Stablecoins account for two-thirds of on-chain transaction volume, whether used for exchange, DeFi transactions, or simple transfer payments. Initially, stablecoins gained attention through Tether, the first widely used stablecoin. Tether was originally created to solve the problem that Bitfinex users could not use legal currency conveniently due to bank account restrictions. Bitfinex created USDTether and promised to be backed 1:1 by the US dollar. Since then, Tether has spread rapidly, with traders using USDT to conduct arbitrage transactions between different trading platforms. Compared to traditional bank wire transfers that take several days to complete, Tether transactions only take a few blocks (minutes) to confirm, making USDT a highly advantageous payment tool in the crypto market.

However, while stablecoins were originally designed to solve specific problems in the cryptocurrency ecosystem, they have now transcended their initial purpose and become a core driver of everyday money transfers, and are increasingly being used to earn yield and facilitate real-world transactions. Currently, the total market value of stablecoins accounts for about 5% of the cryptocurrency market. If we take into account the companies that manage these stablecoins, or blockchain networks like Tron whose valuation mainly depends on the usage of stablecoins, the overall market share of stablecoins is close to 8%.

Despite this meteoric growth in stablecoins, relatively limited content has been published on why stablecoins are so popular. Tens of millions of users are replacing the traditional financial system with stablecoins, but little is known about what really drives them. In addition, there is very little research on the platforms and projects that support the development of the stablecoin ecosystem and different user groups. Therefore, this article will delve into why stablecoins are so popular, who are the main players in the stablecoin field, and which user groups are driving this trend, and analyze how stablecoins are gradually becoming the next stage of monetary evolution.

1. A brief history of the US dollar

What do you think of when you hear the word "money"? cash? Dollar? Price tags in the supermarket? Or taxes? In these contexts, money is essentially a conventional unit of measurement used to measure the value of a variety of different and heterogeneous goods and services.

In the beginning, money was in the form of shells and salt, which then evolved into copper coins, silver coins, gold coins, and now the US dollar/fiat currency.

1) Let’s focus on the US dollar

The U.S. dollar (and modern fiat currencies, which are currencies issued by governments and not backed by physical assets) have gone through several stages of development. In the United States, the original dollar bills (paper money issued by banks) were privately issued. At that time, banks were free to print money, a model somewhat similar to Hong Kong's Hong Kong dollar (HKD) system. However, due to the many problems with this model, the government eventually stepped in and took over the issuance of the dollar, while passing laws pegging the dollar to gold.

In 1871, Western Union used the telegraph to complete the first wire transfer, achieving a breakthrough in transferring funds without moving large amounts of paper money. This innovation greatly improved the efficiency of the financial system because it eliminated the physical limitations on the circulation of money, making the entire financial system more efficient.

2) A brief history of the development of the US dollar

• 1913: The Federal Reserve System was established and began to regulate the issuance of US dollars and monetary policy.
• 1971: Nixon ends the gold standard, which no longer pegs the dollar to gold and moves to a free-floating currency system.
• 1950: The world's first credit card was born, ushering in the era of non-cash payments.
• 1973: The SWIFT (Society for Worldwide Interbank Financial Telecommunication) payment network is established, making U.S. dollar transactions faster and more global.
• 1983: The first digital bank account is established at Stanford Federal Credit Union, kicking off the digitalization of banking.
• 1999: PayPal is born, enabling purely digital payments without the need for a bank account.
• 2014: Tether launches the first dollar-backed stablecoin (USDT), laying the foundation for today’s stablecoin market.

All of this development has brought us to the current era of stablecoins.

The most important thing this brief historical review reveals to us is that the form of money and the way we use it are always changing.

These days, it's perfectly possible to pay $20 via PayPal, cash, Zelle, or bank transfer (although you might get some strange looks if you use a traditional bank transfer). This trend also applies to stablecoins in developing countries, and increasingly in developed countries.

Personally, I get paid in stablecoins, have exchanged stablecoins for cash, and now even prefer to use stablecoins instead of bank accounts for savings, and use protocols such as @HyperliquidX's HLP, AAVE, Morpho, and @StreamDeFi to manage funds.

