Bitcoin’s inception in 2008 set the stage for the development of blockchain technology we see today. It was created to be a peer-to-peer version of an electronic cash that facilitates payments without a financial intermediary. However, over the years, the focus of blockchain technology has shifted. While DeFi and other blockchain applications have surged in popularity, blockchain-based payments, or Payment Finance (PayFi), have often been overlooked. Like an awkward middle child, PayFi exists in the shadow of its more prominent blockchain siblings, yet it holds immense potential to reshape global payments by leveraging programmable money and real-time liquidity.
Traditional payment solutions like Stripe, PayPal, and credit card networks have long dominated the digital payment landscape, providing users with seamless, fast, and secure transactions across various platforms. Not enough attention is being given to this sub-sector of payments, slowing down the rate of innovation of a decentralised and efficient payment frontier.
However, the industry seems to be circling back to the original vision of blockchains as a peer-to-peer electronic cash system. The concept of PayFi was introduced by Lily Liu, President of the Solana Foundation. PayFi is a sub-sector of Real World Asset (RWA) and a new financial paradigm that utilises programmable money to innovate the payment system and achieve a more efficient and low-cost transaction experience. A core feature of PayFi is the ability to help users maximise the time value of money by offering instant liquidity.
The state of payments today
At present, there is an increasing number of projects who are working on blockchain payments. One of the notable projects is MoonPay, which bridges the gap between web2 and DeFi by enabling users to purchase cryptocurrencies with traditional credit cards or bank transfers. Although MoonPay has achieved considerable success, it might be difficult for new projects to compete for a piece of the pie in the payments sector as we know it today. Newer projects starting out in the traditional on- and off-ramping payments sector might face problems providing thick liquidity for transactions, leading to higher spreads and thus higher transaction fees as a result. Instead, new projects could potentially embrace PayFi and leverage on the strengths of DeFi and blockchain technology to innovate a payment system that is unique to crypto.
While blockchain technology has evolved, it has struggled to consistently outperform traditional financial systems by the desired margin. Since the inception of decentralised applications (dApps), crypto natives have been pushing for solutions to replace traditional financial systems. We paint a rosy picture for blockchain technology, emphasising its quicker transaction speeds, cheaper costs, heightened security and accessibility, as well as its permissionless nature. However, not much has been achieved in the blockchain payments space due to a myriad of reasons such as unclear regulations leading to many legal restrictions, licensing requirements, poor user experience etc. The vision for PayFi is to establish an entirely new financial market as opposed to just incrementally improving existing systems.
As a new financial layer, PayFi aims to leverage blockchain technology to provide services previously thought to be impossible. For instance, with PayFi, it is possible to achieve a "Buy Now, Pay Never” (BNPN) primitive. With BNPN, users can consume without immediate payment as this is made possible by utilising lending fees generated from money market dApps to offset the users’ expenses. PayFi could also revolutionise creator monetisation, by providing content creators with advanced payments based on their projected advertising revenue.
An exploration into interesting PayFi projects
a) Huma Finance
Huma Finance is a decentralised lending protocol that enables businesses and individuals to borrow against their future income by connecting them with global investors on-chain. Huma focuses on income-backed lending, offering a range of credit facilities, such as revolving credit lines and receivable factoring.
Huma V2 introduces receivable-backed credit lines and enhanced features aimed at institutional investors. This version includes support for structured finance, offering tools such as tranches, first-loss coverage, and transparent on-chain tracking of receivable life cycles. By providing such transparency and flexibility, Huma allows businesses to efficiently manage their cash flows and access capital without traditional collateral requirements.
At the core of Huma’s vision is the commitment to unlocking liquidity and improving financial inclusion, particularly for SMEs and the unbanked population. These groups often struggle with liquidity constraints and limited access to traditional financial services. Huma Finance addresses a critical gap in financial services by providing liquidity solutions to underserved markets, particularly SMEs. Huma’s innovative use of blockchain technology and smart contracts provides SMEs with fast, scalable, and cost-effective financial solutions, positioning itself as a critical player in the emerging PayFi ecosystem.
b) Arf
Arf is a regulated global settlement banking platform designed to eliminate the capital-intensive business model traditionally seen in the cross-border payments industry. Arf’s USDC-based working capital credit line allows institutions to access short-term, unsecured working capital without the need for collateral or pre-funding. This provides licensed financial institutions with fiat on- and off-ramp capabilities, streamlining cross-border transactions and unlocking seamless, real-time global payments for businesses.
