Innovation of Blockchain Payment Infrastructure: In-depth Interpretation by PolyFlow Co-founder Raymond

The 2008 Bitcoin white paper depicted a peer-to-peer electronic cash payment network that does not require a trusted third party. Over the past decade, the industry has invested heavily in developing underlying Blockchain infrastructure, and we are now witnessing the rise of high-performance Blockchains and stablecoins. However, most of the current market infrastructure is still built around transactions and cannot truly support the real-time nature and scalability of payments, hindering the large-scale adoption of Web3 payments.

So, what kind of infrastructure do we need to support real-world payment scenarios? What is the value and significance of PayFi?

This article deeply dialogues with Raymond, the co-founder of the PayFi infrastructure PolyFlow, exploring his comprehensive thoughts and practices on digital finance, as well as his profound understanding of digital currency and Blockchain technology.

Raymond has over twenty years of experience in international financial consulting and management, having led Huiyuantong to become a comprehensive global financial services company covering international payments, cross-border remittances, foreign exchange, and prepaid card businesses. He is also a well-known investor in the global digital finance sector, with investments in several leading companies in financial technology, digital banking, Blockchain, Web3, and artificial intelligence. Raymond is also a senior advisor to the Canada Development Bank and a member of the expert group at the Financial Research Institute of the Development Research Center of the State Council of China.

1. The Original Intention of Founding PolyFlow

PolyFlow is the infrastructure layer of the Blockchain network, designed to integrate traditional payments, Web3 payments, and decentralized finance ( DeFi ), processing real-world payment scenarios in a decentralized manner. PolyFlow will serve as the infrastructure for PayFi, promoting the establishment of a new financial paradigm and industry standards.

1.1 The Core of Financial Transactions

In traditional financial markets, any financial transaction and value transfer is inseparable from the flow of information and the flow of funds, which together constitute the foundation of financial transactions.

• Information flow refers to the information in the transaction process, including a collection of transaction initiation, payment, and settlement instructions, ensuring the accuracy and timeliness of transactions, and focusing on the transmission of transaction instructions and data.

• Capital flow refers to the entire process of fund transfer among various parties during the transaction phase, focusing on the actual circulation of funds.

The flow of information and the flow of funds are inseparable in financial transactions, and an effective combination of the two ensures that financial transactions can be completed safely and efficiently.

1.2 Information Flow and Capital Flow in a Cross-Border Context

In the context of cross-border transactions, due to differences in language, currency, and regulation, the flow of information and capital in financial transactions is also different.

For example, SWIFT focuses solely on the transmission of information and does not involve the flow of funds. SWIFT has built a highly standardized and automated international financial communication network through standardized message formats, enabling banks around the world to exchange financial transaction information quickly and accurately.

The information flow of transactions can be fully transmitted through SWIFT, but the flow of funds is restricted by factors such as foreign exchange controls, regulatory compliance, and anti-money laundering in various jurisdictions, making it impossible to synchronize in real-time with the information flow. The flow of funds still needs to circulate through financial intermediaries in various countries, involving complex domestic clearing systems, cross-border payment clearing systems of settlement currencies, and international payment and clearing systems.

What further hinders the global flow of value is that even with a SWIFT CODE, it does not mean one can participate in this network.

1.3 Promote value circulation through PolyFlow

The original intention of founding PolyFlow is to build a decentralized infrastructure that allows more people to participate in the construction of a global payment network, helping to alleviate regulatory compliance pressures, eliminate fund custody risks, and minimize third-party involvement as much as possible.

The core concept of PolyFlow is to effectively separate the transaction information flow and capital flow previously controlled by centralized institutions through modular design, using a decentralized approach to better align various transaction processes with regulatory compliance standards, eliminate capital custody risks, and meanwhile leverage Blockchain characteristics to connect the DeFi ecosystem, promoting the large-scale implementation of PayFi applications.

PolyFlow has launched two key components: Payment ID ( PID ) and Payment Liquidity Pool ( PLP ).

• PID is associated with information flow, serving as a powerful tool for user identity recognition and compliance access, privacy protection and data sovereignty, AI data processing, and X to earn functions.

• PLP is associated with cash flow, managed by smart contracts for the payment of transactions. It not only provides a secure and compliant framework for the circulation, custody, and issuance of digital assets, but also introduces the composability and scalability of the DeFi ecosystem.

Thus, PolyFlow has built a business architecture for PayFi applications that is lightly regulated, free from custody risks, and compatible with the DeFi ecosystem, as well as a secure and compliant framework for the circulation, custody, and issuance of digital assets.

Bitcoin and its Blockchain network represent a new solution to financial currency issues that have emerged in the digital age, aiming not only to address the problems of value transfer across time and space but also to solve the trust issues related to third parties in transactions. These are the goals that PolyFlow aims to achieve.

2. PID - Connecting the Physical World and Digital Currency Wallets

The Payment ID(PID) launched by PolyFlow is a decentralized ID, a byproduct of splitting transaction information flow, which can be bound to KYC/KYB proof information that protects user privacy through encryption, associating users with verifiable credentials( on multiple platforms, enabling:

• Compliance Access: PID can include multiple validation information across different platforms, helping partners to simplify the verification process.

• Privacy Protection: PID utilizes various technical means such as zero-knowledge proofs to help fulfill anti-money laundering/anti-terrorism financing obligations like ) AML/CTF ( without disclosing user privacy. This is a prerequisite for users to participate in traditional finance/DeFi ecosystems.

• Data Sovereignty: On one hand, PID can provide transaction information to regulators to meet compliance requirements; on the other hand, it can return on-chain behavior data to users.

