Editor's note: This article talks about how stablecoins are changing the world of payments and finance. It analyzes the revenue play of stablecoins, their advantages over traditional payments, and their role in exchanges and cross-chain transactions. It also mentions some challenges, such as regulatory and technical issues. The article also talks about how big companies like JPMorgan and PayPal have entered the stablecoin issuance market, how amazing the profits behind it are, and the new possibilities that stablecoins bring in improving payment efficiency and expanding financial coverage. Overall, stablecoins are driving a financial revolution, but they are also facing a game between freedom and regulation.
The following is the original content (for easier reading and understanding, the original content has been reorganized):
As countries and institutions rush to enter the stablecoin space, a trillion-dollar opportunity is emerging.
8 major opportunities related to stablecoins:
DeFi applications of high-yield stablecoins
Extend your benefits in a variety of ways:
ethena labs generates income through arbitrage of market fluctuations.
CapLabs introduces MEV and arbitrage profit models.
usualmoney and withAUSD use their own tokens to compound treasury yields.
Reservoir adopts a diversified high-yield asset basket strategy.
Deploy the loop strategy on MorphoLabs and pendle fi.
However, as TVL grows, the benefits are gradually diluted, and the project needs to explore sustainable profit models and real usage scenarios. Currently, only USDT, USDC and a small amount of DAI are the main trading pairs, and other stablecoins are more regarded as financial products rather than circulating currencies.
On-chain payments in emerging markets
USDT has a strong liquidity network in emerging markets, and locals rarely exchange USDT for fiat currency, but instead view it as a substitute for the US dollar. For example:
In Türkiye, stablecoin transactions account for 3.7% of its GDP.
Argentina’s stablecoin premium reaches 30.5%.
In Nigeria, the rate reached 22.1%.
Projects like Zarpay app and MentoLabs use grassroots marketing strategies through local agents and payment systems to attract more users into the blockchain ecosystem.
Licensed Stablecoin Issuer
Institutions rely on trusted stablecoin issuers to circumvent technical and regulatory complexities. Current key players include:
Paxos (issuing PYUSD, BUSD)
brale xyz (issued by USC)
Stablecoin (provides B2B API services)
Integrated Stablecoin API
In the future, we will face the complexity of cross-currency, cross-currency and cross-chain, and solutions will gradually take shape:
AMMs (Automated Market Makers) such as CurveFinance and Uniswap provide flexible and efficient trading methods.
Companies like Perena are actively building infrastructure to simplify deployment, exchange, and liquidity management while supporting commercial scenarios.
Distributor-issued stablecoins: the pinnacle of a new profit model
Issuing stablecoins has created an unparalleled business model. Take Tether as an example. This company, which has only about 100 employees, has made billions of dollars in profits by investing its reserves, sometimes even exceeding the profitability of BlackRock.
Entry of traditional financial giants:
JPMorgan: Launched its own stablecoin, JPM Coin, focusing on inter-institutional payment and settlement needs.
PayPal: Launched PYUSD with the intention of further enhancing the value of its business through its reserve earnings.
Stripe: By acquiring stablecoin technology, it has demonstrated its interest in mastering the core technology stack of stablecoins, rather than just integrating USDC.
Visa and Mastercard: Testing the integration of stablecoins to explore future possibilities for digital payments.
Core driving force: Stablecoins can not only significantly reduce payment costs, but also generate a continuous profit stream through the investment of reserve assets. Therefore, distributors are not only intermediaries in the payment system, but also important players in the new financial infrastructure.
On-chain solutions for foreign exchange platforms
This is one of the biggest market gaps at present. The traditional foreign exchange market has a daily trading volume of more than 7.5 trillion US dollars, but faces the following problems:
Counterparty Settlement Risk
The high cost of a multi-bank system
Global settlement time zone differences
Access restrictions
On-chain solutions provide the best transparency and efficiency through the use of oracles (such as chainlink) and AMMs.
Citibank is developing its on-chain FX platform in Singapore.
Binance has launched a peer-to-peer order book product to further explore the possibilities of the on-chain foreign exchange market.
Withdrawals, Asset Management and Margin Deposits
Banks are the core entry point for fiat-backed stablecoins: Standard Chartered has begun to support withdrawal services, and more banks are expected to join in succession. Banks provide asset management services to institutions and are expected to use stablecoins for margin deposits for stock trading.
RWA investment of stablecoin reserve income
RWA is still in its early stages. Tether earns billions of dollars every year by investing its reserves like a bank. Currently, most stablecoin reserves are invested in short-term Treasury bonds managed by BlackRock and RWA products issued by Securitize. BlackRock and FTI US provide more on-chain financial product portfolios, and more complex high-yield on-chain products are expected to emerge in the future while maintaining controllable risks.
