Author: Rui Shang, SevenX Ventures
Compiled by: Mensh, ChainCatcher
Overview: Eight major stablecoin-related opportunities — —
The younger generation are digital natives, and stablecoins are their native currency. As artificial intelligence and the Internet of Things drive billions of automated microtransactions, global finance needs flexible currency solutions. Stablecoins, as 'currency APIs', transfer seamlessly like internet data, reaching a transaction volume of $4.5 trillion in 2024, a figure expected to grow as more institutions realize stablecoins represent an unparalleled business model — — Tether earned $5.2 billion in profits from investing its dollar reserves in the first half of 2024.
In the competition of stablecoins, complex crypto mechanisms are not key; distribution and genuine adoption are crucial. Their adoption is primarily reflected in three key areas: crypto-native, fully banked, and unbanked worlds.
In a $29 trillion crypto-native world, stablecoins are essential for DeFi entry, crucial for trading, lending, derivatives, liquidity farming, and RWA. Crypto-native stablecoins compete through liquidity incentives and DeFi integration.
In a fully banked world of over $400 trillion, stablecoins enhance financial efficiency, primarily used for B2B, P2P, and B2C payments. Stablecoins focus on regulation, licensing, and leveraging banks, card networks, payment, and merchants for distribution.
In the unbanked world, stablecoins provide access to dollars and promote financial inclusion. Stablecoins are used for savings, payments, foreign exchange, and yield generation. Grassroots market promotion is crucial.
Natives of the crypto world
In the second quarter of 2024, stablecoins accounted for 8.2% of the total crypto market capitalization. Maintaining exchange rate stability remains challenging, and unique incentives are key to expanding on-chain distribution, with the core issue being the limited applications on-chain.
The Battle for Dollar Pegging
Fiat-backed stablecoins rely on banking relationships:
93.33% are fiat-backed stablecoins. They offer greater stability and capital efficiency, with banks having the final say through control of redemptions. Regulated issuers like Paxos have become PayPal's dollar issuer due to their successful redemptions of billions of BUSD.CDP stablecoins improve collateral and liquidation to enhance exchange rate stability:
3.89% are collateralized debt position (CDP) stablecoins. They use cryptocurrency as collateral but face issues with scalability and volatility. By 2024, CDP has improved its risk resilience by accepting a wider range of liquidity and stable collateral, with Aave's GHO accepting any asset in Aave v3, and Curve's crvUSD recently adding USDM (real assets). Partial liquidations are improving, especially the soft liquidation of crvUSD, which provides a buffer for further bad debts through its custom automated market maker (AMM). However, the ve-token incentive model faces challenges, as when the valuation of CRV declines after large-scale liquidations, the market cap of crvUSD also shrinks.Synthetic dollars utilize hedging to maintain stability:
Ethena USDe has captured 1.67% of the stablecoin market share alone within a year, reaching a market cap of $3 billion. It is a delta-neutral synthetic dollar that combats volatility by opening short positions in derivatives. It is expected to perform well in the upcoming bull market, even after seasonal fluctuations. However, its long-term viability largely depends on centralized exchanges (CEX), which raises questions. As similar products increase, the influence of small funds on Ethereum may diminish. These synthetic dollars may be vulnerable to black swan events and can only maintain low funding rates during bear markets.Algorithmic stablecoins have dropped to 0.56%.
Liquidity guidance challenges
Crypto stablecoins leverage yields to attract liquidity. Fundamentally, their liquidity costs include the risk-free rate plus a risk premium. To remain competitive, stablecoin yields must at least match Treasury bill rates — — we have already seen lending costs for stablecoins decline as T-bill rates reach 5.5%. sFrax and DAI are leading in Treasury bill exposure. By 2024, multiple RWA projects have enhanced the on-chain composability of Treasury bills: CrvUSD will use Mountain's USDM as collateral, while Ondo's USDY and Ethena's USDtb are supported by Blackstone's BUIDL.
Based on Treasury bill rates, stablecoins adopt various strategies to increase risk premiums, including fixed budget incentives (such as distributions from decentralized exchanges, which could lead to constraints and death spirals); user fees (linked to lending and perpetual contract trading volumes); volatility arbitrage (falling when volatility weakens); and reserve utilization, such as staking or re-staking (which lacks attractiveness).