The platform addresses a critical pain point in cross-border payments: the inefficiency and high costs associated with traditional settlement processes. By offering an unsecured, USDC-based credit line, Arf empowers institutions to make same-day settlements with their global partners, significantly reducing costs and increasing transaction transparency. By eliminating the need for prefunding and offering access to short-term credit with transparent on-chain repayments, Arf helps businesses improve cash flow and enhance their competitive positioning.
Earlier this year, Huma Finance and Arf merged, combining their respective expertise in tokenized real-world assets and liquidity solutions. Huma, originally launched on Polygon and now planning expansions to Solana and Stellar by October, brings its PayFi network, which facilitates lending against future income streams and accounts receivable underwriting. Arf, a liquidity and settlement platform, has been instrumental in solving liquidity issues for financial institutions.
Through this merger, Huma and Arf aim to enhance the adoption of tokenized assets and blockchain-based financial solutions. By leveraging Huma’s decentralised finance solutions and Arf’s seamless cross-border transaction capabilities, the two companies aim to create a powerful, efficient financial ecosystem. Their goal is to achieve instant liquidity and programmable money into cross-border payments, providing businesses and individuals with more efficient, low-cost financial services. Together, Huma and Arf aim to make the PayFi concept a reality, offering solutions that bypass the inefficiencies of traditional financial systems.
c) Ether.fi
Most people would know ether.fi as one of the first Liquid Restaking Token (LRT) protocols built on top of Eigenlayer. Ether.fi’s LRT, $eETH, which provides a liquid alternative for users who wanted to restake with Eigenlayer, took the market by storm earlier this year. However, a lesser known feature that ether.fi is soon pushing out is “ether.fi Cash”.
As inferred from the name “ether.fi Cash”, this product allows users to use their token balance on the ether.fi dApp as collateral to fund their daily consumption. As a crypto native VISA credit card that even offers cashback on purchases, users can now seamlessly consume and send USDC to other users without routing the transaction through their bank accounts. By utilising the ether.fi balance as collateral, users’ outstanding credit card balances will be paid off with native yields. This is a great application of PayFi that also features great user experience for daily use.
Where is PayFi headed?
The renewed interest in blockchain payments, driven by PayFi, signals a shift towards innovative financial solutions. However, PayFi still faces significant challenges in realising its full potential as a new financial primitive as it faces the similar hurdle of onboarding new crypto users who can fully utilise composability and features that PayFi offers. Additionally, concepts such as “Buy Now, Pay Never” (BNPN) have not yet gained traction or achieved widespread commercial success, probably due to the friction in integrating existing merchants into these new products and ideas. Some critics even see PayFi as a repackaged version of existing blockchain payment solutions, dismissing its long-term potential.
Despite the obstacles that PayFi faces, this new paradigm has inspired some alternative blockchain applications for real-life payments. One such example is ZAR, a Decentralised Physical Infrastructure Network (DePIN) cash to stablecoin on-ramp solution that leverages branchless banking. ZAR is based in Pakistan and leverages the local branchless banking agent network to facilitate P2P on-ramps and payments via its dApp. Such innovations demonstrate the growing viability of blockchain payments in addressing real-world financial needs.
Despite its relative obscurity, PayFi holds the promise to disrupt traditional financial systems, just as Bitcoin once aimed to do. Though it has often been overshadowed by the rapid development of other decentralised applications, its role in improving liquidity, efficiency, and access to financial services cannot be understated.
With new and innovative products breathing new life into the payments sector, the vision for PayFi is clear. Leverage blockchain technology and programmable money to overcome the inefficiencies and high costs associated with legacy systems, delivering faster, more accessible, and cost-effective financial services to individuals and businesses alike. As PayFi matures, its potential to reshape global finance—particularly through real-world applications like trade financing, remittances, and commercial payments—will become more apparent. The future of PayFi lies in unlocking liquidity and financial inclusion on a global scale, offering a seamless transition into a more efficient and decentralised financial era.
*Disclosure: Arf is Signum Capital’s portfolio company and the information provided on this newsletter is for general informational purposes only and does not constitute professional nor investment advice.
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