Are stablecoins a new financial system or will they replace it?

Stablecoins have evolved from a payment tool in the cryptocurrency market to an important part of global money transfers, savings, and income management, but they still face challenges such as regulation and dependence on the banking system.

Stablecoins account for two-thirds of on-chain transaction volume, whether used for exchange, DeFi transactions, or simple transfer payments. Initially, stablecoins gained attention through Tether, the first widely used stablecoin. Tether was originally created to solve the problem that Bitfinex users could not easily use fiat currency due to bank account restrictions. Bitfinex created USDTether and promised to be 1:1 backed by the US dollar. Since then, Tether has spread rapidly, and traders use USDT to conduct arbitrage transactions between different trading platforms. Compared with traditional bank wire transfers that 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, while stablecoins were originally created to solve specific problems in the cryptocurrency ecosystem, they have now transcended their original purpose and become a core driver of everyday money transfers, and are increasingly being used to earn yield and facilitate real-world transactions. Currently, the total market value of stablecoins accounts for about 5% of the cryptocurrency market, and when you factor in the companies that manage these stablecoins, or blockchain networks like Tron that are valued primarily based 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 people have little understanding of the real driving factors. In addition, there is even less research on the platforms and projects that support the development of the stablecoin ecosystem and the different user groups. Therefore, this article will delve into why stablecoins are so popular, who are the main players in the stablecoin field, and which user groups are driving this trend, and analyze 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 do you think of? Cash? Dollars? Price tags in supermarkets? Taxes? In these scenarios, money is essentially a conventional unit of measurement used to measure the value of a variety of different and heterogeneous goods and services.

At first, money took the form of shells and salt, then evolved into copper coins, silver coins, gold coins, and now the US dollar/fiat currency.

1) Let's focus on the US dollar

The US dollar (and modern fiat currency, which is money issued by the government and not backed by physical assets) has gone through several stages of development. In the United States, the original US dollar banknotes (paper money issued by banks) were private. At that time, banks were free to print money, a model somewhat similar to the Hong Kong dollar (HKD) system in Hong Kong. However, due to the many problems with this model, the government eventually stepped in and took over the issuance of the US dollar, and at the same time passed laws to peg the US dollar to gold.

In 1871, Western Union completed the first wire transfer using the telegraph, achieving a breakthrough in transferring funds without moving large amounts of paper money. This innovation greatly improved the efficiency of the financial system because it eliminated the physical limitations of money circulation and made 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 US dollars and monetary policy.

1971: Nixon ended the gold standard, and the US dollar was no longer pegged to gold, switching to a free 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 Interbank Financial Telecommunication) payment network was established, making US dollar transactions faster and more global.

1983: The first digital bank account was established at Stanford Federal Credit Union, starting the process of bank digitization.

1999: PayPal was born, realizing a purely digital payment method without a bank account.

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

All of this brings us to the age of stablecoins.

This brief historical review, more than anything, reveals the fact that the shape of money and how we use it is constantly changing.

It’s perfectly possible to pay $20 via PayPal, cash, Zelle, or bank transfer today (although you’ll probably get some weird looks if you use a traditional bank transfer). This trend is also true for stablecoins in the developing world, and increasingly in the developed world.

Personally, I use stablecoins for my salary, have used them for cash, and now prefer to use them for savings instead of bank accounts, and manage my money with protocols like @HyperliquidX’s HLP, AAVE, Morpho, and @StreamDeFi.

We live in a world where the traditional financial system often places a heavy burden on the most vulnerable. Capital controls, bank monopolies, and high fees are the norm. In this environment, stablecoins are a powerful tool for financial freedom—not only making it easier to transfer money across borders, but also increasingly being used to pay for goods and services directly.

To understand how stablecoins have succeeded in such a short period of time, we must first understand why stablecoins can beat the traditional financial system.

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

The essence of stablecoins 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 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 financial technology companies are emerging in an endless stream, the most well-known of which are Alipay and WeChat Pay.

In these regions, people are accustomed to depositing money in banks without worrying that the balance in their accounts will disappear the next day, nor do they have to worry about hyperinflation. Small transfers can usually be completed quickly, and even large fund flows, although they may take longer, are not unbearable. In addition, most companies force customers to use the local banking system 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 seized by the government on multiple occasions, and the local currency is one of the worst performing currencies in history.

In Nigeria, the official exchange rate is seriously out of sync with the black market rate, making it extremely difficult to move money in and out of the country - ironically, this also applies to Argentina.

In the Middle East, bank accounts can be frozen at will by the government, which makes many ordinary people (especially those without political backgrounds) afraid to deposit most of their liquid assets in banks and have to choose other ways to store funds.

Not only is there a risk of holding funds, but transferring money is often more difficult. Cross-border transfers via SWIFT (Society for Worldwide Interbank Financial Telecommunication) are expensive and cumbersome, and most people in these countries do not have bank accounts for the aforementioned reasons.