We live in a world where traditional financial systems often place a heavy burden on the most vulnerable. Capital controls, banking monopolies and high fees have become the norm. In such an environment, stablecoins have become a powerful tool for financial freedom - not only do they make cross-border currency transfers more convenient, but they are also increasingly being used to directly pay for goods and services.

To understand how stablecoins have become so successful in such a short period of time, we first need to understand why stablecoins can beat the traditional financial system.

2. Stablecoins vs. Bank Transfers: One City, Two Stories

The essence of a stablecoin is a token backed by a fiat currency such as the US dollar or the euro.

Many of you reading this article may be from developed countries in North America, Europe, or Asia, where the financial systems are relatively efficient, smooth, and stable. In the United States, there are PayPal and Zelle, in Europe, there is SEPA, and in Asia, various financial technology companies are emerging, the most well-known of which are Alipay and WeChat Pay.

In these areas, people are accustomed to depositing money in banks without worrying about the balance in their accounts disappearing the next day or worrying about hyperinflation. Small transfers can usually be completed quickly, and even large fund movements, while they may take longer, are not unbearable. Furthermore, most businesses force their customers to use the local banking system because it is considered safer and more convenient.

However, in another part of the world, a completely different reality exists.

• In Argentina, bank deposits have been forcibly seized by the government on multiple occasions, and the national currency is one of the worst performing currencies in history.
• In Nigeria, the official exchange rate is so far out of sync with the black market rate that it is extremely difficult to move money in and out of the country - ironically, this also applies to Argentina.
• In the Middle East, bank accounts may be frozen at will by the government, causing many ordinary people (especially those without political background) to be afraid to deposit most of their liquid assets in banks and have to choose other ways to store funds.

Not only is holding funds risky, transferring money is often more difficult. Cross-border transfers via SWIFT (Society for Worldwide Interbank Financial Telecommunication) are expensive and cumbersome, and most people in these countries do not have bank accounts for the aforementioned reasons.

As for alternatives such as Western Union, while they can complete cross-border money transfers, they usually charge very high fees (you can check their fee calculator). Worse still, they often settle at official exchange rates, which are often much higher than actual market rates, resulting in huge “hidden” fees for users.

Stablecoins allow people to hold money outside of their local financial system because they are global in nature and rely on blockchains to transfer money rather than local bank servers. This characteristic stems from their historical background - cryptocurrency exchanges have faced challenges in opening bank accounts, processing large-scale deposits and withdrawals, and transferring funds across exchanges.

One of the most famous cases is Japan. Due to the cumbersome bureaucracy of Japan's banking system and strict capital controls, there has long been an arbitrage space between global cryptocurrency prices and local Japanese prices.

In 2017, BN announced in its white paper that its trading platform would only support stablecoin-cryptocurrency trading pairs to speed up settlement. This move directly promoted the transfer of market trading volume to stablecoin trading pairs. In 2019, BN launched the USDT perpetual contract, allowing users to use USDT instead of BTC for margin trading, further consolidating the dominance of stablecoins. Today, stablecoins have become a recognized basic asset in the cryptocurrency market, and this acceptance is gradually expanding to application scenarios beyond cryptocurrencies.

3. Stablecoins vs. Fintech: Speed, innovation, and solutions to global financial problems

If we look at transaction speed, innovative design, and the ability to solve global financial problems, stablecoins are significantly different from Fintech.

So far, the main contribution of FinTech has been to optimize and beautify the existing payment infrastructure rather than to completely change its underlying architecture. In essence, they simply add a layer of "paint" on top of the traditional financial system, but do not address its inherent inefficiencies and complexities. Stablecoins are the most significant change to the global financial system in 50 years.

• Fast, reliable, and transparent: The transfer speed of stablecoins far exceeds that of the traditional banking system, and they are verifiable on the chain, making the flow of funds more efficient.
• Low-cost remittances: Compared to traditional payment methods such as bank wires or Western Union, stablecoins almost eliminate the high fees (although this also means losing some of the protections provided by the traditional financial system).
• Competitor to Cash and Payment Processors: Stablecoins are not only an alternative to cash, but also compete with payment processors such as Western Union, while being safer and longer-lasting than cash.
• Cannot be easily destroyed or stolen: Stablecoins will not disappear due to floods, fires, or theft like cash, and can be exchanged for local currency at any time.
• Extremely low transaction fees: The cost of transferring stablecoins depends on the blockchain network, but is usually less than $2 and is a fixed fee, much lower than the fees of traditional payment systems such as Western Union (usually between 0.65% and more than 4%).

