Stablecoin Playbook: Flipping Billions to Trillions
Original author: Rui Shang, Medium writer
Original translation: zhouzhou, BlockBeats
Editors note: Stablecoins are driving a revolution in the financial system, especially showing great potential in improving payment efficiency, cross-border transactions and foreign exchange markets. The traditional foreign exchange system faces high costs, low efficiency and settlement risks, while blockchain foreign exchange provides low costs, instant settlement and transparency through decentralized exchanges, significantly improving the efficiency of capital circulation. The popularity of stablecoins can not only enhance the convenience of cross-border payments, but also provide financial inclusion for underbanked markets.
The following is the original content (for easier reading and understanding, the original content has been reorganized):
Preface:
The younger generation is a digital native, and stablecoins are their natural currency. As artificial intelligence and the Internet of Things drive billions of automated microtransactions, global finance needs more adaptable monetary solutions. As a currency API, stablecoins are transmitted seamlessly like Internet data and reached a transaction volume of $4.5 trillion in 2024. This figure is expected to grow as more institutions recognize that stablecoins are an unparalleled business model - Tether made a profit of $5.2 billion by investing its reserves in the first half of 2024.
In the race for stablecoins, distribution and true adoption are key, not complicated cryptographic mechanisms. Their adoption is unfolding in three key areas: crypto-native, fully banked, and unbanked worlds.
In the $2.9 trillion native crypto world, stablecoins are widely used for trading, lending, derivatives, yield farming, and RWA as the entry point to DeFi. Crypto native stablecoins compete through liquidity incentives and DeFi integration. In the fully banked world of more than $400 trillion, stablecoins improve financial efficiency and are mainly used for B2B, P2P, and B2C payments.
Stablecoins focus on regulation, licensing, and distribution through banks, card networks, payments, and merchants. In an unbanked world, stablecoins provide access to the U.S. dollar and promote financial inclusion. Stablecoins are used for savings, payments, foreign exchange, and yield generation, and grassroots market entry strategies are critical.
Contents
Preface:
Natives of the local crypto world
The battle for stablecoin pegs
Challenges of Liquidity Startup
DeFi entry: trading pairs, lending, derivatives, income, RWA
Outsiders in a fully banked world
Key players dynamics
Efficiency drivers: B2B, P2P, C2B payments
Pioneers in the Unbanked World
Shadow Dollar Economy
USD access: savings, payments, foreign exchange
Ending: Intertwined
Interoperability: Cross-currency, cross-token, and cross-chain
Opportunity highlights and unsolved mysteries
Natives of the Crypto World
In the second quarter of 2024, stablecoins accounted for 8.2% of the total crypto market capitalization. Maintaining the stability of the peg remains a challenge, unique incentives are key to expanding on-chain distribution, and the current core problem is the limited use of on-chain scenarios.
Battle for the Stability Peg
Fiat-backed stablecoins rely on banking relationships:
93.33% of stablecoins are fiat-backed stablecoins, which have greater stability and capital efficiency, and banks have the final say by controlling redemptions. Regulated issuers like Paxos became the USD issuer for PayPal because they were able to successfully redeem billions of dollars of BUSD.
CDP stablecoins have improved collateral and liquidation mechanisms to enhance peg stability:
3.89% of stablecoins are based on collateralized debt positions (CDPs). They use cryptocurrencies as collateral but face challenges with scalability and volatility. By 2024, CDPs have increased resilience by accepting a wider range of liquidity and stability collateral.
Aave’s GHO accepts any asset in Aave v3, and Curve’s crvUSD recently added USDM (RWA). Some liquidation mechanisms have been improved, especially crvUSD’s soft liquidation, which uses its custom AMM to provide a buffer for further bad debts. However, the ve-token incentive model faces difficulties because crvUSD’s market value shrinks when CRV valuation drops after large-scale liquidations.
Synthetic USD is kept stable through hedging:
Ethena USDe has single-handedly captured 1.67% of the stablecoin market share with a market cap of $3 billion in one year. It is a delta-neutral synthetic dollar that fights volatility by opening short positions in the derivatives market. Its funding rate is expected to perform well in the upcoming bull run, even after the dot season.
However, its long-term viability, which is highly dependent on CEX, remains questionable. As similar products increase, the influence of small funds on Ethereum may weaken. These synthetic dollars may face the risk of black swan events and low funding rates during bear markets.