In 2024, innovative liquidity strategies are emerging:
Maximizing on-chain yields:
While many yields currently stem from self-consuming DeFi inflation as incentives, more innovative strategies are emerging. By using reserves as banks, projects like CAP aim to direct MEV and arbitrage profits directly to stablecoin holders, providing sustainable and more abundant potential yield sources.Compounding with Treasury yields:
Leveraging the new composability of RWA projects, initiatives like Usual Money (USD0) offer 'theoretically' unlimited yields based on Treasury yields — — attracting $350 million in liquidity providers and entering Binance's launch pool. Agora (AUSD) is also an offshore stablecoin with Treasury yields.Balancing high yields against volatility:
Newer stablecoins adopt diversified basket approaches to avoid singular yield and volatility risks, providing balanced high yields. For example, Fortunafi's Reservoir allocates Treasury bills, Hilbert, Morpho, PSM, and dynamically adjusts portions, incorporating other high-yield assets when necessary.Is total locked value (TVL) a flash in the pan?
Stablecoin yields often face scalability challenges. While fixed budget yields can bring initial growth, as total locked value increases, yields can be diluted, leading to diminishing returns over time. Without sustainable yields or true utility in trading pairs and derivatives post-incentives, their total locked value is unlikely to remain stable.
DeFi gateway dilemma
On-chain visibility allows us to examine the true nature of stablecoins: are stablecoins a genuine representation of currency as a medium of exchange, or merely financial products for yield?
Only the best-yielding stablecoins are used as trading pairs on CEX:
Nearly 80% of trades still occur on centralized exchanges, with top CEXs supporting their 'preferred' stablecoins (e.g., Binance's FDUSD, Coinbase's USDC). Other CEXs rely on the spillover liquidity of USDT and USDC. Additionally, stablecoins are working to become margin deposits on CEX.Few stablecoins are used as trading pairs on DEX:
Currently, only USDT, USDC, and a small number of DAI are used as trading pairs. Other stablecoins, such as Ethena, have 57% of USDe staked in their own protocol, purely held as financial products to earn yields, far from being mediums of exchange.Makerdao + Curve + Morpho + Pendle, combination allocation:
Markets such as Jupiter, GMX, and DYDX prefer using USDC as deposits, as the mint-redeem process for USDT is more scrutinized. Lending platforms like Morpho and AAVE prefer USDC due to its better liquidity on Ethereum. On the other hand, PYUSD is primarily used for lending on Solana's Kamino, especially when incentives are provided by the Solana Foundation. Ethena's USDe is mainly used for yield activities on Pendle.RWA is undervalued:
Most RWA platforms, such as Blackstone, use USDC as a minting asset for compliance reasons; additionally, Blackstone is also a shareholder of Circle. DAI has achieved success in its RWA products.Expand the market or explore new areas:
Although stablecoins can attract major liquidity providers through incentives, they face bottlenecks — — DeFi usage is declining. Stablecoins are now in a dilemma: they must wait for the expansion of crypto-native activities or seek new utility beyond this space.