• AI-driven: PID can not only associate with KYC/KYB data information, but also link to transaction data uploaded off-chain or collected on-chain. AI can help analyze the rich daily transaction data to extract additional value for PID owners. This plays a crucial role in establishing an on-chain credit system.

The innovative introduction of PID provides transformative advantages for PolyFlow as a PayFi infrastructure, not only building a bridge between traditional finance and the DeFi ecosystem but also offering users a flexible and reliable way to manage digital identities, participate in cross-platform transactions, and establish on-chain credit.

Raymond stated: "PID does not necessarily equal the ID used for payments, but should be more like a wallet in the physical world."

Imagine what else is in the wallet in our pocket besides cash? It could be family photos ), NFTs (, bank cards, as well as driver's licenses and ID documents ). Users can support the extraction of ZK information and the protection of data privacy (, and so on.

Therefore, from this perspective, Wallet does not necessarily equal Money Wallet, and there are many more things that PID can do that are worth looking forward to. One of them is the Scan to Earn project built around PID.

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3. PLP - Consensus of Pooling Capital Flow

The Payment Liquidity Pool ) PLP launched by PolyFlow is a product of fund flow splitting. The smart contract address is used to receive transaction funds, achieving on-chain custody of funds instead of relying on the traditional method of expensive corporate wallets from centralized institutions.

The more decentralized model of PLP can achieve:

• Decentralized fund custody: Provides a convenient, secure, and compliant custody method for PayFi applications, minimizing the need for trading intermediaries while ensuring the safety of funds.

• Liquidity Pool: A collection of trading funds through a smart contract address, which can provide liquidity for financing needs in payment transactions.

• DeFi Compatibility: Centralized applications cannot be compatible with the decentralized DeFi ecosystem. PLP, built on Blockchain, can seamlessly connect to the DeFi ecosystem and bring DeFi business logic to PayFi applications.

• No-risk RWA income category: The income generated by the protocol can be directly reflected in the PLP, and this income based on real-world payment transaction scenarios provides a no-risk stable source for DeFi.

This PLP architecture can flexibly integrate with the DeFi ecosystem, ensuring that PayFi applications can adapt to the ever-changing digital asset landscape.

Raymond explains how to understand the goal of PLP as building a consensus on the flow of funds from three settlement models of Web3 payments:

( Peer-to-Peer Model

In the cross-border remittance scenario, transferring funds from address A to address B, Web3 payments based on the characteristics of Blockchain can achieve synchronous confirmation of transaction information flow and capital flow, with information reflected on a publicly transparent Blockchain ledger, where everyone shares the accounting and confirms across the network, making transaction information immutable.

In this relatively low-frequency scenario, the synchronization of information flow and capital flow can fully demonstrate the advantages of Web3 payments, such as near-instant settlement, low transaction costs, transparent ledgers, and global reach.

However, the current method of synchronizing on-chain peer-to-peer information flow and capital flow cannot meet the high-frequency demand for thousands of transactions per second/minute/day, similar to traditional financial payments, which can easily lead to blockchain network congestion.

In 2023, VISA processes about 720 million transactions per day, which means the average number of user-generated transactions per second in 2023 is about 8,300, which is 8 times the TPS of the highest-performing blockchain Solana. Therefore, Web3 payments appear to be less efficient compared to traditional payments in this context.

Raymond explained: "Currently, the efficiency of Blockchain and distributed ledger technology cannot support the accounting of every transaction. In traditional finance, it is only necessary to satisfy the accounting between the two counterparties, but the current peer-to-peer model requires the entire network to account for each transaction together, making it hard to imagine a situation where the whole network accounts for tens of thousands of transactions per second. To accommodate the current total scale of 20 trillion in the crypto market, there have already been multiple instances of network congestion, let alone the desire to include the traditional financial market with a scale of 400 trillion to 600 trillion."

Raymond said: "Our answer is: we must believe in the power of technology. As computing power continues to improve, the efficiency of payment clearing will eventually be resolved. However, we cannot use future technologies to solve today's problems; we still need to address it from the essence of Blockchain - building consensus on the flow of funds."

) 3.2 Hedging Model

In traditional finance, while the information flow and capital flow of transactions are ultimately consistent, they are not synchronized. The data of information flow based on digital networks can achieve real-time and fully interactive exchanges, whereas for capital flow, the underlying funds are still held in fixed addresses and settled independently according to the agreed settlement cycle. The demand for interaction in capital flow is actually not that high.

Raymond illustrates cross-border fund transfer settlement: Bank A in China and Bank B in the USA conduct fund transfer settlements, processing tens of thousands of fund transactions between the two banks every day. As mentioned earlier, if the two banks were to synchronize the information flow and fund flow of each transaction for settlement, no existing financial infrastructure would be able to meet such a massive settlement demand, nor is it necessary.

Therefore, a net settlement ### method will emerge for handling multiple transactions between counterparties. In this method, the information flow between the two banks interacts fully in real-time, achieving a hedging of their respective ledgers. At the end of the day (, assuming daily settlement ), after the information flow of tens of thousands of financial transactions is completed, the net amount will be finalized for separate settlement of funds.

For example, if the net amount is that Bank A owes Bank B 20 million, then at that time, Bank A only needs to make a one-time payment of 20 million to Bank B to fulfill the settlement of tens of thousands of transactions on that day; or if the net amount happens to be 0, then the cash flow between the two banks will not change.

Raymond explained: "In this case, the actual underlying capital flow changes of tens of thousands of transactions are very small, and what everyone is doing is the interaction of information flow. This is why, despite the large volume of underlying assets in traditional finance, there are requirements for banks in terms of their ability to handle underlying assets, the system's capability, and payment settlement capability."