Questions to be answered:
Will regulation compromise "open finance"? Compliant stablecoins may monitor, freeze and withdraw funds. Will this pose a threat to openness?
Will compliant stablecoins avoid offering yields in order to maintain their non-security status? In doing so, will DeFi be unable to benefit from its expansion?
Can any open blockchain actually handle huge amounts of money and real-world transaction throughput (TPS)?
Will the separation of currencies and jurisdictions bring more confusion or opportunity?
Let’s dive in now:
Stablecoin Operation Manual: From Billions to Trillions
Startup: Distribution
The younger generation is a digital native, and stablecoins are their natural currency. As AI and IoT drive billions of automated microtransactions, global finance needs adaptable monetary solutions. As a "currency API", stablecoins are transmitted seamlessly like Internet data, with a transaction volume of $4.5 trillion in 2024. As more institutions realize that stablecoins are an unparalleled business model - Tether earned $5.2 billion in profits by investing in reserves in the first half of 2024, this figure is expected to continue to grow.
In the stablecoin race, distribution and true adoption are key, not complicated cryptographic mechanisms. Stablecoin adoption is reflected in three main areas: native crypto, fully banked, and underbanked worlds.
Native Crypto World ($2.9 trillion):
In the $2.9 trillion crypto-native world, stablecoins act as DeFi gateways and are essential for trading, lending, derivatives, liquidity mining, and RWA. Crypto-native stablecoins compete through liquidity incentives and DeFi integration.
Fully Banked World ($400 trillion+):
Stablecoins improve financial efficiency and are mainly used in the field of B2B, P2P and B2C payments. In this field, stablecoins focus on compliance, licensing and distribution through banks, card networks, payment systems and merchants.
The Underbanked World:
Stablecoins promote financial inclusion by providing users with access to USD. Stablecoins are used for savings, payments, foreign exchange transactions, and yield generation. Grassroots marketing is crucial in this area.
Natives of the Crypto World
By the second quarter of 2024, stablecoins account for 8.2% of the total crypto market capitalization. Maintaining the stability of the peg remains a challenge, and a unique incentive mechanism is key to expanding on-chain distribution. The current key issue is the limited use of on-chain applications.
The battle for stablecoin pegs
Fiat-backed stablecoins rely on banking relationships:
93.33% of stablecoins are fiat-backed stablecoins, which have greater stability and capital efficiency, and banks have the final say by controlling redemption rights. Regulated issuers like Paxos became the USD issuer for PayPal due to its reliability in successfully redeeming billions of dollars of BUSD.
CDP stablecoins have improved collateralization and liquidation mechanisms to maintain better peg stability:
3.89% of stablecoins are collateralized debt position (CDP) stablecoins, which use cryptocurrencies as collateral but face scalability and volatility issues. By 2024, CDP stablecoins have become more resilient by accepting a wider variety of liquid and stable collateral.
Aave's GHO accepts any asset in Aave v3, and Curve's crvUSD recently added USDM (physical assets). Some liquidation mechanisms have been improved, especially crvUSD's soft liquidation, which provides a buffer for further bad debts thanks to their customized AMM. However, the ve-token incentive model has problems, as the valuation of CRV has fallen after large-scale liquidations, resulting in a shrinking market value of crvUSD.
Synthetic dollars are kept stable through hedging:
Ethena USDe alone has captured 1.67% of the stablecoin market cap in a year, reaching $3 billion. It is a delta-neutral synthetic dollar that fights volatility by opening short positions in derivatives. It is expected to perform well in the upcoming bull run with its funding rate, even maintaining stability after seasonal adjustments.
However, the long-term viability of relying on CEX is questionable, and as similar products increase, the impact of funding on Ethereum may weaken. These synthetic dollars may be affected in black swan events, and during bear markets, continued low funding rates may pose risks.
Algorithmic stablecoins reduced to 0.56%
Liquidity Launch Challenge
Crypto stablecoins use yields to attract liquidity, and fundamentally, their liquidity costs include the risk-free rate and the risk premium. To remain competitive, stablecoin yields must at least match Treasury rates - we see that stablecoin borrowing costs have fallen as Treasury rates have reached 5.5%.
sFrax and DAI are at the forefront of Treasury exposure. By 2024, multiple RWA projects have driven on-chain Treasury portfolio capabilities: CrvUSD uses Mountain’s USDM as collateral, Ondo’s USDY and Ethena’s USDtb are backed by BlackRock’s BUIDL.
