Are stablecoins a new financial system or will they be replaced?

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

Original Author: @DiogenesCasares

Original Compilation: Baihua Blockchain

Stablecoins account for two-thirds of on-chain transaction volume, whether for exchanges, DeFi trading, or simple transfer payments. Initially, stablecoins gained attention through Tether (the first widely used stablecoin). Tether was created to address the issue of Bitfinex users being unable to conveniently use fiat currency due to banking restrictions. Bitfinex launched USDTether, promising a 1:1 backing with the US dollar. Since then, Tether has spread rapidly, with traders using USDT for arbitrage across different trading platforms. Compared to traditional bank wire transfers, which 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, despite stablecoins initially being designed to solve specific problems within the cryptocurrency ecosystem, they have long since surpassed their original use, becoming a core driver of everyday fund transfers and increasingly used for earning yields and facilitating real-world transactions. Currently, the total market capitalization of stablecoins accounts for about 5% of the cryptocurrency market, and when considering the companies managing these stablecoins or blockchain networks like Tron that primarily rely on stablecoin usage for valuation, the overall market share of stablecoins approaches 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 traditional financial systems with stablecoins, yet little is known about the true driving factors behind this shift. Furthermore, research on the platforms and projects supporting the stablecoin ecosystem and the different user groups is scarce. Therefore, this article will delve into why stablecoins are so popular, who the main players in the stablecoin space are, which user groups are driving this trend, and analyze how stablecoins are gradually becoming the next stage in the evolution of money.

1. A Brief History of the Dollar

When you think of "money," what comes to mind? Cash? The dollar? Price tags in supermarkets? Or taxes? In these scenarios, money is essentially a conventional unit of measurement used to gauge the value of various different and heterogeneous goods and services.

In the earliest days, money took the form of shells and salt, evolving into copper coins, silver coins, gold coins, and now the dollar/fiduciary currency.

1) Let's Focus on the Dollar

The dollar (and modern fiat currency, which is issued by governments and not backed by physical assets) has gone through several stages of development. In the United States, the initial dollar bills (bank-issued paper currency) were private. At that time, banks could freely print money, a model somewhat similar to the Hong Kong dollar (HKD) system. However, due to numerous issues with this model, the government eventually intervened and took over the issuance of the dollar, legally tying it to gold.

In 1871, Western Union completed the first telegraphic money transfer, achieving a breakthrough that allowed funds to be transferred without the need to physically move large amounts of cash. This innovation greatly enhanced the efficiency of the financial system by eliminating the physical limitations of money circulation, making the entire financial system more efficient.

2) A Brief History of Dollar Development

1913: The Federal Reserve System was established, beginning to regulate the issuance of dollars and monetary policy.

1971: Nixon ended the gold standard, decoupling the dollar from gold and transitioning to a freely floating currency system.

1950: The world's first credit card was born, ushering in the era of cashless payments.

1973: The SWIFT payment network was established, making dollar transactions faster and more global.

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

1999: PayPal was launched, enabling pure digital payments without the need for a bank account.

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

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

This brief historical review reveals an important fact: the form of money and the way we use money are constantly changing.

Today, whether paying $20 through PayPal, cash, Zelle, or bank transfer, all are completely feasible (though using traditional bank transfer might earn you some strange looks). In developing countries, and increasingly in more developed nations, this trend also applies to stablecoins.

Personally, I use stablecoins to pay salaries, have exchanged cash through stablecoins, and now even prefer to use stablecoins instead of bank accounts for savings, utilizing protocols like @HyperliquidX's HLP, AAVE, Morpho, and @StreamDeFi to manage funds.

In our world, traditional financial systems often impose heavy burdens on the most vulnerable groups. Capital controls, the monopoly of banks, and high fees have become the norm. In such an environment, stablecoins have emerged as a powerful tool for financial freedom—they not only make cross-border currency transfers more convenient but are also increasingly used for direct payments for goods and services.

To understand how stablecoins have achieved success in such a short time, we must first clarify why stablecoins can outperform traditional financial systems.

2. Stablecoins vs. Bank Transfers: A Tale of Two Cities

The essence of stablecoins is that they are tokens backed by fiat currencies (such as the dollar or euro).

Many readers of this article may come 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 fintech companies are emerging, the most well-known being Alipay and WeChat Pay.

In these regions, people are accustomed to depositing money in banks without worrying that their balance will disappear the next day or that they will face hyperinflation. Small transfers can usually be completed quickly, and even large fund movements, while they may take longer, are not unbearable. Additionally, most businesses require customers to use local banking systems, as this is considered safer and more convenient.

However, the reality in another part of the world is starkly different.

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

In Nigeria, there is a severe disconnect between official and black market exchange rates, making it extremely difficult to move funds in and out of the country—ironically, this also applies to Argentina.

In the Middle East, bank accounts can be arbitrarily frozen by the government, causing many ordinary citizens (especially those without political connections) to hesitate to deposit most of their liquid assets in banks, opting for alternative ways to store their funds.

