Today's financial systems were built for the past, not the future. We need new payment systems equipped to scale that are instant, programmable, and borderless.
Key Takeaways
- Huma pioneered an open framework for the PayFi Stack, divided into six layers to facilitate payment financing solutions globally.
- Transaction Layer: High-speed, low-cost blockchains (L1s and L2s) ensure efficiency and security in transactions.
- Currency Layer: Stablecoins and yield-bearing currencies facilitate seamless, stable, and compliant payments.
- Custody Layer: Advanced solutions like MPC and smart contract-based custody manage secure asset ownership and real-time settlements.
- Compliance Layer: Integrates global regulations using on-chain identity to ensure regulatory adherence.
- Financing Layer: Connects capital with demand through transparent, tokenized assets and risk management on the blockchain.
- Application Layer: Provides the infrastructure for building intuitive and compliant financial applications using the stack's capabilities.
In most geographies, money moves more slowly than expected. Even in the “hyperconnected 2024”, long settlement times, high transaction fees, and limited access to credit are still the norm. Traditional financial systems, designed in an era of centralized banking and static infrastructure, are struggling to keep pace with the growing demands of a hyper-connected global economy.
We need a new financial paradigm that reflects modern realities, one in which payments and financing are instant, programmable, and accessible to everyone, everywhere. PayFi is that paradigm.
Payment financing enables businesses and consumers to access future money today. PayFi uses blockchain technologies to revolutionize payment financing, improving existing markets, and unlocking new innovations.
The magnitude of the payment financing market is immense. For instance, the credit card industry, where merchants receive funds much earlier while consumers pay, underpins a market exceeding $16 trillion. Trade finance powers global trade with a $10 trillion market. Additionally, an estimated $4 trillion is locked in pre-funded accounts worldwide, tying up capital that could be used more productively.
As exciting as this vision is, it is riddled with challenges. Moving financial operations on-chain requires overcoming issues such as the lack of global compliance frameworks and the technical complexity of blockchain networks. Without an open and standardized framework, this transition could result in isolated ecosystems, slowing down the adoption and innovation.
Over the last 40 years, the OSI model laid the groundwork for consistent, interoperable standards that have allowed for exponential growth in technology. While the OSI model helped govern the Internet of data, we are now stepping into an era defined by the Internet of money.
Huma pioneered an open PayFi Stack, inspired by the OSI model, for the world to use and build upon.
The PayFi Stack, like the OSI model, is designed to be an open and modular system that provides a common language and structure for building financial applications on a blockchain. Its purpose is to ensure that the innovations of the future, like real-time payments, decentralized lending, or asset tokenization, can integrate seamlessly into this ecosystem.
What Is The PayFi Stack?
The PayFi Stack by Huma is a technology framework for streamlining blockchain-based payment financing and overcoming the limitations of TradFi systems by creating an open, modular stack that revolutionizes payment financing.
Much like the internet transformed communication and information sharing, PayFi seeks to reshape how money moves by enabling real-time transactions, programmable payments, and accessible credit. And the PayFi Stack, the architecture that powers it, is inspired by the internet’s OSI model.
A Peek Into The OSI Model
Over the last 40 years, the OSI model laid the groundwork for consistent, interoperable standards that have allowed for exponential growth in technology. While the OSI model helped govern the Internet of data, we are now stepping into an era defined by the Internet of money.
Huma has pioneered an open PayFi Stack, inspired by the OSI model, for the world to use and build upon.
The PayFi Stack, like the OSI model, is designed to be an open and modular system that provides a common language and structure for building financial applications on a blockchain. Its purpose is to ensure that the innovations of the future, like real-time payments, decentralized lending, or asset tokenization, can integrate seamlessly into this ecosystem.
The OSI model standardizes how different systems communicate over the internet. It consists of seven layers, each serving a specific function — from physical data transmission to applications like web browsers. This modular approach ensures that any two systems, regardless of their origin or platform, can communicate and exchange information seamlessly.
Here’s a quick overview of the OSI model’s seven layers:
- Physical Layer: Manages the physical hardware (like cables) that transmits raw data.
- Data Link Layer: Ensures data transfers between adjacent network nodes.
- Network Layer: Handles data routing across networks.
- Transport Layer: Manages reliable data transmission between devices.
- Session Layer: Establishes and maintains communication sessions.
- Presentation Layer: Ensures data is presented in a readable format (like encryption/decryption).
- Application Layer: Here, users interact with applications (like a web browser).
Each layer in the OSI model builds on the one below it, ensuring that systems can cooperate without needing to understand the complexities of the entire communication process.
The PayFi Stack and its Components
Like the OSI model, the PayFi Stack divides financial operations into modular layers. Each part of the stack focuses on specific tasks (think transaction handling, compliance, custody, etc.) so that developers, businesses, and financial institutions can build applications on top of it without reinventing the wheel.
The overarching goal of the PayFi Stack is to replace slow, costly financial infrastructure with one that is fast, programmable, and borderless.
With the support of Solana, Stellar, and Circle, Huma introduced the PayFi Stack in July 2024 — a six-layer structured model to guide the development of the ecosystem. The PayFi Stack is designed to support existing financial markets and new Web3 innovations.
