Security passwords in the PayFi payment revolution safeguard the core of Web3 finance

The Hash (SHA 1) of this article is 8656ff83d95af1de9dab2b925597cf72c6f63c66.

Number: Chain Source Security Knowledge No.032

With the continuous development of blockchain technology, the financial industry is undergoing an unprecedented transformation. In this context, a new concept is gradually emerging: PayFi (Payment Finance). This term was first proposed by Lily Liu, Chairman of the Solana Foundation, at the 2024 EthCC conference, aiming to explore an innovative payment and financial model. The vision of PayFi is not only based on cryptocurrency payment systems, but also hopes to provide users with more secure, fast, and low-cost financial services by combining decentralization technology with the time value of money.

一、PayFi’s core concept: the time value of money and Decentralization finance

What is PayFi

Lily Liu mentioned that the core motivation of PayFi is to realize the initial vision of BTC payment, which is to apply blockchain technology to the payment field and build an open, transparent, and intermediary-free financial system. Compared with Decentralized Finance (DeFi), PayFi focuses on creating new financial primitives around the “time value of money”. The time value of money (TVM) is a fundamental concept in finance, emphasizing that money today has a higher value than money in the future. PayFi aims to maximize the use of the time value of money through smart contracts and decentralization technology, enabling users to achieve fast and efficient financial operations.

The vision of PayFi

PayFi’s ultimate vision is not only to realize BTC’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. With Smart Contract, the use of money will no longer be limited to traditional payment methods, but will automatically perform complex financial operations according to set rules. For example, with PayFi, users can automate payments, borrowing, investing, and more without the need for third-party intervention, greatly improving the efficiency and transparency of financial activities.

Second, the application scenarios and technical principles of PayFi

1. Buy Now Pay Never: Maximizing the Time Value of Money

When discussing PayFi, Lily Liu often mentions three key use cases: ‘Buy Now Pay Never’, ‘Creator Monetization’, and ‘Account Receivable’. Among them, the concept of ‘Buy Now Pay Never’ is particularly noteworthy as it represents how to maximize users’ purchasing power 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 requires paying a certain Interest. In the ‘Buy Now Pay Never’ model, users deposit funds into Decentralized Finance or PayFi products and use the interest 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, and when the Interest in the account accumulates to $5, it automatically pays for the coffee. This process does not require user intervention, and all transactions are automatically executed by Smart Contracts, without sacrificing too much cash flow for users.

Case study: Compound and Aave’s Decentralized Finance model

Taking Compound and Aave as examples of Decentralized Finance platforms, these platforms allow users to deposit assets into liquidity pools and earn interest through borrowing protocols. Users can deposit funds on these platforms and use the interest generated to pay for expenses. This ‘Buy Now Pay Never’ model not only improves the efficiency of fund utilization, but also reduces the economic burden on users.

2, Creator Monetization: Self-financial Management for Creators

In the field of content creation, PayFi provides creators with a new monetization model. Traditionally, creators earn income through advertising, sponsorship, or subscription, but these models often require the involvement of intermediaries (such as YouTube, Patreon and other platforms), resulting in creators’ income being taken by the platforms. With PayFi, creators can interact directly with fans, build a payment system based on Smart Contracts, and fans’ tipping, subscription or purchasing behavior will directly interact with the creator’s digital wallet, without the need for intermediaries. More importantly, creators can choose to deposit a portion of their income into interest-bearing products based on the time value of money, so as to continue to earn income in the future, forming long-term passive income.

Case Study: Steemit and Mirror Protocol

Platforms like Steemit and Mirror Protocol have already succeeded in this field. Steemit directly links user-generated content with Token rewards through blockchain technology, while Mirror Protocol allows creators to generate income by tokenizing their content. The success of these platforms proves the effectiveness of the DeFi model in content creation.