Outliers in a Fully Banked World
Key players are taking action
Global regulation is gradually becoming clearer:
99% of stablecoins are backed by the dollar, with the federal government having the final say. It is expected that after a crypto-friendly Trump presidency, the U.S. regulatory framework will become clearer, as he promises to lower interest rates and ban CBDCs, which could benefit stablecoins. The U.S. Treasury report outlines the impact of stablecoins on demand for short-term government bonds, with Tether holding $90 billion in U.S. debt. Preventing crypto crime and maintaining the dollar's dominance are also motivating factors. By 2024, multiple countries have established regulatory frameworks under common principles, including approval for stablecoin issuance, liquidity and stability requirements for reserves, restrictions on the use of foreign currency stablecoins, and generally prohibiting interest generation. Key examples include: MiCA (EU), PTSR (UAE), Sandbox (Hong Kong), MAS (Singapore), PSA (Japan). Notably, Bermuda has become the first country to accept stablecoin tax payments and license interest-bearing stablecoin issuance.Licensed issuers gain trust:
The issuance of stablecoins requires technological capability, cross-regional compliance, and strong governance. Key players include Paxos (PYUSD, BUSD), Brale (USC), and Bridge (B2B API). Reserve management is handled by trusted institutions like BNY Mellon, generating returns safely by investing in its Blackstone-managed funds. BUIDL now allows a broader range of on-chain projects to earn yields.Banks are the gatekeepers of withdrawals:
While inflows (fiat to stablecoin) have become easier, challenges remain for outflows (stablecoin to fiat), as banks struggle to verify the source of funds. Banks prefer to use licensed exchanges like Coinbase and Kraken, which conduct KYC/KYB and have similar anti-money laundering frameworks. Although highly reputable banks like Standard Chartered have begun to accept outflows, smaller banks like Singapore's DBS Bank move quickly. B2B services like Bridge aggregate outflow channels and manage billions in transaction volume for high-end clients, including SpaceX and the U.S. government.Issuers have the final say:
As a leader in compliant stablecoins, Circle relies on Coinbase and is seeking global licenses and partnerships. However, as institutions issue their own stablecoins, this strategy may be affected, as its business model is unparalleled — — Tether, a company with 100 employees, earned $5.2 billion from investing its reserves in the first half of 2024. Banks like JPMorgan have already launched JPM Coin for institutional trading. Payment app Stripe's acquisition of Bridge shows interest in owning a stablecoin stack, not just integrating USDC. PayPal also issued PYUSD to capture reserve yields. Card networks like Visa and Mastercard are tentatively accepting stablecoins.
Stablecoins enhance the efficiency of a banked world
With support based on trusted issuers, healthy banking relationships, and distributors, stablecoins can enhance the efficiency of large-scale financial systems, especially in payments.
Traditional systems face limitations in efficiency and cost. In-app or intra-bank transfers offer instant settlements but are limited to their ecosystems. Interbank payment fees are around 2.6% (70% goes to the issuing bank, 20% to the receiving bank, and 10% to card networks), with settlement times exceeding one day. Cross-border transaction costs are even higher, about 6.25%, with settlement times stretching up to five days.
Stablecoin payments provide point-to-point instant settlement by eliminating intermediaries. This accelerates the velocity of money and reduces capital costs while offering programmability features such as conditional automated payments.
B2B (Annual Transaction Volume of $120–150 Trillion):
Banks are in the best position to drive stablecoins. JPMorgan developed JPM Coin on its Quorum blockchain, which is used for approximately $1 billion in daily transactions as of October 2023.P2P (Annual Transaction Volume of $1.8–2 Trillion):
E-wallets and mobile payment applications are in the best position, with PayPal launching PYUSD, currently valued at $604 million on Ethereum and Solana. PayPal allows end users to register for free and send PYUSD.B2C Commerce (Annual Transaction Volume of $5.5–6 Trillion):
Stablecoins need to collaborate with POS, bank APIs, and card networks, with Visa becoming the first payment network to settle transactions using USDC in 2021.
Innovators in the underbanked world
Shadow dollar economy
Due to severe currency devaluation and economic instability, emerging markets desperately need stablecoins. In Turkey, stablecoin purchases account for 3.7% of its GDP. Individuals and businesses are willing to pay a premium above the fiat dollar for stablecoins, with premiums reaching 30.5% in Argentina and 22.1% in Nigeria. Stablecoins provide access to dollars and financial inclusion.
Tether dominates this space with a reliable 10-year track record. Even amid complex banking relationships and redemption crises — — Tether acknowledged in April 2019 that USDT was only 70% backed by reserves — — its peg remains stable. This is because Tether has established a strong shadow dollar economy: in emerging markets, people rarely redeem USDT for fiat; they see it as dollars, a phenomenon particularly evident in areas like Africa and Latin America for paying employees, invoices, etc. Tether achieved this without incentives, relying solely on its long-standing existence and continued utility, enhancing its credibility and acceptance. This should be the ultimate goal for every stablecoin.