As for alternatives such as Western Union, although they can complete cross-border remittances, they usually charge extremely high fees (you can check their fee calculator). Worse, they often settle at official exchange rates, which are often much higher than the actual market exchange rate, resulting in users bearing huge "hidden" fees.

Stablecoins enable people to hold funds outside of the local financial system because they are global in nature and rely on blockchains for transfers rather than local bank servers. This feature stems from their historical background - cryptocurrency exchanges have faced challenges in opening bank accounts, processing large-scale deposits and withdrawals, and transferring money across exchanges.

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

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 promoted the market trading volume to stablecoin trading pairs. In 2019, BN launched USDT perpetual contracts, allowing users to use USDT instead of BTC for margin trading, further consolidating the dominance of stablecoins. Today, stablecoins have become a recognized basic asset in the cryptocurrency market, and this acceptance is gradually expanding to application scenarios outside of cryptocurrencies.

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

If we look at transaction speed, innovative design, and the 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 the existing payment infrastructure rather than completely change its underlying architecture. In essence, they just add a layer of "paint" on top of the traditional financial system, but do not solve its inherent inefficiency and complexity. Stablecoins are the most significant change in the global financial system in 50 years.

Fast, reliable, and transparent: Stablecoins transfer much faster than the traditional banking system, and have on-chain verifiability, making the flow of funds more efficient.

Low-cost remittances: Compared with traditional payment methods such as bank wires or Western Union, stablecoins almost eliminate high fees (although this also means losing some of the protection provided by the traditional financial system).

Competitor to Cash and Payment Processors: Stablecoins are not only an alternative to cash, but also compete with payment processors such as Western Union, while being safer and longer-lasting than cash.

They cannot be easily destroyed or stolen: Stablecoins cannot disappear due to floods, fires, or thefts like cash, and can be exchanged for local currency at any time.

Very low transaction fees: The cost of transferring 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 such as Western Union (usually between 0.65% and more than 4%).

All this shows that stablecoins are not only dominating 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 gain popularity, the financial services and complex products around them are also growing rapidly.

For example, @MountainUSDM has introduced RWA (real world asset) yields on multiple platforms in Argentina, while @ethena_labs enables users to profit through zero-exposure delta-neutral trading 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 included in corporate balance sheets.

It is worth noting that many users of stablecoins do not even know that they are using crypto technology - this is the huge breakthrough in product innovation around stablecoins in recent years. Major companies continue to optimize the user experience, making the use of stablecoins more seamless and intuitive, further promoting its global adoption.

4. Companies that are promoting the popularity of stablecoins

The main stablecoin projects are first of all the companies that issue these stablecoins. These include:

USDC issuer @Circle

USDT issuer @Tether_to

DAI/USDS issuer @SkyEcosystem

PYUSD, jointly launched by @PayPal and @Paxos

Of course, there are many other stablecoins that have not been mentioned, but the above are the most important stablecoins for payment purposes. These companies usually have bank accounts, receive traditional bank wires, and convert these funds into stablecoins for users.

1) Stablecoin funding operation model

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, and the issuer earns interest on the funds in the bank account (i.e. "floating income" or "yield" in the context of DeFi).

Trading companies play an important role in this process, responsible for large-scale processing of the conversion of fiat currency and stablecoins (on/off ramp). As more exchanges start to crack down on users who only deposit and withdraw stablecoins but do not pay transaction fees, the role of exchanges in this market becomes more and more critical.

Exchanges often offer better prices than local exchanges, further improving the efficiency and competitiveness of stablecoins.

As all major exchanges compete fiercely in this market, they continue to optimize liquidity and services to make stablecoin transactions smoother.

Stablecoin issuers earn interest in the process instead of 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 adopts a hybrid model, and its stablecoin USDS is backed by multiple 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 the risk-free rate), borrow USDS on platforms such as @MorphoLabs and @Aave, or simply hold USDS.

This model allows users to choose safer yield options or take 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 indirectly provide stablecoin support through different financial services companies. This model is similar to MasterCard-it works with banks but does not directly connect to end users.

You may rarely hear names like @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 the number of Coinbase users, while Argentina's population is only 1/7 of that of the United States.

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

These platforms act as the entry point for most non-peer stablecoin transactions, and they themselves have a large amount of crypto trading 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 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 their own trading platform infrastructure.

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

Similarly, BuenBit and Lemon will not attract market makers to settle in. 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 and efficient way, not only affecting the crypto market, but also changing the landscape of the traditional payment and remittance industry.

Next, let's look at the blockchain where stablecoins actually run, that is, where stablecoin transfers, transaction records and balances are stored. Currently, the main chains for stablecoin transactions include:

@justinsuntron's @trondao(TRON)

@binance's BN Smart Chain(BSC)

@solana(Solana)

@0xPolygon(Polygon)

The main purpose of these chains is value transfer, and does not necessarily involve DeFi interaction or yield acquisition.

Although Ethereum still leads 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 transactions on the Tron network are related to stablecoins.

In contrast, on Ethereum, the proportion of stablecoin transactions is still high, but it is only 70%.

