GuShiio.com Stable coins have evolved from a payment instrument in the cryptocurrency market to an important part of global fund transfers, savings and income management, but still face challenges such as regulation and reliance on the banking system.
Author: @DiogenesCasares
Compilation: Vernacular blockchain
Stable coins account for two-thirds of on-chain transactions, whether it is used for exchanges, DeFi transactions, or simple transfer payments. Initially, stablecoins gained attention through Tether, the first widely used stablecoin. The original intention of Tether was to solve the problem that Bitfinex users could not easily use fiat due to bank account restrictions. Bitfinex created USDTether and promised 1:1 U.S. dollar support. Since then, Tether has quickly spread, and traders use USDT to carry out arbitrage transactions between different trading platforms. Compared to traditional bank wire transfers that take days to complete, Tether transactions can be confirmed in only a few blocks (minutes), making USDT an extremely advantageous payment tool in the crypto market.
However, while stablecoins were originally designed to solve specific problems in the cryptocurrency ecosystem, they have now gone beyond their original use to become a core driver of daily money transfers and are increasingly used to earn revenue and facilitate real-world transactions. Currently, the total market value of stablecoins accounts for about 5% of the cryptocurrency market. If you take into account the companies that manage these stablecoins, or blockchain networks like Tron, which rely mainly on stablecoin usage for valuation, the overall stablecoins market share is already close to 8%.
Despite the rapid growth of stablecoins, there is relatively limited content about why stablecoins are so popular. Tens of millions of users are replacing the traditional financial system with stablecoins, but little is known about its real drivers. In addition, there is very little research on the platforms and projects and different user groups that support the development of the stablecoin ecosystem. Therefore, this article will explore in depth why stablecoins are so popular, who are the main players in the stablecoins field, and which user groups are driving this trend, and analyze how stablecoins are gradually becoming the next stage in currency evolution.
1. A brief history of the US dollar
What do you think of when you mention “money”? Cash? Dollar? Price tags in supermarkets? Or taxes? In these scenarios, money is essentially a conventional unit of measurement used to measure the value of various and heterogeneous goods and services.
Originally, money was in the form of shells and salt, and later evolved into copper coins, silver coins, gold coins, and then into today’s U.S. dollars/legal tender.
1) Let’s focus on the US dollar
The U.S. dollar (and modern fiat tender, currencies issued by governments and not backed by physical assets) has gone through multiple stages of development. In the United States, the original U.S. dollar notes (notes issued by banks) were privately owned. 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 many problems with this model, the government eventually stepped in and took over the issuance of the US dollar, while passing the law to link the US dollar to gold.
In 1871, Western Union used telegraph to complete the first wire transfer, achieving a breakthrough in transferring funds without having to carry large amounts of paper money. This innovation has greatly improved the efficiency of the financial system because it removes physical restrictions on the flow of money and makes 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 U.S. dollars and monetary policy.
1971: Nixon ends the gold standard, the dollar is no longer pegged to gold, and changes to a freely 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 Banking and Financial Telecommunications) payment network was established, making dollar transactions faster and more global.
1983: The first digital bank account was opened at the Stanford Federal Credit Union, beginning the process of bank digitalization.
1999: PayPal was born, realizing a pure digital payment method without 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 today’s era of stablecoins.
The most important thing about this brief historical review is to reveal to us one fact: the form of money and the way we use it are constantly changing.
Nowadays, paying $20 whether via PayPal, cash, Zelle or bank transfer is completely feasible (although if you use traditional bank transfer, you may get strange looks). In developing countries, and even in a growing number of developed countries, this trend also applies to stablecoins.
Personally, I use stablecoins to pay wages, have exchanged stablecoins for cash, and now I even prefer to use stablecoins instead of bank accounts for savings, and use @HyperliquidX’s HLP, AAVE, Morpho, and @StreamDeFi protocols to manage funds.
We live in a world where traditional financial systems often place a heavy burden on the most vulnerable. Capital controls, bank monopoly positions and high fees have become the norm. In this environment, stablecoins have become a powerful tool of financial freedom-not only has it made cross-border currency transfers more convenient, but has also gradually been used to make direct payments for goods and services.
To understand how stablecoins can succeed in such a short period of time, we must first understand why stablecoins can defeat the traditional financial system.
2. Stable coins 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 readers of this article may come from developed countries in North America, Europe or Asia, where financial systems are relatively efficient, smooth and stable. In the United States, there are PayPal and Zelle, in Europe, there are SEPA, and in Asia, various financial technology companies emerge one after another, the most well-known of which are Alipay and Weixin Pay.