All this shows that stablecoins are not only dominating the cryptocurrency space, but are also challenging the foundations of the traditional financial system.

Once stablecoins become widely accepted and gradually mature, they will inevitably fill gaps in the global financial system that traditional financial institutions have not yet covered. As stablecoins continue to grow in popularity, the financial services and sophisticated products surrounding them are also growing rapidly.

For example, @MountainUSDM has introduced RWA (real world asset) returns on multiple platforms in Argentina, while @ethena_labs enables users to profit through positionless delta-neutral trading without relying on the traditional banking system or exchange custody.

Today, the uses of stablecoins have far exceeded simple payment processing or hedging, and more and more people are beginning to use stablecoins to earn income or even use them for local payments. As this trend develops, stablecoins are gradually becoming an important part of global financial planning and are even being included in corporate balance sheets.

It is worth noting that many stablecoin users do not even know that they are using crypto technology - this is precisely the huge breakthrough in product innovation around stablecoins in recent years. Major companies continue to optimize the user experience, making the use of stablecoins more seamless and intuitive, further promoting its global adoption.

4. Companies that are promoting the popularity of stablecoins

The main stablecoin projects start with the companies that issue these stablecoins. These include:

• USDC issuer @Circle
• USDT issuer @Tether_to
• DAI/USDS issuer @SkyEcosystem
• PYUSD, jointly launched by @PayPal and @Paxos

Of course, there are many more stablecoins that have not been mentioned, but these are the most important stablecoins for payment purposes. These companies typically have bank accounts, receive traditional bank wires, and convert those funds into stablecoins and provide them to users.

1) Stablecoin funding model

Stablecoin issuers hold the funds deposited by users and charge users extremely low fees (usually 1-10 basis points). Users can transfer these assets at any time, and the issuer earns interest on the funds in the bank account (i.e. “floating income” or “yield” in the DeFi context).

Trading firms play an important role in this process, responsible for handling the conversion between fiat currency and stablecoins (on/off ramp) on a large scale. As more and more trading platforms begin to crack down on users who only use stablecoins to deposit and withdraw funds but do not pay trading fees, the role of trading firms in this market becomes increasingly critical.

Trading firms often offer better prices than local trading platforms, further improving the efficiency and competitiveness of stablecoins.

As all major trading firms compete fiercely in this market, they continue to optimize liquidity and services to make stablecoin transactions smoother.

Stablecoin issuers earn interest in the process rather than charging users high fees, which is also the core of their business model.

It is worth mentioning that @SkyEcosystem (formerly Maker) has a different model.

SkyEcosystem adopts a hybrid model, with its stablecoin USDS backed by a variety of collateral assets (including other currency reserves).

Users can deposit these collateral assets and borrow USDS at a predetermined interest rate.

They can choose to deposit into the "savings rate module" (similar to the risk-free rate), or borrow USDS on platforms such as @MorphoLabs, @Aave, or simply hold USDS.

This model allows users to choose safer income options, or take higher risks to obtain higher returns.

2) Growth in stablecoin users: not directly for consumers

Currently, most major stablecoin issuers do not directly target ordinary consumers, but provide stablecoin support indirectly through different financial services companies. This model is similar to MasterCard - it works with banks but does not directly connect to end users.

You may rarely hear names like @LemonCash, @Bitso, @Buenbit, @Belo, and @Rippio in the crypto community (CT), but they play an important role in the stablecoin trading market. For example:

The above-mentioned Argentine trading platforms alone have more than 20 million KYC-certified users, almost half of Coinbase's users, while Argentina's population is only 1/7 of that of the United States.

Lemon Cash has a transaction volume of $5 billion in 2023, a large portion of which is stablecoin-stablecoin transactions, or ARS (Argentine Peso)-stablecoin transactions.

These platforms serve as on-ramp for most non-peer stablecoin trading and have a large amount of crypto trading volume and stablecoin deposits themselves. However, with the exception of Rippio, most platforms do not have their own order books and rely on order routing systems to complete transactions.

