In today's era of digital waves sweeping across the globe, traditional financial systems seem overwhelmed. Most of them were built in the past and struggle to adapt to the rapidly changing financial demands of the future. We urgently need a brand new payment system that is scalable, instantaneous, programmable, and borderless, and Huma Finance (HUMA) is bringing hope to solve this problem with its groundbreaking first PayFi network.

Traditional Financial Dilemmas and the Rise of PayFi

Currently, even in the 'hyper-connected year of 2024,' the speed of fund flows remains far below expectations in most parts of the world. Long settlement times, high transaction fees, and limited access to credit continue to be the norm in traditional finance. The traditional financial system, born in an era of centralized banks and static infrastructure, now struggles to keep pace with the rapid development of a hyper-connected global economy. We urgently need a new financial paradigm that makes payment and financing instantaneous, programmable, and universally accessible, and PayFi represents this ideal paradigm.

Payment financing enables businesses and consumers to access future funds in the present. PayFi revolutionizes payment financing through blockchain technology, not only improving existing markets but also spawning new innovations. The payment financing market is vast; for example, the credit card industry supports a model where merchants receive funds upfront and consumers delay payments, creating a market of over $16 trillion. Trade financing drives global trade, with a market size of $10 trillion. Additionally, an estimated $4 trillion in global pre-financing accounts remains idle, which could be utilized in more productive areas.

However, realizing this vision is fraught with challenges. Migrating financial operations on-chain requires overcoming numerous issues, such as the lack of a global compliance framework and the complexity of blockchain network technologies. Without an open and standardized framework, this transformation could lead to the emergence of isolated ecosystems, thereby hindering adoption and innovation.

PayFi Stack: An Innovative Architecture Inspired by the OSI Model

Over the past 40 years, the OSI model has established unified, interoperable standards for the tech field, driving exponential growth in internet data. Today, we are entering the 'currency internet' era, and Huma, inspired by the OSI model, has created the open PayFi Stack for global use and expansion.

The PayFi Stack, like the OSI model, is an open and modular system that provides a common language and architecture for building financial applications on the blockchain. Its purpose is to ensure that future innovations, such as real-time payments, decentralized lending, or asset tokenization, can seamlessly integrate into this ecosystem.

The OSI model standardized the communication methods of different systems on the internet through a seven-layer structure, ensuring that different systems and platforms can communicate and exchange information seamlessly. Similarly, the PayFi Stack divides financial operations into modular layers, each focusing on specific tasks such as transaction processing, compliance management, and asset custody, enabling developers, businesses, and financial institutions to build applications on its foundation without reinventing the wheel.

With support from Solana, Stellar, and Circle, Huma launched the PayFi Stack in July 2024. This six-layer structural model aims to guide ecosystem development, supporting existing financial markets and new innovations in Web3, with the goal of replacing slow, expensive traditional financial infrastructure with fast, programmable, and borderless financial infrastructure.

Analysis of the Six-Layer Architecture of PayFi Stack

Transaction Layer

The transaction layer is the foundation of the PayFi Stack, encompassing Layer 1 (L1) and Layer 2 (L2) blockchains, responsible for managing the core features of the network, including throughput, latency, transaction costs, and security. In the field of payment financing, scalability is a key challenge. High-throughput, low-latency networks like Solana and Stellar stand out, providing extremely fast transaction speeds (with block times of about 400 milliseconds) and low fees, which are crucial for micropayments and real-time financial applications. Key technological considerations for this layer include consensus mechanisms, finality time, and data availability challenges, with developers needing to optimize performance while ensuring security and decentralization are not compromised.

Currency Layer

The currency layer primarily deals with the digital currencies used in transactions, especially stablecoins that provide price stability, such as USDC and PYUSD, which are crucial for payment scenarios, as they mitigate the volatility risks of traditional cryptocurrencies. This layer also integrates yield-bearing stablecoins (like USDM), which can eliminate transaction costs while providing liquidity. At the same time, it ensures that the currency infrastructure complies with and integrates into the global financial system, including regions like Europe, Singapore, and Japan. Additionally, programmable stablecoins are also an innovative focus of this layer, allowing conditions to be embedded in transactions.