Based on Treasury rates, stablecoins employ a variety of strategies to increase risk premiums, including fixed budget incentives (such as constraints on DEX issuance and death spirals); user fees (linked to lending and perpetual contract volume); volatility arbitrage (performs poorly when volatility declines); and the use of reserve products such as staking or re-staking (unattractive).
Innovative liquidity strategy for 2024
Maximizing on-chain benefits:
While many yields currently come from self-consuming DeFi inflation incentives, more and more innovative strategies are emerging. By operating reserves as banks, projects like CAP aim to direct MEV (miner extracted value) and arbitrage profits directly to stablecoin holders, providing a sustainable and potentially more profitable source of yield.
Compounded with Treasury yields:
Through the new combination capabilities of RWA projects, projects like Usual Money (USD0) offer "theoretically" unlimited returns through their governance tokens, with treasury yields as the base rate - attracting $350 million in liquidity providers and successfully entering Binance Launchpool. Agora (AUSD) is also an offshore stablecoin with treasury yields.
Balanced high-yield anti-volatility:
The new stablecoin adopts a diversified asset portfolio approach to avoid single income and volatility risks and provide balanced high returns. For example, Fortunafi's Reservoir allocates and dynamically adjusts the proportion of government bonds, Hilbert, Morpho, PSM, etc., and integrates other high-yield assets as needed.
Is your TVL just a flash in the pan?
Stablecoin returns often face scalability issues. While fixed-budget returns can trigger volatility in the early stages, as TVL grows, returns are gradually diluted, causing the return effect to decline over time. Without sustainable returns or practical applications in trading pairs and derivatives, their TVL is likely to be unsustainable after the incentive ends.
The DeFi Gateway Dilemma
On-chain visibility allows us to truly examine the nature of stablecoins: Are stablecoins truly currencies that serve as a medium of exchange, or are they merely financial products designed for yield?
Only best interest stablecoins are used for CEX trading pairs <br>Although ~80% of trading still happens on CEXs, these exchanges support their “preferred” stablecoins (e.g. Binance uses FDUSD, Coinbase uses USDC). Other CEXs rely on overflow liquidity from USDT and USDC, and stablecoins are also working to become margin deposits on CEXs.
·Few stablecoins are used in DEX trading pairs <br>Currently, only USDT, USDC, and a small amount of DAI are used as trading pairs. Other stablecoins, such as Ethena's USDe, 57% of which has been pledged to its own protocol, are held purely as financial products to earn returns, far from being a medium of exchange.
Makerdao + Curve + Morpho + Pendle, the best combination of distribution combinations
Markets like Jupiter, GMX, and DYDX prefer to use USDC as deposits because USDT's minting and redemption process is more complicated. Lending platforms like Morpho and AAVE prefer USDC because it has better liquidity on Ethereum. On the other hand, PYUSD is mainly used for Solana's Kamino lending, especially when the Solana Foundation provides incentives. Ethena's USDe is mainly used for Pendle for revenue activities.
·RWA is undervalued <br>Most RWA platforms (such as BlackRock) use USDC as a minting asset for compliance reasons, and BlackRock is also a shareholder of Circle. The success of DAI in its RWA product is also worth noting.
Expand the market or explore new areas Although stablecoins are able to attract major liquidity providers through incentives, they face a bottleneck - the use of DeFi is declining. Stablecoins now face a dilemma: they can either wait for the expansion of crypto-native activities or seek new uses beyond these activities.
Outsiders in a fully banked world
Key players taking action
Global regulation is becoming clearer
99% of stablecoins are backed by the U.S. dollar, and the U.S. federal government has ultimate influence in this space. The regulatory framework in the U.S. is expected to be further clarified after the crypto-friendly Trump presidency, which has promised to lower interest rates and ban central bank digital currencies (CBDCs), a policy that could have a positive impact on stablecoins.
The U.S. Treasury Department's report pointed out that stablecoins have an impact on the demand for short-term Treasury bonds, of which Tether holds $90 billion in U.S. Treasury bonds. Preventing crypto crimes and maintaining the dominance of the U.S. dollar are also driving forces for regulation. By 2024, many countries have established a stablecoin regulatory framework based on common principles, including approval of stablecoin issuance, reserve liquidity and stability requirements, restrictions on the use of foreign currency stablecoins, and generally prohibiting the generation of interest.
Key examples include the EU’s MiCA, the UAE’s PTSR, Hong Kong’s sandbox regulation, Singapore’s MAS, and Japan’s PSA. Notably, Bermuda became the first country to accept stablecoin tax payments and authorize interest-bearing stablecoin issuers.