Not only is holding funds risky, but transferring money is often even more challenging. SWIFT's cross-border transfer fees are expensive and cumbersome, and in these countries, most people do not have bank accounts due to the aforementioned reasons.

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

Stablecoins allow people to hold funds outside of local financial systems because they are inherently global, relying on blockchain for transfers rather than local bank servers. This characteristic stems from their historical background—cryptocurrency exchanges faced challenges in opening bank accounts, handling large deposits and withdrawals, and transferring funds across platforms.

One of the most notable cases is Japan. Due to the cumbersome bureaucratic system of the Japanese banking system and strict capital controls, there has long been an arbitrage opportunity between global cryptocurrency prices and local 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 drove market trading volume toward stablecoin trading pairs. In 2019, BN launched USDT perpetual contracts, allowing users to trade on margin using USDT instead of BTC, further solidifying the dominance of stablecoins. Today, stablecoins have become recognized as the foundational 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 Problems

When 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 existing payment infrastructure rather than fundamentally change its underlying architecture. Essentially, they have only added a layer of "coating" on top of the traditional financial system without addressing its inherent inefficiencies and complexities. In contrast, stablecoins represent the most significant transformation in the global financial system in 50 years.

Fast, reliable, and transparent: The transfer speed of stablecoins far exceeds that of traditional banking systems, while also providing on-chain verifiability, making fund circulation more efficient.

Low-cost remittances: Compared to traditional payment methods like bank wires or Western Union, stablecoins have virtually eliminated high fees (though this also means losing some of the protections offered by traditional financial systems).

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

Not easily destroyed or stolen: Stablecoins do 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 transfer cost of stablecoins depends on the blockchain network but is usually under $2 and is a fixed fee, far lower than the fees of traditional payment systems like Western Union (which typically range from 0.65% to over 4%).

All of this indicates that stablecoins not only dominate the cryptocurrency space but are also challenging the foundations of traditional financial systems.

Once stablecoins are widely accepted and gradually mature, they will inevitably fill the gaps in the global financial system that traditional financial institutions have yet to cover. As stablecoins continue to gain popularity, the financial services and complex products surrounding them are also rapidly growing.

For example, @MountainUSDM has introduced RWA (Real World Assets) yields on multiple platforms in Argentina, while @ethena_labs allows users to profit through delta-neutral trading without relying on traditional banking systems or trading platform custody.

Today, the use of stablecoins has far surpassed simple payment processing or hedging, with more and more people beginning to utilize 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 may not even realize they are using crypto technology—this is a significant breakthrough in product innovation surrounding stablecoins in recent years. Major companies are continuously optimizing user experiences, making the use of stablecoins more seamless and intuitive, further driving their global adoption.

4. Companies Driving the Adoption of Stablecoins

The main stablecoin projects are primarily the companies issuing these stablecoins. These include:

The issuer of USDC: @Circle

The issuer of USDT: @Tether_to

The issuer 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 stablecoins used for payment purposes. These companies typically have bank accounts, receive traditional bank wires, and convert these funds into stablecoins for users.

1) The Funding Operation Model of Stablecoins

Stablecoin issuers hold the funds deposited by users and charge users very low fees (usually 1-10 basis points). Users can transfer these assets at any time, while issuers earn interest on the funds in their bank accounts (i.e., "floating yield" or "yield" in the context of DeFi).

Trading companies play an important role in this process, responsible for large-scale conversions between fiat and stablecoins (on/off ramp). As more trading platforms begin to crack down on users who only deposit and withdraw using stablecoins without paying trading fees, the role of trading companies in this market is becoming increasingly critical.

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

As all major trading companies compete fiercely in this market, they continuously optimize liquidity and services, making stablecoin trading smoother.

Stablecoin issuers earn interest in this 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 employs a hybrid model, with its stablecoin USDS backed by various 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 a "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) User Growth of Stablecoins: Not Directly Targeting Consumers

Currently, most major stablecoin issuers do not directly target ordinary consumers but 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 rarely hear names like @LemonCash, @Bitso, @Buenbit, @Belo, and @Rippio in the crypto community (CT), but they play important roles in the stablecoin trading market. For example:

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

Lemon Cash's trading volume reached $5 billion in 2023, a significant 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 trading, and they themselves also have substantial crypto trading volumes and stablecoin deposits. However, except for Rippio, most platforms do not have their own order books and rely on order routing systems to complete trades.

This model is very similar to Robinhood—Robinhood is not a true trading platform but routes pricing through liquidity providers (Market Makers). I refer to these platforms as "Retail Venues," as their focus is on optimizing 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 do not attract market makers; their primary target users are ordinary consumers rather than professional trading companies or high-frequency traders.

In this model, the application of stablecoins is entering the global financial system in a low-cost, high-efficiency manner, impacting not only the crypto market but also changing the landscape of traditional payments and remittance industries.

