PayFi applications can front these redemptions through liquidity pools, with smart contracts finalising settlement once the underlying assets clear. Settling transactions on the same day can also reduce the counterparty risk that comes with a multi-day clearing window.
Accounts receivable refer to the money owed by clients to businesses for goods or services, and waiting for these payments to clear can lead to cash flow issues. With PayFi, these outstanding payments can be optimised and settled near-instantly to speed up capital flows.
DeFi projects are also using PayFi for new forms of financing, ranging from on-chain lending to niche sectors like DePIN (decentralised physical infrastructure), where users help to fund telecom or energy nodes and then repay those loans with future revenue.
These are just a few examples of how PayFi’s efficiency can unlock liquidity and streamline payment flows, creating entirely new models of capital deployment and value creation. The benefits of PayFi can also extend to remittances, insurance markets, interbank repo markets, and consumer finance like credit cards and payday loans.
Who is driving the change?
PayFi might be a new name, but it already boasts a very lively ecosystem with a number of leading financial institutions actively integrating decentralised rails into their existing frameworks.
Visa has been settling USDC transactions on Solana for merchant acquirers like WorldPay. PayPal now allows merchants to accept crypto assets through Solana and receive payouts in their local currencies without having to worry about volatility or the overhead cost. Franklin Templeton expanded its FOBXX money market fund to Solana last month, and Shopify merchants can now use Solana Pay for near-instant payment confirmations.
Meanwhile, PayFi solution Arf has recently surpassed USD 3.5 billion in on-chain volume and partnered with infrastructure provider Huma Finance to bring cross-border receivables on both the Solana and Stellar networks. Other active projects include PolyFlow and DePIN data provider TLay.
Source: Huma Finance
PayFi challenges
PayFi certainly offers some great innovations, but regulators are still working to define clear reserve requirements, tokenised RWA standards and the legal standing of smart contracts that enable things like programmable compliance. This means many banks and other financial institutions will be waiting before they can confidently integrate with the industry.
There is also the question of making sure that PayFi’s modular stack (settlement, currency, compliance, etc.) functions flawlessly under real-world conditions. Even if one component struggles, a bad experience could drive businesses back to pre-funded accounts and slow wire transfers (not because PayFi does not work, but because old habits feel safer).
Outlook
PayFi offers a fresh and reassuring narrative that could see a collaboration between crypto projects, infrastructure providers and traditional institutions bring real economic value to the industry as well as the underlying blockchains that support them.
Institutions are clearly hungry for efficiency gains and alternatives to the costly bottlenecks of traditional systems, so leveraging PayFi to build smarter and more agile financial systems is certainly a compelling step forward.
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