In addition, some new blockchains are trying to process stablecoin transactions efficiently and cheaply, among which LaChain is worth noting.

LaChain is jointly operated by a consortium of Ripio, Num Finance, SenseiNode, Cedalio, Buenbit 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 been the main tool for cross-border remittances, but nowadays, they are increasingly used for local payments.

This involves cryptocurrency payment gateways and payment portals, namely:

Converting stablecoins into fiat currency, or

Allowing merchants to directly accept stablecoin payments in fiat currency.

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

However, since there is still a certain friction in the redemption of stablecoins (both in time and handling fee costs), a large number of companies dedicated to optimizing this process have also emerged in the market, and the solutions they provide range from simple and efficient to complex and comprehensive.

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

@zcabrams' Bridge: Provides convenient conversion between stablecoins, between different chains, and between fiat currencies, greatly reducing the friction cost of 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 yet directly accepted USDC or USDT. They will first help users complete the conversion 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 usage rate of stablecoin-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 stablecoins to build a payment system in the post-bank era.

6. Financialization of Stablecoins: How to Make Stablecoins "Add Value"

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 returns.

@MountainUSDM's USDM: Allows stablecoin holders to earn returns and has been integrated into multiple trading platforms and payment services in Latin America.

Many trading platforms and retail financial platforms regard stablecoin yields as a stable source of income, hoping to balance the income fluctuations caused by market cycles.

Traditional trading platforms are highly dependent on transaction fees, which causes their income to surge in bull markets, but plummet by several orders of magnitude in bear markets.

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

7. What is the future of stablecoins?

Non-crypto uses of stablecoins: international transfers and expansion of payments

The main non-crypto application of stablecoins is international transfers, and nowadays they are increasingly used for payments. However, as the infrastructure of stablecoins continues to improve and gradually become popular, they may also be used for savings, especially in developing countries, where this trend has begun to emerge.

A few weeks ago, @tarunchitra told me a story: In Georgia, the owner of a convenience store would collect Georgian Lari (GEL) deposited by customers, convert it into USDT and earn interest, while recording customer balances in a simple paper ledger and charging a certain fee from the interest. In this store, customers can also pay using Trust Wallet's QR code. It is worth noting that Georgia's banking system is relatively healthy, but this alternative financial model has still developed here.

In Argentina, the Financial Times (FT) estimates that the total amount of US dollar cash held by citizens has exceeded US$200 billion, and these funds are outside the traditional financial system. If even half of the funds enter the on-chain or crypto ecosystem, the DeFi market size will double and the total market value of stablecoins will increase by about 50% - and this is just the potential of one country. Similar situations also exist in countries such as China, Indonesia, Nigeria, South Africa and India, where the informal economy is large or there is a certain degree of distrust in the banking system.

More potential use cases for stablecoins As the use of stablecoins grows, their application scenarios are also expanding.

Credit lending: Currently, stablecoins are mainly used for fully collateralized credit lending, which is extremely rare in the global credit market. However, with the introduction of new tools by institutions such as Coinbase, KYC certification data may be used to expand the credit market in the future, and a negative credit record mechanism may be introduced (i.e., failure to repay will affect credit scores).

Profit distribution: Stablecoin issuers are gradually allowing profits to be "passed on" to holders, for example:

USDC offers an annualized return of 4.7%

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

Cross-fiat currency transactions: Currently, many transactions are beginning to be conducted in a "double-layer conversion" manner - for example,

A transaction is first converted from local currency to US dollar stablecoins, and then

converted to the target currency (such as Argentine Peso or Nigerian Naira).

This practice means that users need to pay two fees, but as blockchain technology matures, it may be directly converted to the stablecoin of the target currency in the future to reduce costs.

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

8. Challenges facing stablecoins

When discussing the future of stablecoins, we also need to face up to 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 safe, for example:

In 2023, USDC was briefly de-anchored due to the collapse of Silicon Valley Bank (SVB), which shows that even the most trusted stablecoins may face risks in 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 evade the depreciation of local currencies, you have actually acknowledged a fact-this behavior may be classified as money laundering under the local legal framework.

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

3) The freezing and inability to re-issue stablecoins

Currently, neither Circle (USDC) nor Tether (USDT) allows the re-issuance of stablecoins.

If a user's funds are frozen for legal reasons (such as involving a crime or being identified as stolen money), then these assets will not be returned to the victim, even if the latter holds a court ruling document.

This approach is extremely controversial on an ethical level and even difficult to maintain in the long run.

4) Government regulatory pressure & CBDC substitution risk

Governments may demand tighter regulation of stablecoins to make them “seizable”.

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

This topic covers a wide range, and I will explore it in detail in subsequent articles.

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

In the next few years, government regulatory pressure on stablecoins will promote the development of truly decentralized, privacy-preserving stablecoins.

These stablecoins will not be able to be frozen or seized unilaterally by the government and are completely decentralized.

This may give rise to a new financial technology competition, and the development of stablecoins may also evolve from regulated financial instruments to truly decentralized currencies.

Of course, this also means new compliance challenges.