In the long run, it will be a multi-trillion dollar market that can accommodate multiple large companies.
By Alana Levin, Variant
Compiled by: 1912212.eth, Foresight News
Stablecoins are the most transformative form of payment since the credit card. They change the way money moves. With low cross-border transfer fees, near-instant settlement, and access to a currency that is in widespread global demand, stablecoins have the power to iterate today’s financial system. For institutions that hold U.S. dollar deposits that back digital assets, the stablecoin business also has the potential to bring huge profit opportunities.
Currently, the global stablecoin supply has exceeded $150 billion. Five stablecoins have at least $1 billion in circulation: USDT, USDC, DAI, First Digital USD, and PYUSD. I believe we are moving towards a world with more stablecoins - every financial institution will issue its own stablecoin.
I’ve been thinking about the opportunities that this growth presents, and I’ve concluded that observing the maturation of other payment systems—particularly the card networks—might provide us with the answer.
What are the similarities between credit card networks and stablecoins?
To consumers and merchants, all stablecoins should feel like the U.S. dollar. But in reality, each stablecoin issuer handles the dollar differently—due to different issuance and redemption processes, reserves backing each stablecoin supply, different regulatory regimes, frequency of financial audits, etc. There is a huge opportunity to resolve these complexities.
We’ve seen something similar happen before with credit cards. Consumers use assets that are almost equivalent to dollars but not completely interchangeable (they are loans in dollars, but those loans are not interchangeable because everyone has a different credit score). Networks like Visa and Mastercard coordinate the payment process in the system. And the stakeholders in both systems (or may eventually become stakeholders) look very similar: the consumer, the consumer’s bank, the merchant’s bank, and the merchant.
An example may help to illustrate the similarities in network structure.
Let's say you go to a restaurant and pay the bill using a credit card. So how does your payment get into the restaurant's account?
Your bank (the credit card issuer) will authorize the transaction and send the funds to the restaurant's bank (called an acquirer).
A clearing network — like Visa or Mastercard — facilitates the exchange of funds for a small fee.
The acquiring bank will then deposit the funds into the restaurant's account, minus a fee.
Now suppose you want to pay with stablecoins. Your bank A issues the stablecoin AUSD, and the restaurant's bank F uses FUSD. Although both stablecoins represent US dollars, they are different. The restaurant's bank only accepts FUSD. So how do you convert AUSD payments to FUSD?
This process looks very similar to the process in the credit card network:
- The consumer's bank (the bank that issued AUSD) authorizes the transaction.
- The coordination service will facilitate the conversion of AUSD to FUSD and may charge a small fee. There are at least a few possible ways for this conversion to happen:
- Path 1: Use decentralized exchanges to exchange stablecoins. For example, Uniswap provides many such pools with fees as low as 0.01%.
- Path 2: Convert AUSD to USD deposits, then deposit the USD into the acquiring bank, which then issues FUSD.
- Path 3: Coordinated services perform net settlement of funds across the network, which may require a certain scale to achieve.
3. FUSD is deposited into the merchant’s account, and a handling fee may be deducted.
Where does analogy turn into differentiation?
The above demonstrates what I believe to be clear parallels between credit card and stablecoin networks. This also provides a framework for us to think about when stablecoins begin to significantly scale and in some ways surpass credit card networks.
The first is cross-border transactions. If the scenario above is a US consumer paying at an Italian restaurant, the consumer wants to pay in USD, and the merchant wants to receive EUR, existing credit cards will charge up to 3%. On a DEX, the fee for a stablecoin exchange can be as low as 0.05% (a 60x difference). Applying this scale of fee reduction to a wide range of cross-border payments, the productivity gains that stablecoins can bring to global GDP become obvious.
Next is business-to-consumer payment flows. The time between payment authorization and the funds actually leaving the payer's account is very fast: once the funds are authorized, they can leave the account immediately. Instant settlement is both valuable and highly desired. In addition, many businesses have a global workforce. The frequency and amount of cross-border payments can be much higher than the average consumer's daily transactions. As the workforce continues to globalize, this will provide a strong impetus for this area.
Forward-looking thinking: Where might opportunities appear?
If the analogy between network structures holds any weight, it can reveal areas where entrepreneurial opportunities may emerge. In the credit card ecosystem, major businesses have developed from payment coordination, issuance innovation, form factor support, etc. A similar situation may also occur for stablecoins.
The previous examples mainly describe the role of payment coordination, as the movement of money is a huge business in itself. Visa, Mastercard, American Express, and Discover all have market caps of at least tens of billions, and together exceed $1 trillion. The fact that these card networks are able to maintain balance in the market shows that competition is healthy and the market is large enough to support large companies. It is reasonable to speculate that in mature markets, there will be similar competition in the field of stablecoin coordination. The development of stablecoins is currently only about 1-2 years of infrastructure construction, and there is still plenty of time for new startups to seize this opportunity.
"Issuing stablecoins" is also an area of innovation. Similar to the popularity of commercial credit cards, we may see more and more companies want to have their own stablecoins. Mastering the payment unit can give companies greater control over the end-to-end accounting process, from expense management to handling foreign taxes. These may become direct business lines for stablecoin coordination networks, but may also bring opportunities for brand new startups (such as Lithic). The byproduct of corporate demand may give rise to more new businesses.
“Issuing stablecoins” can also become more professional. For example, the tier system in credit cards: many credit cards allow customers to pay an upfront fee to get a better reward structure. For example, Chase Sapphire Reserve or AmEx Gold. Some companies (usually airlines and retailers) even offer their own exclusive credit cards. I would not be surprised if similar experiments with stablecoin reward tiers also appear. This may also open up a new path for startups.
All of these trends are driving each other’s growth. As issuance forms diversify, the need for payment coordination services increases. As coordination networks mature, they will lower the barriers to entry for new issuers. These are huge opportunities, and I fully expect to see more startups enter this space. In the long run, it will be a multi-trillion dollar market that can accommodate multiple large players.