This model is very similar to Robinhood - Robinhood is not a true trading platform, but routes pricing through liquidity providers (Market Makers). I call these platforms “Retail Venues” because their focus is on optimizing user experience and retail products rather than building their own marketplace infrastructure.

Robinhood’s API does not allow high-frequency traders or market makers to use it because its target users are not professional traders but ordinary investors.

Similarly, BuenBit and Lemon will not attract market makers. Their main target users are ordinary consumers, not professional trading firms or high-frequency traders.

Under this model, the application of stablecoins is entering the global financial system in a low-cost and efficient manner, which not only affects the crypto market, but also changes the landscape of the traditional payment and remittance industries.

Next, let’s look at the blockchain where stablecoins are actually executed, which is where stablecoin transfers, transaction records, and balances are stored. Currently, the main chains for stablecoin transactions include:

• @justinsuntron of @trondao (TRON)
• @binance’s BN Smart Chain (BSC)
• @solana (Solana)
• @0xPolygon (Polygon)

The primary purpose of these chains is value transfer and does not necessarily involve DeFi interaction or yield generation.

Although Ethereum still leads in terms of TVL (total value locked), it is not attractive for most stablecoin transactions due to high transaction costs. Data shows:

92% of USDT transactions occur on the Tron chain.

About 96% of the transaction volume on the Tron network is related to stablecoins.

In contrast, on Ethereum, stablecoin transactions still account for a high proportion, but only 70%.

In addition, some new blockchains are trying to process stablecoin transactions efficiently and at low cost, among which LaChain is notable.

LaChain is jointly operated by an alliance consisting of Ripio, Num Finance, SenseiNode, Cedalio, Buenbit and FoxBit, and is mainly aimed at users and platforms in Latin America.

This also shows that as the stablecoin market continues to mature, the ecosystem is becoming more complex and diversified.

5. The evolution of stablecoin payments: from cross-border remittances to local payments

Stablecoins have been a staple for cross-border remittances, but nowadays they are increasingly being used for local payments.

This involves cryptocurrency payment gateways and payment portals, namely:

Convert stablecoins to fiat, or

Allow merchants to accept stablecoin payments directly in fiat currency.

For example, a merchant could “accept” crypto payments, but in reality, the transaction’s cryptocurrency is immediately converted into U.S. dollars and then settled in the merchant’s bank account. Of course, merchants can also accept stablecoin payments directly.

However, since there is still a certain friction in the redemption of stablecoins (whether it is time or transaction fee costs), a large number of companies dedicated to optimizing this process have emerged in the market, and the solutions they provide range from simple and efficient to complex and comprehensive.

**Pomelo（ https://www.pomelogroup.com/）**: A platform that supports cryptocurrency debit card payments, allowing users to spend directly with stablecoins.

@zcabrams' Bridge: provides convenient conversion between stablecoins, between different chains, and between fiat currencies, greatly reducing the friction costs for merchants and payment platforms.

@stripe even acquired Bridge to make its own payment system more efficient.

At present, payment gateways such as Bridge are mainly used in scenarios where merchants have not yet directly accepted USDC or USDT. They will first help users complete the conversion and then charge a certain fee.

As stablecoin payments become more popular and their lower costs compared to traditional bank cards and banking systems, the usage of stablecoin-stablecoin transactions will continue to increase. In the future, more and more merchants will directly accept stablecoin payments to optimize unit economic benefits and promote stablecoins to build a payment system in the post-banking era.

6. Financialization of Stablecoins: How to Make Stablecoins “Add Value”

In addition to payments and remittances, more and more companies are exploring how to put stablecoins into use to improve their asset utilization, such as:

Lemon Cash: Provides @aave deposit function, allowing users to deposit funds to earn yield.

@MountainUSDM’s USDM: allows stablecoin holders to earn yield and has been integrated into multiple exchanges and payment services in Latin America.

Many trading platforms and retail financial platforms regard stablecoin yield as a stable source of income, hoping to balance the income fluctuations caused by market cycles.

Traditional trading platforms are highly dependent on transaction fees, which causes their revenue to surge in bull markets but plummet by several orders of magnitude in bear markets.

By providing stablecoin deposit returns and related services, these platforms can obtain more stable income and reduce the impact of market volatility on their profitability.

