Original author: DC
Original translation: TechFlow
Stablecoins account for 2/3 of on-chain transactions, whether for exchange, use in DeFi, or pure transfers. Initially, stablecoins gained attention through Tether, the first widely used stablecoin. Tether was created in response to bank account restrictions faced by Bitfinex crypto users. Bitfinex launched USDTether, which is backed 1:1 by the US dollar. Since then, Tether has become popular, and traders use USDT to more easily seize arbitrage opportunities across exchanges. Tether transactions only take a few blocks (minutes) to complete, while wire transfers take days.
Despite their crypto-specific beginnings, stablecoins have expanded far beyond their initial use cases. They are now powerful tools for everyday money transfers and are increasingly used to earn yield and facilitate real-world transactions. Stablecoins account for about 5% of the total cryptocurrency market cap, and if you include the companies that manage them or blockchains like Tron whose primary value comes from stablecoin usage, stablecoins account for nearly 8% of the total cryptocurrency market cap.
However, despite this astonishing growth, there is still relatively limited content on why stablecoins are so prevalent and why tens of millions of users around the world are using stablecoins as an alternative to the traditional financial system. Even less is said about the many platforms and projects that have enabled this astonishing expansion, and the types of users who interact with them. Therefore, this article will explain why stablecoins are so prevalent, who are the players in this field, and the main user groups of stablecoins today, and explore how stablecoins can become the next important evolution of money.
A brief history of the US dollar
When someone says money, what do you think of? Cash? Dollars? Prices at the supermarket? Taxes? In these cases, money is an agreed-upon unit of measurement used to assign value to a variety of different, heterogeneous items. Money started with shells and salt, evolved to copper, silver, gold, and now the dollar/fiat currency.
Let’s focus on the US dollar. The US dollar/modern fiat money (money issued by the government and not backed by commodities) has gone through multiple stages. In the US, paper money (paper dollars issued by banks) was originally private. Banks could print their own money at will, similar to how the Hong Kong dollar works in Hong Kong. After this model broke down, the government stepped in and took over, pegging the dollar to gold by law.
In 1871, using the telegraph, Western Union completed the first wire transfer, allowing money to be transferred without moving large amounts of paper money. This was a huge breakthrough because it removed physical barriers to the movement of money, making money—and the entire financial system—more efficient.
Brief History Overview:
1913: The Federal Reserve System is established.
1971: Nixon ends the gold standard, allowing the dollar to float freely without any link to gold.
1950: The first credit card is invented.
1973: The SWIFT payments network is established, allowing faster, more global U.S. dollar transactions.
1983: Stanford Federal Credit Union establishes the first digital bank account.
1999: PayPal allows purely digital payments, without the need for a bank account.
2014: Tether launches the first dollar-backed stablecoin, leading us to where we are today.
What this little history lesson teaches us more than anything else is that money — what it is, how we use it — is always changing. Today, a $20 payment via PayPal, Cash, Zelle, or bank transfer is equally accepted, even though a regular bank transfer might raise an eyebrow. The same is true for stablecoins in the developing world, and increasingly in the developed world. Personally, I get paid in stablecoins, have used stablecoin transfers to get cash, and increasingly use them in lieu of bank accounts to save through protocols like @HyperliquidX’s HLP, AAVE, Morpho, and of course @StreamDeFi.
We live in a world where many existing financial systems impose disproportionate burdens on the most vulnerable consumers. Capital controls, monopolistic and incumbent banks, and high fees are the norm. In this environment, stablecoins are an excellent tool for achieving financial freedom. They allow for cross-border money transfers and are increasingly used to pay for goods directly. To understand how this has happened in such a short period of time, we must first understand why stablecoins outperform traditional financial products.
