Title: Are Stablecoins A New Financial System or Will they Be Replaced?

Author: @DiogenesCasares

Translated by: Bai Hua Blockchain

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

However, although stablecoins were initially created to solve specific problems in the cryptocurrency ecosystem, they have now far exceeded their original purpose and have become a core driver of everyday fund transfers, increasingly being used for earning yields and facilitating real-world transactions. Currently, the total market capitalization of stablecoins is around 5% of the cryptocurrency market, and if we consider the companies managing these stablecoins or blockchain networks like Tron that are largely dependent on stablecoin usage, the overall market share of stablecoins is close to 8%.

Despite the rapid growth of stablecoins, there is relatively limited content on why stablecoins are so popular. Tens of millions of users are replacing the traditional financial system with stablecoins, but little is known about the true drivers behind this trend. Furthermore, research on the platforms and projects supporting the stablecoin ecosystem, as well as the different user groups, is scarce. Therefore, this article will delve into why stablecoins are so prevalent, who the main participants in the stablecoin space are, which user groups are driving this trend, and how stablecoins are gradually becoming the next stage of monetary evolution.

1. A Brief History of the US Dollar

When you think of "money," what comes to mind? Cash? The US dollar? Price tags in the supermarket? Or taxes? In these scenarios, money is essentially a socially agreed-upon unit of account used to measure the value of various, heterogeneous goods and services.

The earliest forms of money were seashells and salt, which later evolved into copper coins, silver coins, gold coins, and finally the US dollar/fiat currency.

1) Let's Focus on the US Dollar

The US dollar (and modern fiat currencies, i.e., government-issued currencies not backed by physical assets) has gone through multiple stages of development. In the US, the initial US dollar banknotes (paper currency issued by banks) were private. At the time, banks were free to print their own currency, a model similar to the Hong Kong dollar (HKD) system. However, due to various issues with this model, the government eventually intervened and took control of US dollar issuance, also legally tying the US dollar to gold.

In 1871, Western Union used the telegraph to complete the first wire transfer, enabling fund transfers without the need to physically move large amounts of currency. This innovation greatly improved the efficiency of the financial system, as it eliminated the physical constraints on the flow of money, making the entire financial system more efficient.

2) A Brief History of the US Dollar

1913: The Federal Reserve System was established to regulate the issuance of the US dollar and monetary policy.

1971: Nixon ended the gold standard, and the US dollar became a free-floating currency no longer tied to gold.

1950: The first credit card was born, ushering in the era of non-cash payments.

1973: The SWIFT (Society for Worldwide Interbank Financial Telecommunication) payment network was established, making US dollar transactions faster and more globalized.

1983: The first digital bank account was established at the Stanford Federal Credit Union, kicking off the digitalization of banking.

1999: PayPal was born, enabling digital payments without a bank account.

2014: Tether launched the first US dollar-backed stablecoin (USDT), laying the foundation for today's stablecoin market.

All of these developments have led us to the current era of stablecoins.

The key takeaway from this brief historical review is that the form of money and the way we use it have always been evolving.

Today, whether you pay $20 through PayPal, cash, Zelle, or a bank transfer, it is all feasible (although you might get some strange looks if you use a traditional bank transfer). In developing countries, and increasingly in developed countries as well, this trend also applies to stablecoins.

Personally, I have used stablecoins to pay salaries, convert to cash, and even prefer to use stablecoins instead of a bank account for savings, managing my funds through protocols like @HyperliquidX's HLP, AAVE, Morpho, and @StreamDeFi.

In the world we live in, the traditional financial system often imposes a heavy burden on the most vulnerable. Capital controls, the monopolistic position of banks, and high fees have become the norm. In this environment, stablecoins have become a powerful tool for financial freedom - not only making cross-border money transfers more convenient, but also gradually being used for direct payments for goods and services.

To understand how stablecoins have achieved such success in such a short time, we first need to understand why stablecoins can outperform the traditional financial system.

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

The essence of stablecoins is that they are Tokens backed by fiat currencies like the US dollar or Euro.

Many readers of this article may be from developed countries in North America, Europe, or Asia, where the financial system is relatively efficient, smooth, and stable. In the US, there are options like PayPal and Zelle, in Europe there is SEPA, and in Asia, there are numerous fintech companies, the most well-known being Alipay and WeChat Pay.