· Licensed issuers gain trust <br>The issuance of stablecoins requires technical capabilities, cross-regional regulatory compliance, and strong management capabilities. Major players include Paxos (PYUSD, BUSD), Brale (USC), and Bridge (B2B API). Reserve management is handled by trusted institutions such as BNY Mellon, and USDC's reserves generate income by investing in its funds managed by BlackRock. BUIDL now allows more on-chain projects to earn income.
Banks are the gatekeepers of fiat currency exits
While fiat-to-stablecoin deposits have become easier, stablecoin-to-fiat withdrawals remain challenging as banks have difficulty verifying the source of funds. Banks prefer licensed exchanges like Coinbase and Kraken, which perform KYC (customer identification) and KYB (business identification) and have similar AML (anti-money laundering) frameworks.
Highly reputable banks such as Standard Chartered have already started accepting stablecoin withdrawals, and small and medium-sized banks such as Singapore's DBS Bank are also moving quickly. B2B services such as Bridge manage billions of transactions for high-profile clients including SpaceX and the US government by integrating withdrawal channels.
· Distributors have the final say <br>As the leader in compliant stablecoins, Circle relies on Coinbase and is currently pursuing global licenses and partnerships. However, this strategy may be challenged as institutions issue their own stablecoins, as stablecoins are unparalleled as a business model - Tether is a 100-person company that made $5.2 billion in profits by investing reserves in the first half of 2024.
Banks like JPMorgan have launched JPM Coin for institutional transactions. In terms of payment applications, Stripe acquired Bridge, showing its interest in having a stablecoin ecosystem, not just integrating USDC. PayPal also issued PYUSD to capture reserve returns. Card networks Visa and Mastercard are testing the feasibility of accepting stablecoins.
Efficiency Driver
With a trusted issuer, healthy banking relationships, and a distributor base, stablecoins can create efficiencies in the large-scale financial system, particularly in payments.
Traditional systems face efficiency and cost limitations, with internal applications or bank transfers providing instant settlement, but only within their own ecosystems. Interbank payments typically incur fees of around 2.6% (70% to the issuing bank, 20% to the acquiring bank, and 10% to the card network) and take more than a day to settle. Cross-border transactions are more expensive, at around 6.25%, and can take up to five days to settle.
Stablecoins can eliminate intermediaries and enable instant point-to-point settlement. This not only speeds up the flow of funds and improves the efficiency of capital use, but also provides programmable functions such as conditional automatic payment.
B2B payments (US$120-150 trillion annual transaction volume)
Banks are in the best position to promote stablecoins, with JPMorgan Chase having developed JPM Coin on its Quorum blockchain, which will be used for approximately $1 billion in transactions per day as of October 2023.
P2P payments (annual transaction volume of $1.8-2 trillion)
E-wallets and mobile payment applications are well positioned to drive stablecoin adoption. PayPal has launched PYUSD, currently valued at $604 million on Ethereum and Solana. PayPal enables end users to access and send PYUSD for free.
B2C commerce (US$5.5-6 trillion in annual transaction volume)
Stablecoins need to work with POS systems, bank APIs, and card networks. Visa became the first payment network to accept USDC for settlement transactions as early as 2021.
Innovators in a “de-banked” world
Shadow Dollar Economy
Emerging markets are in urgent need of stablecoins due to severe currency depreciation and economic instability. In Turkey, stablecoin purchases account for 3.7% of its GDP. People and businesses are willing to pay a higher premium for stablecoins than for fiat dollars, with a stablecoin premium of 30.5% in Argentina and 22.1% in Nigeria. Stablecoins provide these regions with access to dollars and financial inclusion.
Tether’s dominance in this space cannot be underestimated, with a solid decade-long track record. Even in the face of banking complications and redemption crises — Tether admitted in April 2019 that USDT reserves were only 70% — its peg remained stable.
This is because Tether has built a powerful shadow dollar economy: in emerging markets, people rarely convert USDT into fiat currency, but instead treat it as US dollars, a phenomenon that is particularly evident in regions such as Africa and Latin America, where people use it to pay employee salaries, bills, etc. Tether has achieved this result through long-term existence and continued utility, without additional incentives, with its credibility and widespread acceptance, which should be the ultimate goal of every stablecoin.
US dollar access
Remittances: Inequality in remittances impedes economic growth. In sub-Saharan Africa, an economically active individual typically pays 8.5% in remittance fees when sending money to low-middle-income countries (LMICs) and developed countries. For businesses, high remittance fees, long processing times, cumbersome procedures, and exchange rate risks are barriers to growth and competitiveness.