3、Account Receivable: Blockchain Solution for Accounts Receivable

Accounts receivable financing is an important area in TradFi, especially for small and medium-sized enterprises. By utilizing accounts receivable financing, cash flow pressure can be alleviated. However, the traditional accounts receivable financing process often involves complex auditing, collateral, and liquidation procedures, making it difficult for businesses 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, meaning they can be converted into digital assets that can be transacted on-chain. This allows businesses to quickly access funds while reducing credit risks. This process not only accelerates the financing efficiency of enterprises but also enhances transparency and security in the financial system.

Case Study: Tradle and InvoiceFair

Platforms like Tradle and InvoiceFair have already achieved initial success in this field. Tradle digitizes and automates accounts receivable through blockchain technology, while InvoiceFair allows businesses to convert accounts receivable into working capital through blockchain technology. These platform cases demonstrate the potential application of blockchain in the TradFi sector.

III. Security Challenges and Solutions for PayFi

Although PayFi has great potential in theory, it also faces a series of security challenges in practical applications. Especially in the 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 discussed in depth.

Security of Smart Contracts

The operation of PayFi relies heavily on smart contracts, and security vulnerabilities in smart contracts can lead to significant financial losses. In the past few years, there have been multiple hacker attacks in the field of Decentralized Finance caused by smart contract vulnerabilities, resulting in instant theft of users’ assets. Therefore, ensuring the security of smart contracts is of utmost importance in the application scenario of PayFi.

In order to drop the risk of Smart Contract, the development team must follow a strict code audit process to ensure that the Smart Contract is thoroughly tested and audited before going live. In addition, the PayFi platform may consider introducing technical means such as Multi-signature mechanism and time lock to further enhance the security of assets. For example, when a user executes a large payment or transfer, the system can automatically trigger a time lock, requiring the user to confirm the transaction within a specified time to avoid malicious transfer of assets.01928374656574839201

Case Study: Balancer Vulnerability Attack Incident

In August 2023, the Decentralized Finance platform Balancer encountered a Smart Contract vulnerability attack, and the attacker exploited the contract loophole to steal approximately $900,000. Although the platform promptly took responsive measures, this incident also highlighted the potential risks in Smart Contracts. Such events have prompted the Decentralized Finance industry to continuously improve in security audits, monitoring, and response mechanisms to prevent potential future attacks.

User Self-Custody Challenge

In the Decentralization financial system, users need to keep their Private Key themselves, which means that if the Private Key is lost, users will not be able to recover their assets. In order to help users better manage their Private Key, the PayFi platform can develop a series of user-friendly Wallet management tools, such as hierarchical deterministic Wallet, mnemonic backup tools, etc. In addition, the PayFi platform can also introduce security measures such as multi-factor authentication (such as fingerprint, facial recognition) to ensure that users can recover their assets through other identity verification methods when they lose their Private Key.

Case Study: BitGo and Ledger

Companies such as BitGo and Ledger have successfully improved user asset security. BitGo provides multi-signature Wallet services, while Ledger offers hardware Wallet solutions. These tools effectively enhance the security of user assets and reduce the risk of Private Key loss.

Hacker Attacks and Defense

With the continuous development of the PayFi ecosystem, the risk of hacker attacks is also increasing. In order to effectively prevent hacker attacks, the PayFi platform must continuously enhance 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 security testing of the system, promptly identify and fix potential security vulnerabilities.

Case Study: Poly Network Attack

In 2021, Poly Network encountered a record-breaking $60 million attack. This incident exposed the potential security risks of DecentralizationCross-Chain Interactionprotocol and prompted the industry to increase investment in security protection.

IV. International Compliance: PayFi’s path to globalization

PayFi, as an emerging payment and financial model, is gaining more and more attention globally. However, with the rapid development of blockchain technology and decentralized finance, regulatory pressure is also increasing. Ensuring compliance is an important issue in promoting the globalization of PayFi.

Diversity of global regulatory environments:

Regulatory attitudes towards Crypto Assets and Decentralization finance vary from country to country worldwide. Taking the United States as an example, the Securities and Exchange Commission (SEC) has imposed strict regulatory requirements on cryptocurrency trading platforms and Decentralized Finance protocols, requiring these platforms to comply with securities laws and undergo KYC (Know Your Customer) reviews. In contrast, some European countries (such as Switzerland) hold a more open attitude towards Crypto Assets and Decentralization finance, allowing these platforms to operate freely within a certain regulatory framework.