In these areas, people are accustomed to putting money in banks without worrying about the balance in their accounts disappearing the next day or hyperinflation. Small transfers can usually be completed quickly, and even large flows of funds, although they may take longer, are not too difficult to bear. In addition, most companies force customers to use local banking systems because it is considered safer and more convenient.
However, another part of the world is a completely different reality.
In Argentina, bank deposits have been forcibly embezzled by the government many times, and the national currency is one of the worst performing currencies in history.
In Nigeria, there is a serious disconnect between the official exchange rate and the black market exchange rate, making it extremely difficult for money to move in and out of the country-which, ironically, applies equally in Argentina.
In the Middle East, bank accounts may be arbitrarily frozen by the government, resulting in many ordinary people (especially those with no political background) being afraid to deposit most of their liquid assets in banks and having to choose other ways to deposit their funds.
It’s not just the risks of holding funds, it’s often more difficult to transfer money. Cross-border transfers at SWIFT are expensive and cumbersome, and most people in these countries do not have a bank account at all for the reasons mentioned above.
As for alternatives such as Western Union, although it is possible to transfer money across borders, it usually charges extremely high fees (check out their fee calculator). To make matters worse, they often settle at official exchange rates, which are often much higher than the actual market exchange rate, causing users to bear huge “hidden” fees.
stablecoins allow people to hold money outside the local financial system because they are essentially global and rely on blockchain to transfer money rather than local bank servers. This feature stems from their historical background-cryptocurrency trading platforms have faced challenges due to difficulties in opening bank accounts, handling large-scale deposits and withdrawals, and transferring funds across trading platforms.
One of the most famous cases is Japan. Due to the cumbersome bureaucracy and strict capital controls of the Japanese banking system, there has been long-standing arbitrage space 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 speed up settlement. This move directly promoted the shift 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 dominant position of stablecoins. Today, stablecoins have become recognized as basic assets in the cryptocurrency market, and this acceptance is gradually expanding to application scenarios other than cryptocurrencies.
3. stablecoins vs. fintech: speed, innovation and solutions to global financial problems
If we look at transaction speed, innovative design and 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 existing payment infrastructure rather than completely change its underlying architecture. In essence, they just add a layer of “painting” to the traditional financial system, but do not address its inherent inefficiencies and complexity. The stablecoin is the most significant change in the global financial system in 50 years.
Fast, reliable and transparent: stablecoins transfer faster than traditional banking systems, and at the same time have on-chain verifiability, making capital flow more efficient.
Low-cost remittances: Compared to traditional payment methods such as bank wire transfers or Western Union, stablecoins almost eliminate high handling fees (although it also means losing some of the guarantees provided by the traditional financial system).
Competitors for cash and payment processors: stablecoins can not only replace cash, but also compete with payment processors such as Western Union, while being safer and longer than cash.
Can’t be easily destroyed or stolen: stablecoins don’t disappear like cash due to floods, fires or theft, and can be exchanged for local currency at any time.
Very low transaction fees: The transfer cost of stablecoins depends on the blockchain network, but is usually less than US$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 of this shows that stablecoins not only dominate the cryptocurrency field, but are also challenging the foundation of the traditional financial system.
Once stablecoins are widely accepted and gradually mature, they will inevitably fill gaps in the global financial system that have not yet been covered by traditional financial institutions. As stablecoins continue to gain popularity, the financial services and complex products surrounding them are also growing rapidly.
For example,@MountainUSDM has introduced RWA (real-world asset) earnings on multiple platforms in Argentina, while @ethena_labs allows users to profit from non-exposure Delta-neutral transactions without having to rely on traditional banking systems or trading platform hosting.
Nowadays, the use of stablecoins goes far beyond simple payment processing or hedging. More and more people are beginning to use stablecoins to earn profits and even use them for local payments. As this trend develops, stablecoins are gradually becoming an important part of global financial planning, and are even included in corporate balance sheets.
It is worth noting that many stablecoin users do not even know that they are using encryption technology-this is the huge breakthrough made around stablecoin product innovation in recent years. Major companies continue to optimize the user experience to make the use of stablecoins more seamless and intuitive, further promoting their global adoption.
4. Companies that are promoting the popularization of stablecoins
The main stablecoin projects are the companies that issue these stablecoins first. These include:
USDC issuer @Circle
USDT issuer @Tether_to
Publisher of DAI/USDS @SkyEcosystem
PYUSD, jointly launched by @PayPal and @Paxos
Of course, there are many unmentioned stablecoins, but these are the most important payment purposes. These companies usually have bank accounts, receive traditional bank wire transfers, and convert these funds into stablecoins and provide them to users.