In these regions, people are accustomed to keeping their money in banks, without worrying about their account balances disappearing the next day or facing hyperinflation. Small-scale transfers can usually be completed quickly, and even large-scale fund movements, while taking longer, are still manageable. Furthermore, most businesses require customers to use the local banking system, as it is considered more secure and convenient.

However, the reality in other parts of the world is starkly different.

In Argentina, bank deposits have been forcibly appropriated by the government multiple times, and the local currency is one of the worst-performing in history.

In Nigeria, the official exchange rate and the black market rate are severely misaligned, and moving funds in and out of the country is extremely difficult - a situation that also applies to Argentina.

In the Middle East, bank accounts may be arbitrarily frozen by the government, leading many ordinary citizens (especially those without political connections) to avoid keeping most of their liquid assets in banks, opting for other storage methods instead.

It's not just the risk of holding funds that is problematic; cross-border money transfers are often much more challenging. SWIFT (the Society for Worldwide Interbank Financial Telecommunication) cross-border transfers are expensive and cumbersome, and in these countries, most people don't even have bank accounts due to the aforementioned reasons.

As for alternatives like Western Union, while they can facilitate cross-border remittances, they often charge exorbitant fees (you can check their fee calculators). Worse still, they typically settle at the official exchange rate, which is often much higher than the actual market rate, resulting in users bearing a significant "hidden" cost.

Stablecoins allow people to hold funds outside of the local financial system, as they are inherently global, using the Blockchain for transfers rather than local bank servers. This feature stems from their historical background - cryptocurrency trading platforms have faced challenges in opening bank accounts, handling large-scale deposits and withdrawals, and cross-platform transfers.

One of the most famous cases is Japan. Due to the cumbersome bureaucratic system and strict capital controls of the Japanese banking system, there has been a long-term arbitrage opportunity between global cryptocurrency prices and local Japanese prices.

In 2017, BN announced in a white paper that its trading platform would only support Stablecoin-Cryptocurrency trading pairs to accelerate settlement. This directly drove the market trading volume to shift towards 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 the recognized base asset in the cryptocurrency market, and this acceptance is gradually expanding to applications beyond cryptocurrencies.

3. Stablecoins vs. Fintech: Speed, Innovation, and Solutions to Global Financial Issues

If we look at transaction speed, innovative design, and the ability to solve global financial problems, Stablecoins have significant differences from Fintech.

So far, the main contribution of Fintech has been to optimize and beautify the existing payment infrastructure, rather than fundamentally changing its underlying architecture. Essentially, they have only added a "coating" on top of the traditional financial system, but have not solved its inherent inefficiency and complexity. Stablecoins, on the other hand, are the most significant change in the global financial system in the past 50 years.

Fast, reliable, and transparent: The transfer speed of Stablecoins is far superior to the traditional banking system, and they also have on-chain verifiability, making fund flows more efficient.

Low-cost remittances: Compared to traditional payment methods such as bank wire transfers or Western Union, Stablecoins almost eliminate the high fees (although this also means losing some of the protections provided by the traditional financial system).

Competitors to cash and payment processors: Stablecoins can not only replace cash, but also compete with payment processors like Western Union, and are more secure and durable than cash.

Cannot be easily destroyed or stolen: Stablecoins will not disappear like cash due to floods, fires, or theft, and can be converted to local currency at any time.

Extremely low transaction fees: The transfer cost of 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 (usually between 0.65% to over 4%).

All of this indicates that Stablecoins not only dominate the cryptocurrency field, but are also challenging the foundations of the traditional financial system.

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

For example, @MountainUSDM has already introduced RWA (Real World Asset) yields on several platforms in Argentina, while @ethena_labs allows users to profit from Delta-neutral trades without exposure, without relying on the traditional banking system or trading platform custody.

Today, the use of Stablecoins has gone far beyond simple payment processing or hedging, and more and more people are starting to use Stablecoins to earn yields, and even 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 cryptocurrency technology - this is a huge breakthrough in product innovation around Stablecoins in recent years. Major companies are constantly optimizing the user experience, making the use of Stablecoins more seamless and intuitive, further driving their global adoption.

4. Companies Driving Stablecoin Adoption

The main Stablecoin projects are first and foremost the companies that issue these Stablecoins. These include:

The issuer of USDC, @Circle

The issuer of USDT, @Tether_to

The issuers of DAI/USDS, @SkyEcosystem

PYUSD, jointly launched by @PayPal and @Paxos

Of course, there are many other Stablecoins not mentioned, but the above are the main payment-oriented Stablecoins. These companies typically have bank accounts, receive traditional bank wire transfers, and convert these funds into Stablecoins to provide to users.