In the process of advancing globalization, the PayFi platform must fully consider the regulatory requirements of different countries to ensure that its services are legally compliant in different jurisdictions. For example, the PayFi platform can cooperate with financial regulatory agencies in various countries to ensure that its products comply with local Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) regulations.

Compliance’s technical solution:

To meet global Compliance requirements, the PayFi platform can introduce a series of technological solutions. For example, the platform can ensure the verification of users’ identity information and monitor suspicious transactions by integrating identity verification systems (KYC) and Anti-Money Laundering tools. At the same time, leveraging the transparency of blockchain technology, the PayFi platform can conduct automated Compliance reviews to reduce manual intervention and operational errors. In addition, the PayFi platform can develop Compliance reporting tools to generate Compliance reports regularly and submit them to regulatory agencies to ensure continued compliance with regulatory requirements.

5. Case Study: Application of PayFi in Reality

To better understand the practical application of PayFi, we can refer to the following specific cases:

• Case Study 1: Decentralized Finance Payment Innovations

A well-known coffee chain has introduced the PayFi payment system in multiple countries worldwide. Users no longer need to pay with cash, but instead can pay for their purchases using Interest earned from depositing funds into the platform’s Decentralized Finance products. With PayFi, the chain has achieved a drop in user payment costs while also increasing customer loyalty.

• Case Study 2: Monetization Scheme for Creator Economy

A well-known content creator directly interacts with his global fans through PayFi, and user rewards and purchases go directly into his digital Wallet, bypassing the intermediary platform’s commission. This new monetization model makes the creator’s income more transparent and leads to higher long-term returns.

• Case Study 3: Accounts Receivable Financing for Small and Medium-sized Enterprises

A certain small and medium-sized enterprise uses the PayFi platform to tokenize accounts receivable, quickly finance, reduce traditional bank audit time and procedures, while reducing credit risk, helping companies solve the difficulty of capital turnover.

Six, PayFi’s Future Outlook

As an important innovation in the payment and finance field of 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 global compliance system, PayFi is expected to make significant breakthroughs in many aspects. The following are the possible development directions and trends for PayFi in the future:

• More extensive application scenarios

Currently, PayFi’s application scenarios are mainly focused on payment, accounts receivable financing, and content creator monetization. However, with the improvement of its technical architecture, PayFi is expected to play a role in more industries and fields. For example, the TradFi industries such as cross-border trade, Supply Chain finance, insurance, and real estate can all enhance efficiency, reduce costs, and decrease reliance on intermediaries through PayFi’s Decentralization feature.

Especially in the field of cross-border payments, PayFi can provide small and medium-sized enterprises with convenient, fast, and low-cost solutions. Through Smart Contract automated processes, users can carry out hassle-free payment operations globally, eliminating traditional problems such as Exchange Rate Fluctuation and payment latency. This is undoubtedly a huge convenience for enterprises and individuals expanding their global business.

• Integration with Depth of the TradFi system

With the gradual popularization of blockchain technology, PayFi may not only be limited to the Decentralization financial system, but also integrate with the TradFi system to achieve Depth. PayFi can serve as an extension of traditional banking systems, helping banks improve the automation level of payments and Financial Services. By integrating PayFi, banks and financial institutions can offer innovative financial products such as Decentralization savings accounts, automated loans, and investment vehicles, further enhancing the user experience.

For example, in the future, banks may offer customers financial products based on PayFi, allowing users to deposit assets into an account that combines the time value of money, earn Interest through Decentralizationprotocol, and automatically pay bills or purchase goods when needed. This seamless integration will not only improve the efficiency of financial operations, but also bring a brand new business model to the TradFi industry.