1) Capital operation model of stablecoin
The stablecoin issuer will hold the funds deposited by users and charge users a very low fee (usually 1-10 basis points). Users can transfer these assets at any time, while the issuer earns interest on funds in a bank account (a “floating yield” or “yield” in the DeFi context).
Trading companies play an important role in this process, responsible for large-scale processing of on/off ramps between fiat currencies and stablecoins. 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 transaction fees, the role of trading companies in this market has become increasingly critical.
Trading companies often offer better prices than local trading platforms, further improving the efficiency and competitiveness of stablecoins.
As all major trading companies compete fiercely in this market, they continue to optimize liquidity and services to make stablecoins trading smoother.
Stabiloin issuers earn interest in this process rather than charging users high fees, which is also at the core of their business model.
It is worth mentioning that the model of @SkyEcosystem (formerly known as Maker) is different.
SkyEcosystem adopts a hybrid model, with its stablecoin USDS backed by multiple collateralized assets, including reserves of other currencies.
Users can deposit these mortgage assets and lend out USDS at a predetermined interest rate.
They can choose to deposit in a “savings rate module”(similar to a risk-free interest rate), borrow USDS on platforms such as @MorphoLabs and @Aave, or simply hold USDS.
This model allows users to choose safer revenue options or take higher risks for higher returns.
2) Stable coin user growth: Not directly targeted to 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 with end users.
You may rarely hear the names @LemonCash,@Bitso,@Buenbit,@Belo,@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, which is almost half of Coinbase’s users, while Argentina’s population is only 1/7 of that of the United States.
Lemon Cash’s trading volume in 2023 will reach US$5 billion, a large part of which will be stablecoin-stablecoin transactions, or ARS (Argentine Peso)-stablecoin transactions.
These platforms serve as entrances for most non-peer-to-peer stablecoin transactions, and they themselves hold large amounts of crypto transaction volume and stablecoin deposits. However, with the exception of 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 rather 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 your own trading platform infrastructure.
Robinhood’s API is not allowed to be used by high-frequency traders or market makers because its target users are not professional traders, but ordinary investors.
Similarly, BuenBit and Lemon will not attract market makers, and their main target audience is ordinary consumers rather than 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 way, not only affecting the crypto market, but also changing the landscape of the traditional payment and remittance industries.
Next, let’s look at the blockchain where stablecoins actually operate, that is, where stablecoins transfer, transaction records and balances are stored. Currently, the main chains of stablecoin transactions include:
@justinsuntron’s @trondao (wavefield)
@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 revenue gains.
Although Ethereum still leads the way in TVL (total locked value), 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, the proportion of stablecoin transactions is still high, but only 70%.
In addition, some new blockchains are trying to process stablecoin transactions efficiently and inexpensively, notably LaChain.
LaChain is jointly operated by an alliance of Ripio, Num Finance, SenseiNode, Cedalio, Buenos 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 become the main tool for cross-border remittances, but today they are increasingly used for local payments.
This involves cryptocurrency payment gateways and payment portals, namely:
Convert stablecoins into fiat currencies, or
Allow merchants to directly accept stable currency payments in fiat currency.
For example, a merchant can **”accept” crypto payments **, but in reality, the cryptocurrency of the transaction is immediately converted to U.S. dollars and then settled into the merchant’s bank account. Of course, merchants can also directly accept stablecoin payments.
However, because there is still some friction in the redemption of stablecoins (whether it is time or fee costs), a large number of companies have emerged in the market that are committed to optimizing this process, and the solutions they provide range from simple and efficient to complex and comprehensive.
**Pomelo (https://www.pomeloggroup.com/)**: A platform that supports cryptocurrency debit card payments, allowing users to directly spend with stablecoins.
@zcabrams ‘Bridge: Provides convenient conversion between stablecoins, between different chains, and between fiat currencies, greatly reducing the friction costs between merchants and payment platforms.
@stripe even acquired Bridge to improve the efficiency of its own payment system.
Currently, payment gateways such as Bridge are mainly used in scenarios where merchants have not directly accepted USDC or USDT. They will help users complete the conversion first and then charge a certain fee.
With the popularity of stablecoin payments and their lower costs compared to traditional bank cards and banking systems, the utilization of stableco-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 stablecoin to build a post-bank payment system.
6. Financialization of stablecoins: How to “add value” to stablecoins
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 revenue.