Algorithmic stablecoins dropped to 0.56%
Liquidity Launch Challenge
Crypto stablecoins attract liquidity through yields, and fundamentally, their liquidity costs include the risk-free rate and a risk premium. To remain competitive, stablecoin yields must at least match the Treasury (T-bill) rate - we have seen stablecoin borrowing costs fall as the T-bill rate reaches 5.5%.
sFrax and DAI lead in T-bill exposure, and multiple RWA projects increase the composability of on-chain T-bills by 2024: CrvUSD uses Mountain’s USDM as collateral, Ondo’s USDY and Ethena’s USDtb are backed by BlackRock’s BUIDL.
Based on the T-bill rate, stablecoins use a variety of strategies to increase risk premiums, including fixed budget incentives (such as issuance on DEXs, which face constraints and death spirals), user fees (related to lending and perpetual contract trading volume), volatility arbitrage (falls when volatility decreases), and reserve utilization like staking or re-staking (less attractive).
In 2024, innovative liquidity strategies begin to emerge:
Maximize intra-block revenue:
Currently, a lot of yield comes from self-consuming DeFi inflation as an incentive, but more innovative strategies are emerging. By leveraging reserves as a bank, projects like CAP aim to direct MEV and arbitrage profits directly to stablecoin holders, providing a sustainable and potentially more profitable source of yield.
Compounding with T-bill returns:
Taking advantage of the newfound composability of RWA projects, initiatives like Usual Money (USD 0) offer “theoretically” unlimited returns through their governance tokens, with T-bill returns as a benchmark — it attracted $350 million in liquidity providers (L and entered the Binance Launch Pool. Agora (AUSD) is also an offshore stablecoin based on T-bill returns.
Balance high returns and anti-volatility:
Newer stablecoins adopt a diversified basket strategy to avoid single-income and volatility risks while providing balanced high returns. For example, Fortunafis Reservoir allocates T-bills, Hilbert, Morpho, and PSM together, dynamically adjusts the ratio, and incorporates other high-yield assets as needed.
Is your TVL a spur of the moment thing?
Stablecoins often face scalability issues. Although fixed-budget revenue can trigger an initial peak in revenue, as TVL grows, returns will be diluted and the revenue effect will decrease over time. Without sustainable revenue or real utility in trading pairs and derivatives after the incentive period, its TVL may be difficult to maintain.
The Dilemma of DeFi Entry
On-chain visibility allows us to examine the true nature of stablecoins: Are stablecoins truly currencies used as a medium of exchange, or are they simply financial products created for yield?
Only best interest stablecoins are used as trading pairs on CEX:
Nearly 80% of trading still occurs on centralized exchanges, with top CEXs supporting their preferred stablecoins (e.g., Binance uses FDUSD, Coinbase uses USDC). Other CEXs rely on overflow liquidity from USDT and USDC. In addition, stablecoins are working to become margin deposits for CEXs.
Few stablecoins are used as trading pairs on DEX:
Currently, only USDT, USDC, and a small amount of DAI are used as trading pairs. Other stablecoins, such as Ethenas USDe, 57% of which is pledged to its own protocol, are held entirely as financial products to earn returns, and are far from becoming a medium of exchange.
Makerdao + Curve + Morpho + Pendle, distribution combination:
Markets like Jupiter, GMX, and DYDX prefer USDC for deposits because USDT has a more skeptical minting and redemption process. Lending platforms like Morpho and AAVE prefer USDC because of its better liquidity on Ethereum. On the other hand, PYUSD is mainly used for lending on Solanas Kamino, especially when the Solana Foundation provides incentives. Ethenas USDe is mainly used in Pendle for yield activities.
RWA is underrated:
Most RWA platforms, such as BlackRock, use USDC as a minting asset for compliance reasons. In addition, BlackRock is a shareholder of Circle. DAI has been successful in its RWA product.
Expand the pie or find new areas:
While stablecoins can attract major liquidity providers through incentives, they face a bottleneck — DeFi usage is already declining. Stablecoins now face a dilemma: they can either wait for crypto-native activities to expand or seek entirely new uses beyond crypto.
Outsiders in a fully banked world
Key players dynamics
Global regulation is becoming clearer:
99% of stablecoins are backed by the U.S. dollar, and the federal government has ultimate influence over them. It is expected that the regulatory framework in the United States will be more clear after President Trump takes office, and Trumps policy of promising lower interest rates and banning CBDCs may be beneficial to stablecoins. The U.S. Treasury Department report pointed out the impact of stablecoins on the demand for short-term Treasury bonds, and Tether holds $90 billion in U.S. debt. Crypto crime prevention and maintaining the dominance of the U.S. dollar are also motivations.
By 2024, several countries have developed stablecoin-related regulations based on common principles, including approval of stablecoin issuance, reserve liquidity and stability requirements, restrictions on the use of foreign currency stablecoins, and generally prohibiting interest generation. Key examples include: EUs MiCA, UAEs PTSR, Hong Kongs Sandbox, Singapores MAS, Japans PSA. Notably, Bermuda became the first country to accept stablecoin tax payments and license interest-bearing stablecoin issuers.