Stablecoins vs. bank transfers: A comparison of two worlds
Stablecoins are essentially tokens pegged to a fiat currency, such as the dollar or the euro. Many readers of this article may come from developed countries in North America, Europe, or Asia, where the financial system is relatively fast, smooth, and efficient. The United States has PayPal and Zelle, Europe has SEPA, and Asia has numerous fintech companies, especially Alipay and WeChat Pay. People in these regions can safely deposit money into their bank accounts without worrying about whether the balance will disappear in the morning or worrying about hyperinflation. Small transfers can be processed quickly, and large transfers, although they may take longer, are never unmanageable. Most companies force customers to use the local banking system because it is considered safer and easier than the alternatives.
The rest of the world lives in an alternative reality. In Argentina, bank deposits have been confiscated multiple times and the local currency is one of the worst performing currencies in history. In Nigeria, there are official and unofficial exchange rates, and it can be extremely difficult to move money in and out of the country - ironically, this also applies to Argentina. In the Middle East, bank account balances can be arbitrarily frozen, resulting in most non-politically affiliated people not keeping most of their liquid assets in bank accounts. In addition to the high risk of holding funds, sending money is often even more difficult. SWIFT transfers are expensive and cumbersome, and many people (for the reasons mentioned above) do not have traditional bank accounts. Alternatives like Western Union often charge high fees for international transfers (see their fee calculator) and use the official local government exchange rate, resulting in huge hidden fees because the official exchange rate is higher than the actual market rate.
Stablecoins allow people to hold funds outside of their local financial system because they are global in nature and are transferred via blockchain rather than local bank servers. This reflects their history - crypto exchanges have difficulty obtaining bank accounts and handling large deposits, withdrawals, and cross-exchange transfers. It is well known that there are arbitrage opportunities between global cryptocurrency prices and Japanese prices due to Japans overly bureaucratic banking system and capital controls.
In 2017, Binance released a whitepaper stating that it would only support stablecoin-cryptocurrency trading pairs to ensure faster settlement. As a result, the majority of trading volume began to be conducted in stablecoin pairs. This was further reinforced in 2019 when Binance launched USDT perpetual derivative contracts, allowing users to use USDT instead of BTC as margin. Stablecoins have been widely accepted as underlying assets in the crypto space by users around the world - and now, this acceptance is beginning to expand beyond pure crypto use cases.
Let’s take a moment to compare stablecoins and fintechs: primarily in terms of their speed, innovative design, and focus on solving global financial problems. Until now, fintechs have mostly been able to glorify or mask the arcane and complex payments infrastructure that users face.
Stablecoins represent the first major change to the global financial system in 50 years. Their speed, reliability, and verifiability make stablecoins ideal for storing value and sending remittances without paying ridiculous fees (although, admittedly, this sacrifices the traditional safeguards of existing bureaucratic systems). Stablecoins can be seen as competing with cash and payment processors like Western Union, while being more durable and safer than cash. They can’t be washed away in a flood or stolen in a burglary, and they’re easily exchanged for local currency. Fees (depending on the blockchain) are typically less than $2 and fixed, far lower than the floor for processors like Western Union, which have variable fees but can range from 0.65% to 4%+.
Once stablecoins become more accepted and mature, it is inevitable that they will be used to fill gaps in the global financial system that have not yet been filled by traditional providers. With this stablecoin adoption, there has also been an explosion of more services and more complex products. @MountainUSDM brings RWA yields to numerous platforms in Argentina, and @ethena_labs enables users to earn money through delta-neutral trades without having to touch the traditional banking system or exchange custody.
Stablecoins are increasingly being used to earn yield and process local payments, rather than just process payments, hold value, or sell local currencies. As this happens, stablecoins are becoming a core part of global financial planning and even corporate balance sheets. Many stablecoin users may not even know they are using cryptocurrency in the background, a testament to the huge leaps companies have made in recent years in creating products around stablecoins.
Companies that are attracting stablecoin users
The main projects related to stablecoins are the issuing companies themselves. @circle for USDC, @Tether_to for USDT, @SkyEcosystem for DAI/USD and PYUSD, @PayPal and @Paxos. There are many more that I havent mentioned, but these are the main stablecoins used for payment purposes. Most of these companies have bank accounts that receive traditional wire transfers and convert them into stablecoins to provide to users.