Next, let's look at the blockchain where stablecoins actually operate, which is where stablecoin transfers, transaction records, and balance storage occur. Currently, the main chains for stablecoin trading include:

@justinsuntron's @trondao (Tron)

@binance's BN Smart Chain (BSC)

@solana (Solana)

@0xPolygon (Polygon)

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

Although Ethereum still leads in TVL (Total Value Locked), its high transaction costs make it unattractive for most stablecoin trading. Data shows:

92% of USDT transactions occur on the Tron chain.

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

In contrast, while stablecoin trading still accounts for a high proportion on Ethereum, it is only 70%.

Additionally, some new blockchains are attempting to handle stablecoin transactions efficiently and at low cost, notably LaChain.

LaChain is operated by a consortium 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 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 become a primary tool for cross-border remittances, but today, they are increasingly being used for local payments.

This involves cryptocurrency payment gateways and payment portals, which:

Convert stablecoins into fiat currency, or

Allow merchants to directly accept stablecoin payments priced in fiat currency.

For example, a merchant can "accept" crypto payments, but in reality, the cryptocurrency from this transaction will be immediately converted into dollars and settled into the merchant's bank account. Of course, merchants can also directly accept stablecoin payments.

However, since there is still some friction in redeeming stablecoins (whether in terms of time or fee costs), many companies dedicated to optimizing this process have emerged, offering solutions that range from simple and efficient to complex and comprehensive.

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

@zcabrams's Bridge: Provides convenient conversions between stablecoins, across different chains, and between fiat currencies, significantly reducing friction costs for merchants and payment platforms.

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

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

As stablecoin payments become more widespread, and given their lower costs compared to traditional bank cards and banking systems, the usage rate of stablecoin-stablecoin transactions will continue to rise. In the future, more merchants will directly accept stablecoin payments to optimize unit economics, driving stablecoins to build a payment system in a post-bank era.

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

Beyond payments and remittances, more and more companies are exploring how to put stablecoins to use to enhance their asset utilization, such as:

Lemon Cash: Offers @aave deposit functionality, allowing users to deposit funds to earn yields.

@MountainUSDM's USDM: 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 fluctuations brought about by market cycles.

Traditional trading platforms heavily rely on trading fees, leading to surges in income during bull markets but plummeting revenues during bear markets.

By providing stablecoin deposit yields and related services, these platforms can achieve more stable income, reducing the impact of market volatility on their profitability.

7. The Future Development of Stablecoins?

The non-crypto applications of stablecoins: Expansion of international transfers and payments

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

A few weeks ago, @tarunchitra told me a story: In Georgia, a convenience store owner accepts Georgian lari (GEL) deposited by customers, converts it into USDT to earn interest, and keeps a simple paper ledger to record customer balances, taking a small fee from the interest. In this store, customers can also pay using Trust Wallet's QR code. Notably, Georgia's banking system is relatively healthy, yet this alternative financial model has still developed here.

In Argentina, the Financial Times (FT) estimates that the total amount of cash dollars held by citizens has exceeded $200 billion, and this money exists outside the traditional financial system. If even half of this money were to enter the on-chain or crypto ecosystem, the DeFi market size would double, and the total market capitalization of stablecoins would increase by about 50%—and this is just the potential of one country. Similar situations exist in countries like China, Indonesia, Nigeria, South Africa, and India, where the informal economy is large, or there is a certain level of distrust in the banking system.

The potential use cases for stablecoins are expanding as their usage grows.

Credit substitution: Currently, stablecoins are mainly used for fully collateralized credit substitution, a model that is extremely rare in the global credit market. However, as institutions like Coinbase launch new tools, KYC verification data may be used in the future to expand the credit market and potentially introduce negative credit record mechanisms (i.e., failure to repay 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, usually exceeding 10%.

Cross-currency transactions: Currently, many transactions are beginning to adopt a "dual conversion" method— for example,

A transaction first converts local currency into a dollar stablecoin, then

Converts it into the target currency (such as Argentine pesos or Nigerian naira).

This practice means users have to pay fees twice, but as blockchain technology matures, it may be possible to directly convert into target currency stablecoins in the future to reduce costs.

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

8. Challenges Facing Stablecoins

When discussing the future of stablecoins, we also need to confront 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 absolutely safe; for example:

In 2023, USDC briefly lost its peg 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 evade capital controls and money laundering

If you agree that stablecoins are used to bypass capital controls and escape local currency devaluation, you are essentially acknowledging a fact—that such behavior may be classified as money laundering under local legal frameworks.

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

3) The issue of freezing and inability to reissue stablecoins

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

If a user's funds are frozen for legal reasons (such as being involved in a crime or deemed illicit), those assets will not be returned to the victim, even if the latter holds court documents.

This handling is highly controversial on a moral level and may be difficult to sustain in the long term.

4) Regulatory pressure from governments & the risk of CBDC replacement

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

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

This topic covers a wide range, and I will explore it in detail in future 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 easily frozen or seized by governments and will be fully decentralized.

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

Of course, this also means new compliance challenges.