The six layers of the PayFi Stack encompass the following:
- Transaction layer
- Currency layer
- Custody layer
- Compliance layer
- Financing layer
- Application layer
1. The Transaction Layer
The Transaction Layer is foundational, encompassing Layer 1 (L1) and Layer 2 (L2) blockchains. It manages the network’s core characteristics: throughput, latency, transaction cost, and security.
Here, scalability is a pressing challenge. High throughput and low-latency networks, like Solana and Stellar, stand out for PayFi use cases because they offer unparalleled transaction speed (block times of approximately 400 milliseconds) and low fees, both of which are critical for micropayments and real-time financial applications.
The transaction layer ensures that the financial transactions in PayFi meet the stringent requirements for mass adoption, providing a robust backbone for the other layers to build upon.
Key technical considerations for this layer include consensus mechanisms, finality times, and data availability challenges. Developers working here must optimize for performance while ensuring security and decentralization are not compromised.
2. The Currency Layer
The Currency Layer deals with the digital currencies used in transactions, particularly stablecoins that provide price stability. Stablecoins like USDC and PYUSD are crucial for payment use cases, as they mitigate the volatility inherent in traditional cryptocurrencies.
This layer also integrates yield-bearing stablecoins (e.g., USDM) that can eliminate transaction costs while providing liquidity.
It ensures that the currency infrastructure complies with and integrates into global financial systems, including those in Europe, Singapore, and Japan. Innovations like programmable stablecoins, which allow conditions to be embedded into transactions, are also a focus of this layer.
3. The Custody Layer
Custody is the cornerstone of DeFi. Traditionally, moving funds required physical transfers between custodians. The PayFi Stack incorporates a custody layer that can make use of the crypto custody solutions to meet diverse market requirements.
Different PayFi applications require different custody models. For businesses and enterprises, shared custody is the norm to manage treasury. Unfortunately, shared custody, in the traditional sense, slows funds disbursal and settlements.
However, shared custody in blockchain ecosystems is an advanced feature that enables multiple parties to have controlled access to assets without slowdown.
Hence, T+0 settlements (real-time transaction settlement) are still possible without security compromises.
Solutions like Fireblocks and Cobo offer institutional-grade custody by employing multi-party computation (MPC) to ensure secure key management. In contrast, decentralized custody methods, like Polyflow, use smart contract-based security, allowing greater flexibility and programmability.
A crucial function of these custodial solutions is to manage on-chain and off-chain assets such that data integrity is ensured while providing features like programmable asset locks and customizable authorization mechanisms.
4. The Compliance Layer
The Compliance Layer is crucial for ensuring regulatory adherence, especially for stablecoin payments that operate in heavily regulated environments. This layer addresses jurisdiction-specific requirements, like KYC (Know Your Customer), AML (Anti-Money Laundering), and stablecoin licensing.
For instance, Europe has been progressive with the implementation of the MiCA (Markets in Crypto-Assets) regulation, which provides a regulatory framework for crypto assets. Regions like Singapore and Japan have also developed stablecoin-specific rules that facilitate wider adoption.
This layer integrates compliance APIs that handle real-time checks, ensuring that every transaction is compliant without sacrificing speed or user experience.
5. The Financing Layer
The Finance Layer is the core of PayFi, connecting capital demand with supply. It enables the structuring, risk assessment, and pricing of financial assets on-chain. Traditionally, this process is opaque, but blockchain introduces transparency by making transaction data publicly available.
In DeFi, securitizing real-world assets (RWAs) involves creating tranches — such as junior and senior debt tranches — based on risk profiles. These assets can be packaged into financial instruments like bonds or Special Purpose Vehicles (SPVs). Through smart contracts, PayFi can automate risk assessment using oracles to provide real-time market data. This enables the pricing and structuring of assets to be more transparent than conventional finance, where these operations occur behind closed doors.
Security remains a key concern here, and cryptographic concepts like zero-knowledge proofs (ZKPs) are being explored to balance privacy with transparency, particularly for sensitive financial data.
This layer involves advanced smart contract design, setting up secure data feeds (oracles), and integrating with risk models that can dynamically adjust based on market conditions.
6. The Application Layer
The Application Layer is the top layer of the stack, enabling developers to build user-facing financial applications. This can range from payment gateways to decentralized lending platforms and financial management tools.
Applications built on this layer can leverage the lower layers for security, speed, and compliance. For instance, DeFi platforms can use PayFi’s infrastructure to offer seamless crypto-to-fiat payments or instant credit facilities.
This layer must also handle user experience (UX), making complex financial transactions simple and intuitive for end-users. Developers must consider aspects like account abstraction, multi-signature wallets, and decentralized governance.
The challenge for developers in this layer is to create applications that are both powerful and easy to use while maintaining high standards of security and privacy.
The Future Is Built Using The PayFi Stack
Just as the OSI model defined how data is governed and transmitted across the internet, the PayFi Stack sets the stage for defining financial transactions on the blockchain. It ensures that as we continue to develop the Internet of money, we have the necessary standards in place to support scalable, secure, and efficient financial solutions.
Huma continues to build upon the PayFi Stack with support from industry leaders like Solana Foundation and Stellar. With events like the PayFi Summit and informational articles, Huma will continue to build knowledge and awareness among developers and builders to accelerate innovations in the payments system.