Licensed issuers gain trust:
The issuance of stablecoins requires technical strength, cross-regional regulatory compliance, and strong management capabilities. Key players include Paxos (PYUSD, BUSD), Brale (USC), and Bridge (B2B API). Reserve management is handled by trusted institutions like BNY Mellon, such as USDC, which safely generates returns by investing in its funds managed by BlackRock. BUIDL now allows more on-chain projects to obtain returns.
Banks are the gatekeepers to exits:
While onboarding (fiat to stablecoin) has become easier, offboarding (stablecoin to fiat) remains challenging as it is difficult for banks to verify the source of funds. Banks prefer to go with licensed exchanges like Coinbase and Kraken that perform KYC/KYB and have similar AML frameworks.
While high-profile banks like Standard Chartered are starting to embrace exits, small and medium-sized banks like Singapore’s DBS Bank are accelerating the process. B2B services like Bridge aggregate exit channels and manage billions in transaction volume for high-profile clients including SpaceX and the US government.
The Distributor has the final say:
As the leader in compliant stablecoins, Circle relies on Coinbase and is now seeking global licenses and partnerships. However, this strategy may be challenged as more institutions issue their own stablecoins, as the business model is unparalleled - Tether, as a company with 100 employees, made $5.2 billion in profits from investing its reserves in the first half of 2024.
Banks, such as JPMorgan, have launched JPM Coin for institutional transactions. Payment applications such as Stripe acquired Bridge, indicating that they are interested in having a stablecoin stack, not just integrating USDC. PayPal also issued PYUSD to capture reserve returns. Card network companies, such as Visa and Mastercard, are testing the market by accepting stablecoins.
Efficiency Promoter
With a foundation of trusted issuers, healthy banking relationships, and distributors, stablecoins can improve efficiencies in large-scale financial systems, especially in payments.
Traditional systems face efficiency and cost limitations. Internal applications or bank transfers offer instant settlement, but only within their ecosystem. Interbank payments cost around 2.6% (70% to the issuing bank, 20% to the acquiring bank, and 10% to the card network) and take more than a day to settle. Cross-border transactions are even more expensive, at around 6.25%, and can take up to five days to settle.
Stablecoin payments provide instant peer-to-peer settlement by eliminating intermediaries. This speeds up the flow of funds and reduces capital costs while providing programmable features such as conditional automatic payments.
B2B ($120-150 trillion in annual transactions): Banks are in the best position to promote stablecoins. In October 2023, JPMorgan Chases JPM Coin was used for about $1 billion in transactions per day on its Quorum chain.
P2P ($1.8-2 trillion annual transaction volume): E-wallets and mobile payment applications are in the best position, PayPal has launched PYUSD, which currently has a market cap of $604 million on Ethereum and Solana. PayPal allows end users to register and send PYUSD for free.
B2C e-commerce (annual transaction volume of US$5.5-6 trillion): Stablecoins need to cooperate with POS systems, bank APIs and card networks. As early as 2021, Visa became the first payment network to allow transactions to be settled with USDC.
The Shadow Dollar Economy: Pioneers in an Underbanked World
Due to severe currency devaluation and economic instability, developing markets are in urgent need of stablecoins. In Turkey, stablecoin purchases account for 3.7% of its GDP. People and businesses are willing to pay a premium over the fiat dollar for stablecoins, with Argentinas stablecoin premium reaching 30.5% and Nigerias 22.1%. Stablecoins provide access to the dollar and financial inclusion.
Tether dominates the space, with a solid 10-year track record. Even amid complex banking relationships and redemption crises — Tether admitted in April 2019 that USDT was only 70% backed by reserves — its stability has remained.
This is because Tether has built a powerful shadow dollar economy: in developing markets, few people convert USDT back to fiat currency, they treat it as US dollars, this phenomenon is particularly significant in Africa and Latin America, and is used to pay employees, bills, etc. Tether has achieved this through long-term existence and consistent utility, without providing incentives, which has increased its credibility and acceptance. This should be the ultimate goal of every stablecoin.
USD Access
Remittances: Inequality in remittances slows economic growth. Economically active individuals in sub-Saharan Africa are charged an average of 8.5% in remittance fees when sending money to low- and middle-income countries and developed countries. For businesses, barriers such as high remittance fees, long processing times, bureaucracy, and exchange rate risk directly affect the growth and competitiveness of businesses in the region.