1) The Funding Model of Stablecoins

Stablecoin issuers hold the funds deposited by users and charge users an extremely low fee (usually 1-10 basis points). Users can transfer these assets at any time, while the issuers earn interest on the funds in their bank accounts (known as "floating income" or "yield" in the DeFi context).

Trading companies play an important role in this process, responsible for large-scale conversion between fiat and Stablecoins (on/off ramp). As more and more trading platforms start to crack down on users who only use Stablecoins for deposits and withdrawals without paying transaction fees, the role of trading companies in this market is becoming increasingly critical.

Trading companies often provide better prices than local trading platforms, further enhancing the efficiency and competitiveness of Stablecoins.

As all major trading companies are engaged in fierce competition in this market, they are constantly optimizing liquidity and services to make Stablecoin trading smoother.

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

It is worth mentioning that the model of @SkyEcosystem (formerly Maker) is somewhat different.

SkyEcosystem adopts a hybrid model, with its Stablecoin USDS supported 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 in the "Savings Rate Module" (similar to a risk-free rate), or borrow USDS on platforms like @MorphoLabs and @Aave, or simply hold USDS.

This model allows users to choose safer yield options or take on higher risks for higher returns.

2) Stablecoin User Growth: Not Directly to Consumers

Currently, most major Stablecoin issuers do not directly target ordinary consumers, but rather provide Stablecoin support indirectly through various financial service companies. This model is similar to MasterCard - it collaborates with banks but does not directly interface with end-users.

You may not hear much about names like @LemonCash, @Bitso, @Buenbit, @Belo, @Rippio in the crypto community (CT), but they play important roles in the Stablecoin trading market. For example:

Just the few Argentine trading platforms mentioned above have over 20 million KYC-verified users, nearly half the user base of Coinbase, while Argentina's population is only 1/7 that of the US.

Lemon Cash's trading volume reached $5 billion in 2023, a large portion of which was Stablecoin-Stablecoin trading or ARS (Argentine Peso)-Stablecoin trading.

These platforms serve as the entry point for most non-peer-to-peer Stablecoin transactions, and they also have a large volume of cryptocurrency trading and Stablecoin deposits. However, except for Rippio, most platforms do not have their own order books, but rely on order routing systems to complete transactions.

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

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

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

In this model, the application of Stablecoins is entering the global financial system in a low-cost, efficient way, affecting not only the crypto market, but also changing the landscape of the traditional payment and remittance industry.

Next, let's look at the Blockchains on which Stablecoins actually operate, i.e., where Stablecoin transfers, transactions, and balances are stored. Currently, the main Blockchains for Stablecoin transactions include:

@trondao (TRON) by @justinsuntron

BN Smart Chain (BSC) by @binance

@solana (Solana)

@0xPolygon (Polygon)

The main purpose of these Blockchains is value transfer, and they may not necessarily involve DeFi interaction or yield generation.

Although Ethereum still leads in 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%.

Additionally, some new Blockchains are trying to process Stablecoin transactions efficiently and at low cost, with LaChain being noteworthy.

LaChain is operated by an alliance consisting of Ripio, Num Finance, SenseiNode, Cedalio, Buenbit, and FoxBit, primarily targeting users and platforms in Latin America.

This also indicates that as the Stablecoin market matures, the ecosystem is becoming more complex and diversified.

5. The Evolution of Stablecoin Payments: From Cross-Border Remittances to Local Payments

Stablecoins have become the primary tool for cross-border remittances, but now they are increasingly being used for local payments.

This involves crypto payment gateways and portals, i.e.:

Converting Stablecoins to fiat, or

Allowing merchants to directly accept Stablecoin payments priced in fiat.

For example, a merchant can "accept" crypto payments, but the crypto in the transaction will be immediately converted to US dollars and settled to the merchant's bank account. Of course, merchants can also directly accept Stablecoin payments.

However, due to the friction in redeeming Stablecoins (whether in time or fee costs), there are also many companies in the market that are dedicated to optimizing this process, offering solutions ranging from simple and efficient to complex and comprehensive.

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

Bridge by @zcabrams: Provides convenient conversion between Stablecoins, across different Blockchains, and between fiat currencies, greatly reducing the friction costs for merchants and payment platforms.

@stripe has even acquired Bridge to improve the efficiency of its own payment system.