@MountainUSDM’s USDM: allows stablecoin holders to earn revenue and has been integrated into trading platforms and payment services in multiple Latin America.
Many trading platforms and retail financial platforms regard the stablecoin yield as a stable source of income, hoping to balance the fluctuations in revenue caused by market cycles.
Traditional trading platforms rely heavily on trading fees, which has led to a surge in revenue during bull markets, but a sharp drop in revenue by several orders of magnitude during bear markets.
By providing stablecin deposit income and related services, these platforms can generate more stable revenue and reduce the impact of market fluctuations on their profitability.
7. The future development of stablecoins?
Non-crypto uses of stablecoins: Expansion of international transfers and payments
The main non-cryptographic application of stablecoins is international money transfers, and are now increasingly used for payments. However, as the infrastructure of stablecoins continues to improve and become increasingly popular, they may also be used for savings, especially in developing countries. This trend is already beginning to emerge.
A few weeks ago,@tarunchitra told me a story: In Georgia, the owner of a convenience store would collect a customer’s deposit of Georgian lari (GEL), convert it into USDT and earn interest, while using a simple paper ledger to record the customer’s balance and collect a fee from the interest. In this store, customers can also use Trust Wallet’s QR code to make payments. It is worth noting that Georgia’s banking system is relatively healthy, but this alternative financial model is still developing here.
In Argentina, the Financial Times estimates that the total amount of US dollar cash held by citizens has exceeded US$200 billion, all outside the traditional financial system. If even half of the money goes into the chain or crypto ecosystem, the size of the DeFi market will double and the total market value of stablecoins will increase by about 50%-and this is just the potential of one country. A similar situation exists in countries such as China, Indonesia, Nigeria, South Africa and India, which have large informal economies or a certain degree of mistrust of the banking system.
More potential use cases for stablecoins As the use of stablecoins grows, its application scenarios are also expanding.
Credit debit: Currently, stablecoins are mainly used for credit debit with full collateral. This model is extremely rare in the global credit market. However, with the launch of new tools by institutions such as Coinbase, KYC certification data may be used to expand credit markets in the future and a negative credit history mechanism may be introduced (i.e., failure to repay will affect credit scores).
Income distribution: Stabiloin issuers are gradually allowing income to be “passed” to holders, such as:
USDC provides 4.7% annualized revenue
Ethena’s USDe has dynamic yields, typically exceeding 10%
Cross-fiat trading: Currently, many transactions are beginning to be conducted using a “level conversion” method-for example,
A transaction is first converted into a U.S. dollar stable currency, and then
Reconvert to a target currency (such as the Argentine peso or Nigeria naira).
This approach means that users need to pay a fee twice, but as blockchain technology matures, it may be directly exchanged into stablecoins in the target currency in the future to reduce costs.
As more capital flows into stablecoins, the types of financial products on the chain will be further enriched, making the application of cryptocurrencies in daily life more mainstream.
8. Challenges faced by stablecoins
When discussing the future of stablecoins, we also need to face up to some neglected issues.
1) Stable coins 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 safe, for example:
The USDC was briefly unanchored in 2023 due to the collapse of Silicon Valley Bank (SVB), suggesting that even the most trusted stablecoins may face risks to the banking system.
2) Stable coins are widely used to circumvent capital controls and money laundering
If you agree that stablecoins are used to circumvent capital controls and evade local currency devaluation, you have actually admitted the fact that 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 yet been fully explored.
3) The freezing and non-reissuance of stablecoins
Currently, neither Circle (USDC) nor Tether (USDT) allows reissuance of stablecoins.
If a user’s funds are frozen for legal reasons (such as involving a crime or being deemed stolen money), the assets will not be returned to the victim, even if the latter holds a court ruling document.
This approach is highly controversial on a moral level and even difficult to maintain in the long run.
4) Government regulatory pressure CBDC substitution risk
Governments may call for stronger regulation of stablecoins to make them “sealable.”
In the long term, Central Bank Digital Currency (CBDC) may become an official alternative to stablecoins.
This topic covers a wide range of topics and I will discuss them in detail in subsequent articles.
9. A truly decentralized stablecoin may be the solution in the future
In the next few years, government regulatory pressure on stablecoins will promote the development of truly decentralized, privacy-protecting stablecoins.
These stablecoins will not be able to be unilaterally frozen or seized by the government and will be completely decentralized.
This could spawn a new financial technology race, and the development of stablecoins could evolve from a regulated financial instrument to a truly decentralized currency.
Of course, this also means new compliance challenges.
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