Stablecoin issuers hold the transferred funds, charging users very low fees (typically 1-10 basis points). Users can now transfer these assets, and the issuers earn “float” (or “yield” for DeFi enthusiasts) on the assets in their bank accounts. Trading firms are increasingly conducting large-scale USD-stablecoin trades, especially as many exchanges crack down on users who only use them for fee-free inflows and outflows. Trading firms often offer better pricing at scale than local exchanges, further increasing the efficiency and competitive advantage of stablecoins in a unique environment - one in which all major trading firms are openly competing to facilitate these flows. At the same time, stablecoin issuers earn interest on user funds, allowing them to profit through floating yield rather than charging users high fees.
It is worth mentioning that @SkyEcosystem (formerly Maker) is a little different. Sky uses multiple collateral types and collateral reserves in other currencies to support its stablecoin USDS. Users deposit these collateral types and borrow SUSDS from the protocol at a predetermined interest rate. Users can earn a return similar to the risk-free rate by depositing the Savings Rate Module, or lend SUSDS on platforms such as @MorphoLabs and @aave, or simply hold it in an account. This system provides a safer choice of yield or a more risky option.
Currently, most major stablecoin issuers are not directly consumer-facing.
Instead, they interact with consumers through a variety of different companies, similar to how MasterCard works with your bank but not directly with you.
@LemonCash, @Bitso, @buenbit, @Belo, and @Rippio are names you don’t see often on Crypto Twitter. Despite this, the Argentinian exchanges mentioned alone have over 20 million KYC users — that’s half the user base of Coinbase, and Argentina’s population is only 1/7 the size of the United States. Last year, Lemon Cash processed about $5 billion in total trading volume, a large portion of which was stablecoin-stablecoin or Argentine Peso-stablecoin trades. Platforms like Lemon are the gateway for most non-P2P stablecoin trading. These platforms also have a large number of cryptocurrency exchanges and stablecoin deposits, although most (with the exception of Rippio) do not have their own order books for 90% of the market and instead operate by routing orders.
This is similar to how Robinhood is not an exchange, but manages pricing through market maker routing. I call these platforms “retail venues” because they focus on retail user experience and products and do not have their own exchange infrastructure. Just like Robinhood will not let market makers use its app or API (in fact, Robinhood will ban you if you make too many API requests), neither will BuenBit or Lemon; that is simply not their customer base or target audience.
Meanwhile, we have actual blockchains — where stablecoins are sent and transactions are recorded. This is led by @justinsuntron’s @trondao, @binance’s Binance Smart Chain, @solana, and @0x Polygon. These chains are used for users to transfer value, not necessarily for interacting with DeFi or earning yield.
Ethereum still maintains its lead in TVL (total value locked), but its high costs make it unattractive for most stablecoin transfers. 92% of USDT transactions occur on Tron, and about 96% of Tron transactions are related to stablecoins, compared to 70% of value transfers on Ethereum. In addition, there are various new chains dedicated to processing stablecoins efficiently and cheaply, notably LaChain, which is actually a consortium composed of Ripio, Num Finance, SenseiNode, Cedalio, Buenbit and FoxBit, mainly targeting Latin American users and platforms. This shows how complex and sophisticated the stablecoin space has become as it continues to mature.
As stablecoins become more widely used in the remittance space, they are increasingly being used for local payments. This is where crypto payment portals and gateways come in, which I define as systems that allow stablecoins to be converted into fiat or enable fiat payments. For example, a merchant could “accept” crypto but actually sell the crypto for dollars, deposit it into a bank account, or simply accept the stablecoin directly.
Given that there will always be some friction in redeeming stablecoins, whether time-related or fee-related, there are a number of companies that are simplifying this process for users and platforms. These range from relatively simple but very useful products like Pomelo (https://www.pomelogroup.com/, which allows for processing crypto debit card transactions), to more expansive projects like Bridge by @zcabrams. Bridge allows for easy transfers between stablecoins, chains, and local currencies, greatly reducing friction for platforms and merchants, so much so that @stripe acquired Bridge to make its payment system more efficient. Systems like Bridge currently exist because merchants don’t accept USDC or USDT directly, so portals/gateways must convert stablecoins for users and often prepare liquidity in exchange for a fee. As stablecoin payments expand, given that many of these platforms have lower fees than credit cards and the banking system, stablecoin-stablecoin transaction volumes (between currencies and end products) will increase as merchants accept stablecoins for better unit economics. This is how stablecoins begin to shape a post-bank-dominated payments world.