• Improve payment efficiency and Liquidity

PayFi is expected to significantly improve the efficiency and liquidity of payments in the future. Through smart contract and decentralization technology, fund flow will be faster and more efficient, and transaction costs will also drop further. In the global market, PayFi has the potential to become an important tool for promoting financial market liquidity, providing flexible and efficient payment and fund management solutions for enterprises and individuals worldwide.

Especially in terms of Liquidity management, PayFi will help businesses optimize fund 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 returns for daily payments and operations management. This not only reduces cash flow pressure, but also improves fund utilization.

• Promote innovation in Decentralization finance

As an extension of Decentralized Finance, PayFi will continue to drive innovation in decentralized finance. Through the concept of the time value of money, PayFi can create new financial instruments and products. For example, Smart Contracts can automatically execute complex financial operations, such as time-weighted investment portfolio management, automatic reinvestment plans, and so on. These innovations will provide the financial market with more flexibility and possibilities, further disrupting traditional financial operating models.

In addition, PayFi can also promote the development of Cross-Chain Interaction financial tools, realizing asset interoperability between different Blockchains through Cross-Chain Interaction technology. For example, in the future, users can seamlessly make payments and transfer funds on different Blockchains networks through the PayFi platform, no longer limited by on-chain constraints. This will greatly promote the interconnectedness of financial markets worldwide 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 also contribute to the global socio-economic development. Especially in areas with weak financial infrastructure, PayFi can serve as the infrastructure for inclusive finance, helping more unbanked individuals or those unable to access financial services to obtain payment, deposit, and loan services.

Through the Financial Service model of Decentralization, PayFi is able to eliminate the restrictions imposed by intermediary institutions 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 Ahead

Despite the bright prospects of PayFi, it still faces many challenges in its development. Firstly, technological security is the foundation of its sustainable development. As the complexity of blockchain technology increases, the risks of Hacker attacks and Smart Contract vulnerabilities will continue to exist, so 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 attitudes towards the regulation of blockchain payments, and the PayFi platform needs to find a balance between Compliance and Decentralization. In the future global expansion, PayFi not only needs to meet the regulatory requirements of various countries, but also needs to build a mechanism for Compliance that can flexibly adapt to different market environments.

Despite these challenges, the development opportunities of PayFi cannot be ignored. With the continuous evolution of blockchain technology, the security and stability of smart contracts will be enhanced, and there may be more innovative financial products and application scenarios emerging in the future. At the same time, through cooperation with global regulatory agencies, the PayFi platform will further promote the development of Decentralization finance Compliance, laying a solid foundation for its globalization.

• Enhance user experience and security

In the future, PayFi will also have significant improvements in user experience. The process of managing funds and making payments will be more convenient and intelligent. For example, through a more intuitive user interface design and smarter contract interaction process, users can have a seamless experience in complex financial operations. PayFi may also introduce advanced privacy protection and security tools, such as Zero-Knowledge Proof technology, to ensure better protection of user transaction information on-chain.

At the same time, with the maturity of Decentralization technology, the risk of managing digital assets will also drop. PayFi may help users to more securely self-custody assets by developing more sophisticated Private Key management and recovery tools, reducing the loss of assets caused by operational errors or Hacker attacks.

Conclusion

By combining the decentralization technology of blockchain with the time value concept of currency, PayFi has provided an innovative path for the payment and financial industry. Looking to the future, PayFi is expected to not only solve pain points in the TradFi system, but also have a far-reaching impact on inclusive finance, payment efficiency, fund liquidity and other aspects. However, the platform’s technical security, global compliance, and user experience still need continuous optimization 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 of global payment and financial industry transformation, leading a new wave of financial innovation.

ChainGuardian is a company that focuses on blockchain security. Our core work includes blockchain security research, on-chain data analysis, as well as asset and contract vulnerability rescue. We have successfully recovered multiple cases of stolen digital assets for individuals and institutions. At the same time, we are committed to providing industry institutions with project security analysis reports, on-chain tracing and technical consulting/support services.

Thank you for reading. We will continue to focus on and share blockchain security content.