Dollar access: The cost of currency fluctuations cost 17 developing countries $1.2 trillion in GDP between 1992 and 2022, or 9.4% of their total GDP. Dollar access is critical to local financial development. Many crypto projects focus on onboarding through “DePIN” methods that use local agents to facilitate cash-to-stablecoin transactions in Africa, Latin America, and Pakistan.
Foreign Exchange: Today, the foreign exchange market has a daily trading volume of over $7.5 trillion. In the global south, individuals often convert local fiat currencies to US dollars through the black market, mainly because the black market exchange rate is more favorable than official channels. Binances P2P trading is beginning to be adopted, but it lacks flexibility due to its order book approach. Many projects, such as ViFi, are building on-chain automated market maker foreign exchange solutions.
Humanitarian aid distribution: Ukrainian war refugees can receive humanitarian aid in the form of USDC, which can be stored in digital wallets or cashed out locally. In Venezuela, frontline medical workers used USDC to pay for medical supplies during the epidemic, despite the deepening political and economic crisis.
Ending: Interconnection
Interoperability: With the widespread use of stablecoins and the integration of different ecosystems, interoperability has become a core challenge and opportunity in the future development of stablecoins. Improving cross-currency, cross-chain and cross-currency liquidity will be the key to driving this field forward.
Traditional foreign exchange systems are inefficient and face multiple challenges:
Counterparty settlement risk (CLS is enhanced but still cumbersome)
Costs of a multi-bank system (for example, when a bank in Australia buys Japanese yen, six banks are involved and this needs to be done through the London dollar office)
Differences in global settlement time zones (for example, the Canadian dollar and Japanese yen banking systems overlap for less than five hours per day)
Limited access to the FX market (retail users pay 100 times more than large institutions)
Onchain FX offers significant advantages:
Cost, efficiency and transparency: Oracles such as Redstone and Chainlink provide real-time price quotes. Decentralized exchanges provide efficient cost control and transparency, and Uniswaps centralized liquidity market makers (CLMMs) reduce transaction costs to 0.15-0.25%, which is about 90% lower than traditional foreign exchange. By moving from T+2 bank settlement to instant settlement, arbitrageurs can use various strategies to correct pricing imbalances.
Flexibility and accessibility: Blockchain FX enables corporate treasurers and asset managers to access a wide range of products without the need for multiple currency-specific bank accounts. Retail users can use crypto wallets with built-in DEX APIs to get the best FX prices.
Separation of currency from jurisdiction: Transactions no longer require domestic banks, which allows currency to be separated from jurisdiction. This approach takes advantage of the efficiency of digitalization while maintaining monetary sovereignty, but there are still pros and cons.
However, challenges remain, including the scarcity of non-USD-denominated digital assets, the security of oracles, support for long-tail currencies, regulatory issues, and unified interfaces with on-chain/off-chain. Nevertheless, blockchain FX still offers lucrative opportunities. For example, Citi is developing blockchain FX solutions under the guidance of the Monetary Authority of Singapore.
Stablecoin Exchange
Imagine a world where most companies issue their own stablecoins. Stablecoin exchanges present a challenge: how to pay JP Morgan merchants using PayPal’s PYUSD. While on-chain and off-chain bridges can solve this problem, they lose the efficiency promised by cryptocurrencies. Blockchain automated market makers provide optimal real-time low-cost stablecoin-to-stablecoin trading.
For example, Uniswap offers some of these liquidity pools with fees as low as 0.01%. However, once billions of dollars enter the blockchain, they must rely on the security of smart contracts and must have deep enough liquidity and instant performance to support real-life activities.
Cross-chain exchange
The major blockchains have their own advantages and disadvantages, which leads to the need for stablecoins to be deployed on multiple chains. The multi-chain approach brings cross-chain challenges, and bridging technology has huge security risks. My view is that stablecoins should launch their own Layer 0 (zero layer protocol), such as USDCs CCTP, PYUSDs Layer 0 integration, and USDTs possible Layer 0 solution for recovering bridge locked tokens.
In the meantime, there are still some open questions:
Will regulation harm “open finance” given that compliant stablecoins could monitor, freeze, and extract funds?
Can compliant stablecoins also avoid offering returns that could be considered securities products, thereby preventing on-chain decentralized finance from benefiting from its massive expansion?
Can any open blockchain handle huge amounts of money, given Ethereum’s slow transactions, its L2’s reliance on a single sequencer, Solana’s imperfect onboarding record, and the lack of long-term stability records of other hyped blockchains?
Will the separation of currencies and jurisdictions bring more confusion or opportunity?
The prospect of a financial revolution led by stablecoins is both exciting and uncertain — a new chapter where regulation and freedom dance in a delicate balance.