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

As Stablecoin payments become more widespread, and their lower costs compared to traditional bank cards and banking systems, the usage of Stablecoin-to-Stablecoin transactions will continue to increase. In the future, more and more merchants will directly accept Stablecoin payments to optimize unit economics and drive the construction of a post-banking payment system.

6. The Financialization of Stablecoins: How to Make Stablecoins "Appreciate"

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

Lemon Cash: Provides a deposit function on @aave, allowing users to deposit funds to earn yields.

USDM by @MountainUSDM: Allows Stablecoin holders to earn yields and has been integrated into multiple trading platforms and payment services in Latin America.

Many trading platforms and retail finance platforms view Stablecoin yields as a stable source of income, hoping to balance the income volatility brought by market cycles.

Traditional trading platforms are highly dependent on trading fees, which leads to a surge in revenue during bull markets but a drastic drop in revenue during bear markets.

By providing Stablecoin deposit yields and related services, these platforms can obtain more stable income and reduce the impact of market fluctuations on their profitability.

7. The Future Development of Stablecoins?

Non-Crypto Use Cases of Stablecoins: Expansion of International Remittances and Payments

The main non-crypto application of Stablecoins is international remittances, and they are increasingly being used for payments. However, as the Stablecoin infrastructure continues to improve and become more widespread, they may also be used for savings, especially in developing countries, a trend that is already emerging.

A few weeks ago, @tarunchitra told me a story: in Georgia, the owner of a convenience store collects Georgian Lari (GEL) from customers, converts it to USDT, and earns interest, while using a simple paper ledger to record customer balances and charging a fee from the interest. In this store, customers can also use the QR code of Trust Wallet for payments. Interestingly, Georgia's banking system is relatively healthy, but this alternative finance model has still developed there.

In Argentina, it is estimated by the Financial Times (FT) that the total amount of US dollars held by citizens exceeds $200 billion, and these funds are all outside the traditional financial system. If even half of this money enters the on-chain or crypto ecosystem, the DeFi market size will double, and the total market cap of Stablecoins will increase by about 50% - and this is just the potential of one country. Similar situations exist in China, Indonesia, Nigeria, South Africa, and India, where the informal economy is massive or there is a certain degree of distrust in the banking system.

More Potential Use Cases of Stablecoins As the use of Stablecoins grows, their application scenarios are also constantly 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 from institutions like Coinbase, KYC data may be used in the future to expand the credit market and potentially introduce negative credit mechanisms (i.e., non-repayment will affect credit scores).

Yield Distribution: Stablecoin issuers are gradually allowing yields to be "passed on" to holders, for example:

USDC offers an annual yield of 4.7%

Ethena's USDe has a dynamic yield rate, often exceeding 10%

Cross-Fiat Transactions: Currently, many transactions are adopting a "double conversion" approach - first converting the local currency to a US dollar Stablecoin, and then converting to the target currency (such as Argentine Peso or Nigerian Naira). This means the user has to pay two sets of fees, but as Blockchain technology matures, it may be possible to directly convert to the target Stablecoin in the future, reducing costs.

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

8. Challenges Facing Stablecoins

When discussing the future of Stablecoins, we also need to address some overlooked issues.

1) Stablecoins Rely on the Banking System

Currently, almost all Stablecoins rely on bank accounts as their supporting assets.

But the banking system itself is not absolutely secure, for example:

In 2023, USDC briefly de-pegged due to the collapse of Silicon Valley Bank (SVB), indicating that even the most trusted stablecoins may face risks from the banking system.

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

If you agree that stablecoins are used to bypass capital controls and avoid local currency devaluation, you are actually acknowledging a fact - under the local legal framework, this behavior may be classified as money laundering.

This is an open secret, but its legal and moral implications have not been fully explored.

3) The issue of stablecoin freezing and non-reissuance

Currently, neither Circle (USDC) nor Tether (USDT) allows the reissuance of stablecoins.

If a user's funds are frozen for legal reasons (such as involvement in a crime or being deemed as proceeds of crime), these assets will not be returned to the victims, even if they hold a court order.

This handling method is highly controversial at the moral level and may be unsustainable in the long run.

4) Government regulatory pressure & CBDC substitution risk

Governments may require stricter regulation of stablecoins, making them "seizable".

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

This topic is broad, and I will discuss it in more detail in subsequent articles.

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

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

These stablecoins will be unable to be unilaterally frozen or seized by the government and will be fully decentralized.

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

Of course, this also means new compliance challenges.