· Dollar access: Currency volatility cost 17 emerging market countries $1.2 trillion in GDP between 1992 and 2022, or about 9.4% of their total GDP. Local financial development is critical to dollar access. Many crypto projects are working on onboarding through grassroots “DePIN” methods that use local agents to facilitate cash-to-stablecoin transactions in Africa, Latin America, and Pakistan.
·Foreign Exchange Market: Currently, the foreign exchange market has a daily trading volume of over $7.5 trillion. In the Global South, individuals often exchange local fiat currencies for US dollars through the black market, mainly because the black market exchange rate is more favorable than official channels. Binance's P2P trading has begun to be adopted, but lacks flexibility due to its order book approach. Many projects such as ViFi are developing on-chain automated market making (AMM) foreign exchange solutions.
Humanitarian aid distribution: Refugees from the war in Ukraine can receive humanitarian aid in the form of USDC, which can be stored in digital wallets or redeemed locally. In Venezuela, frontline health workers use USDC to purchase medical supplies during the COVID-19 pandemic in response to the growing political and economic crisis.
Ending: Intertwined
Interoperability
Foreign Exchange (FX)
The traditional FX system is inefficient and faces several challenges: counterparty settlement risk (although CLS has been enhanced, it is still cumbersome), multi-bank system costs (for example, an Australian bank's yen purchase involves the coordination of six banks), global settlement time zone differences (for example, the Canadian dollar and Japanese yen banking systems overlap for less than 5 hours a day), and limited access to the FX market (retail users pay 100 times the fees of large institutions). On-chain FX offers significant advantages:
1. Cost, efficiency and transparency: Oracles like Redstone and Chainlink provide real-time price quotes. Decentralized exchanges provide more cost-effective and transparent services, and Uniswap's Constant Product Market Maker (CLMM) reduces transaction costs to 0.15%-0.25%, which is about 90% lower than traditional foreign exchange. The shift from T+2 bank settlement to instant settlement allows arbitrageurs to use various strategies to correct pricing errors.
2. Flexibility and accessibility: On-chain FX allows corporate treasurers and asset managers to access a wide range of products without the need for multiple currency-specific bank accounts. Retail users can use wallets embedded with DEX APIs to get the best FX prices.
3. Separation of currency from jurisdiction: Transactions no longer require a domestic bank, decoupling it from the underlying jurisdiction. This approach leverages the efficiency of digitalization while maintaining the sovereignty of currency, although there are still pros and cons.
However, challenges remain, including scarcity of non-USD-denominated digital assets, security of oracles, support for long-tail currencies, regulatory issues, and unified interfaces with on- and off-chain. Despite these obstacles, on-chain FX still offers considerable opportunities. For example, Citibank is developing a blockchain-based FX solution under the guidance of the Monetary Authority of Singapore.
Stablecoin Exchange
Imagine a world where most companies issue their own stablecoins, and stablecoin exchanges face a challenge: how to pay JP Morgan merchants using PayPal’s PYUSD. While on-chain and off-chain solutions can solve this problem, they lose the efficiency that cryptocurrencies promise.
On-chain automated market making (AMM) provides the best real-time and low-cost trading between stablecoins. For example, Uniswap provides multiple such pools with fees as low as 0.01%. However, once billions of dollars enter the chain, users must trust the security of smart contracts, and there must be enough deep liquidity and instant performance to support real-life trading activities.
Cross-chain exchange
The major blockchains have different strengths and weaknesses, which leads to the deployment of stablecoins on multiple chains. This multi-chain approach brings cross-chain challenges, and bridging brings huge security risks. In my opinion, the best solution for stablecoins is to launch their own Layer 0, such as USDC's CCTP and PYUSD's Layer0 integration. In addition, we have also seen USDT reclaiming bridge-locked tokens and may launch solutions similar to Layer0.
Unresolved issues:
1. Will regulation compromise “open finance” because compliant stablecoins may be able to monitor, freeze, and withdraw funds?
2. Will compliant stablecoins also avoid offering returns that could be classified as securities, thereby preventing on-chain DeFi from benefiting from its massive expansion?
3. Can any open blockchain actually handle large amounts of money? Is it even possible given Ethereum’s slow speed, its L2’s reliance on a single sequencer, Solana’s imperfect track record, and the lack of long-term track records of other popular chains?
4. Will the separation of currencies and jurisdictions bring more confusion or opportunity?
The financial revolution led by stablecoins is both exciting and uncertain. It is a new chapter where freedom and regulation dance in a delicate balance.
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