More and more companies and projects are focusing on the application of stablecoins and trying to get current stablecoin users to save on the chain or through some of the platforms mentioned above.
For example, Lemon Cash has an option that allows users to deposit funds into @aave to earn yield. @MountainUSDM’s USDM earns yield on stablecoins and is integrated across multiple retail venues and exchanges in Latin America. Many retail venues and exchanges see stablecoin yield generation and the fees it brings as a potential way to stabilize revenue and smooth out the volatility of revenue caused by reliance on transaction fees and bull market volume - revenue drops significantly (orders of magnitude difference) during bear markets.
What’s next for stablecoins?
The non-crypto specific use of stablecoins is international transfers and, increasingly, payments. However, as the infrastructure for stablecoin use continues to improve and they become ubiquitous, savings may also move to cryptocurrencies, especially in developing countries, a trend that has already begun. A few weeks ago, @tarunchitra told me a story about a grocery store owner in Georgia who collected Georgian lari (the local currency) from customers, converted it into USDT and earned interest, kept a crude physical ledger to record the balances, and took a fee on the interest. At the same grocery store, payments were processed via a Trust Wallet QR code, and it’s worth noting that this happened in a country with a relatively healthy banking system. In a country like Argentina, citizens are estimated to have over $200 billion in cash outside the traditional financial system, according to the Financial Times. If half of that went on-chain or in crypto, it would double the size of DeFi and increase the total stablecoin market cap by about 50% — and that’s just for a relatively small country; others like China, Indonesia, Nigeria, South Africa, and India have large informal economies or relative distrust of banks.
As stablecoin usage increases, numerous additional use cases are likely to continue to grow. Currently, stablecoins are only used for fully collateralized credit, which is one of the least common forms of credit in the world. However, with new tools from Coinbase and others, KYC information can be used to provide capital to users that could result in a negative credit report if not repaid. Stablecoin issuers are increasingly allowing returns to be passed through to stablecoin holders, such as USDCs 4.7% return and Ethenas USDes typically 10%+ variable returns. There is also a growing amount of cross-fiat trading volume, which starts in one currency, converts to a USD stablecoin, and then converts to a third currency. As this continues, it makes more sense to convert directly to the fiat stablecoin of the underlying currency to avoid paying fees twice. As more capital flows into stablecoins, more and more products will become available in crypto and on-chain, which will help drive the daily use of cryptocurrencies to become more mainstream.
Future challenges
Finally, I want to touch on a few points that I think aren’t discussed enough in the conversation around stablecoins. One is that nearly every stablecoin today relies on a bank account to some degree, and the banking system isn’t always safe, as we saw with the USDC depeg and Silicon Valley Bank collapse in 2023.
Furthermore, stablecoins are currently used heavily for money laundering. If you agree that stablecoins are used to circumvent capital controls and get out of local currencies, then you are inadvertently acknowledging that this use case constitutes money laundering in local countries. This is an open secret with significant implications. Currently, neither Circle nor Tether allow “re-issuance” — i.e., if a user’s stablecoin balances are frozen due to legal action or assets are deemed stolen, they cannot be returned to someone with a court order. This practice is ethically dubious at best and unsustainable in the long term. Governments will increasingly require or enforce regulations that make stablecoins confiscable. Potentially, this could mean replacing stablecoins through CBDCs (Central Bank Digital Currency), although I will discuss this in a subsequent article.
The inevitable government pressure in the coming years will create opportunities for truly decentralized and private stablecoins that can continue to operate in a fully decentralized manner, unaffected by government action. I may write a more in-depth article exploring this dark side of stablecoins in the future, as it is a fairly broad topic.