Custody Layer

Custody is the cornerstone of decentralized finance (DeFi). Traditional fund transfers require operations between physical custodians, while the custody layer of the PayFi Stack leverages cryptocurrency custody solutions to meet diverse market needs. Different PayFi applications require different custody models; for businesses and institutions, shared custody is the conventional way to manage funds, but traditional shared custody slows down fund disbursement and settlement speeds. In the blockchain ecosystem, advanced shared custody features allow multiple parties to control assets in real-time without sacrificing security, enabling T+0 settlement (real-time transaction settlement). Solutions like Fireblocks and Cobo provide institutional-grade custody through multi-party computation (MPC), ensuring secure key management; while decentralized custody methods like Polyflow utilize smart contracts for greater flexibility and programmability. The key functions of these custody solutions include managing on-chain and off-chain assets, ensuring data integrity, while providing programmable asset locking and customizable authorization mechanisms.

Compliance Layer

The compliance layer is crucial for ensuring regulatory compliance, especially in the heavily regulated area of stablecoin payments. This layer addresses the requirements of specific jurisdictions, such as Know Your Customer (KYC), Anti-Money Laundering (AML), and stablecoin licensing. For example, Europe has implemented the Markets in Crypto-Assets Regulation (MiCA), providing a regulatory framework for crypto assets; Singapore and Japan have also established specific rules for stablecoins to promote broader adoption. This layer integrates compliance APIs to enable real-time checks, ensuring that every transaction is compliant without sacrificing speed or user experience.

Financing Layer

The financing layer is at the core of PayFi, connecting the supply and demand sides of funds, realizing the structuring, risk assessment, and pricing of financial assets on-chain. Traditionally, this process has been opaque, but blockchain introduces transparency through public transaction data. In decentralized finance, the securitization of real-world assets (RWA) involves creating different tiers based on risk conditions, such as junior and senior debt levels, which can be packaged into financial instruments like bonds or special purpose vehicles (SPV). Through smart contracts, PayFi can automate risk assessment using real-time market data provided by oracles, making asset pricing and structuring more transparent than traditional finance. Security is a key concern for this layer, exploring cryptographic concepts like zero-knowledge proofs (ZKP) to balance privacy and transparency, particularly for sensitive financial data. This layer involves advanced smart contract design, secure data source (oracle) setup, and integration with risk models that can dynamically adjust based on market conditions.

Application Layer

The application layer is the top layer of the PayFi Stack, enabling developers to build user-facing financial applications, covering payment gateways, decentralized lending platforms, and financial management tools. Applications at this layer can leverage the security, speed, and compliance provided by the lower layers. For example, decentralized finance platforms can use PayFi's infrastructure to offer seamless cryptocurrency to fiat payment or instant credit services. This layer also needs to focus on user experience (UX), making complex financial transactions simple and intuitive for end-users. Developers need to consider account abstraction, multi-signature wallets, and decentralized governance, with the challenge being to create applications that are both powerful and user-friendly while maintaining high security and privacy standards.

Looking Ahead: PayFi Stack Leads Financial Transformation

Just as the OSI model defines the governance and transmission of data over the internet, the PayFi Stack lays the foundation for financial transactions on the blockchain. It ensures that as we develop the 'currency internet,' we have the necessary standards to support scalable, secure, and efficient financial solutions.

With support from industry leaders like the Solana Foundation and Stellar, Huma continues to expand the PayFi Stack. By hosting PayFi summits and publishing informational articles, Huma continuously raises awareness among developers and builders, accelerating the pace of innovation in payment systems. It is foreseeable that, driven by the PayFi Stack, the financial sector will undergo a profound transformation, ushering in a new era of finance that is more efficient, transparent, and inclusive.