7. What is the future development of stablecoins?

Non-crypto uses of stablecoins: an expanded suite of international transfers and payments

The main non-crypto application of stablecoins is international transfers, and they are increasingly used for payments today. However, as the infrastructure of stablecoins continues to improve and become more popular, they may also be used for savings, especially in developing countries, a trend that has already begun to emerge.

A few weeks ago, @tarunchitra told me a story about a convenience store owner in Georgia who would take Georgian Lari (GEL) deposits from customers, convert them into USDT and earn interest, while keeping track of customer balances in a simple paper ledger and taking a fee from the interest. In this store, customers can also pay using Trust Wallet's QR code. It is worth noting that this alternative financial model has developed in Georgia, despite its relatively healthy banking system.

In Argentina, the Financial Times (FT) estimates that citizens hold more than $200 billion in U.S. dollar cash, outside the traditional financial system. If even half of the funds enter the on-chain or crypto ecosystem, the DeFi market size will double and the total market value of stablecoins will increase by about 50% - and this is just the potential of one country. Similar situations exist in countries such as China, Indonesia, Nigeria, South Africa and India, where there is a large informal economy or a certain degree of distrust in the banking system.

More potential use cases for stablecoins As the use of stablecoins grows, their application scenarios are also expanding.

• Credit lending: Currently, stablecoins are mainly used for fully collateralized credit lending, a model that is extremely rare in the global credit market. However, with new tools introduced by institutions such as Coinbase, KYC certification information may be used to expand the credit market in the future, and a negative credit record mechanism may be introduced (i.e., failure to repay will affect credit scores).
• Profit distribution: Stablecoin issuers are gradually allowing profits to be "passed on" to holders. For example, USDC offers an annualized return of 4.7%, and Ethena's USDe has a dynamic yield, usually exceeding 10%.
• Cross-fiat currency transactions: Currently, many transactions are beginning to be conducted in a "double-layer conversion" manner - for example, a transaction is first converted from the local currency to the US dollar stablecoin, and then converted to the target currency (such as the Argentine Peso or the Nigerian Naira).

This approach means that users need to pay transaction fees twice, but as blockchain technology matures, it may be possible to directly exchange it into stablecoins of the target currency in the future to reduce costs.

As more capital flows into stablecoins, the variety of on-chain financial products will be further enriched, making the application of cryptocurrencies in daily life more mainstream.

8. Challenges facing stablecoins

When discussing the future of stablecoins, we also need to face some overlooked issues.

1) Stablecoins rely on the banking system

Currently, almost all stablecoins rely on bank accounts as their backing assets.

However, the banking system itself is not completely safe. For example:

In 2023, USDC was briefly depegged due to the collapse of Silicon Valley Bank (SVB), demonstrating that even the most trusted stablecoins may be at risk from the banking system.

2) Stablecoins are widely used to circumvent capital controls and money laundering

If you agree that stablecoins can be used to bypass capital controls and evade local currency depreciation, you have actually acknowledged a fact - under the local legal framework, such behavior may be classified as money laundering.

It’s an open secret, but its legal and ethical implications remain underexplored.

3) The freezing and inability to re-issue stablecoins

Currently, neither Circle (USDC) nor Tether (USDT) allows the re-issuance of stablecoins.

If a user's funds are frozen for legal reasons (such as being related to a crime or determined to be stolen money), then these assets will not be returned to the victim, even if the latter has a court order on file.

This approach is extremely controversial on an ethical level and may even be difficult to sustain in the long run.

4) Government regulatory pressure & CBDC substitution risk

Governments may call for tighter regulation of stablecoins to make them “seizure-able.”

In the long run, central bank digital currencies (CBDCs) could become an official alternative to stablecoins.

This is a broad topic that I will explore in detail in subsequent articles.

9. Truly decentralized stablecoins may be the solution for the future

In the coming years, government regulatory pressure on stablecoins will drive the development of truly decentralized, privacy-preserving stablecoins.

These stablecoins will not be able to be unilaterally frozen or seized by the government and will be completely decentralized.

This could give rise to a new financial technology race, and the development of stablecoins could evolve from regulated financial instruments to truly decentralized currencies.

Of course, this also means new compliance challenges.