Dollar Acquisition
Remittances:
Remittance inequality slows economic growth. In Sub-Saharan Africa, individuals sending remittances to middle- and low-income countries and developed countries pay an average of 8.5% of the total remittance amount. For businesses, the situation is even more dire, with high fees, long processing times, bureaucracy, and exchange rate risks directly impacting the growth and competitiveness of companies in the region.Dollar Acquisition:
From 1992 to 2022, currency fluctuations led to a GDP loss of $1.2 trillion for 17 emerging market countries — — an astonishing 9.4% of their total GDP. Acquiring dollars is crucial for local financial development. Many crypto projects are dedicated to entering the market, with ZAR focusing on a grassroots 'DePIN' approach. These approaches utilize local agents to facilitate cash and stablecoin transactions in Africa, Latin America, and Pakistan.Foreign Exchange:
Today, the foreign exchange market has a daily trading volume exceeding $7.5 trillion. In the Global South, individuals often rely on the black market to exchange local fiat for dollars, mainly because the black market rates are more favorable than official channels. Binance P2P has started to be adopted, but due to its order book approach, it lacks flexibility. Many projects like 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 they can store in digital wallets or cash out locally. In Venezuela, amid deepening political and economic crises, frontline medical workers used USDC to pay for medical supplies during the COVID-19 pandemic.
Conclusion: Intertwined
Interoperability
Cross-coin swaps:
Traditional forex systems are highly inefficient and face multiple challenges: counterparty settlement risk (CLS, while enhanced, is cumbersome), costs of multi-bank systems (involving six banks when purchasing yen at an Australian bank for the London dollar office), global settlement timezone differences (the Canadian and Japanese banking systems overlap for less than 5 hours daily), and limited forex market access (retail users pay 100 times the fees of large institutions). On-chain forex offers significant advantages:
- Cost, efficiency, and transparency: Oracles like Redstone and Chainlink provide real-time price quotes. Decentralized exchanges (DEX) offer cost efficiency and transparency, with Uniswap CLMM reducing transaction costs to 0.15–0.25% — — about 90% lower than traditional forex. Shifting from T+2 bank settlements to instant settlements allows arbitrageurs to adopt various strategies to correct mispricing.
- Flexibility and accessibility: On-chain forex allows corporate treasurers and asset managers to access a wide range of products without needing multiple bank accounts for specific currencies. Retail users can access the best forex prices using crypto wallets with embedded DEX APIs.
- The separation of currency and jurisdiction: Transactions no longer require domestic banks, disassociating them from the underlying jurisdiction. This approach leverages digitization's efficiency while maintaining monetary sovereignty, although drawbacks still exist.
However, challenges remain, including the scarcity of non-dollar-denominated digital assets, oracle security, support for long-tail currencies, regulation, and unified interfaces with on- and off-ramps. Despite these hurdles, on-chain forex still presents enticing opportunities. For example, Citibank is developing a blockchain forex solution under the guidance of the Monetary Authority of Singapore.Different stablecoin swaps:
Imagine a world where most companies are issuing their own stablecoins. Stablecoin exchanges pose a challenge: paying JPMorgan's merchants using PayPal's PYUSD. While on- and off-ramp solutions could address this issue, they lose the efficiency promised by cryptocurrencies. On-chain automated market makers (AMMs) provide optimal real-time low-cost stablecoin-to-stablecoin trading. For instance, Uniswap offers multiple such pools with fees as low as 0.01%. However, once billions flow on-chain, trust in the security of smart contracts becomes paramount, along with sufficient liquidity and instant performance to support real-world activities.Cross-chain swaps:
Major blockchains have diverse advantages and disadvantages, leading to the deployment of stablecoins across multiple chains. This multi-chain approach introduces cross-chain challenges, with bridging posing significant security risks. In my view, stablecoins launching their own layer 0 is the best solution, such as USDC's CCTP, PYUSD's layer 0 integration, and we are witnessing Tether's move to recall bridged locked tokens, potentially launching a similar layer 0 solution.
Unresolved Issues
Meanwhile, several unresolved issues remain:
Will compliant stablecoins hinder 'open finance', as compliant stablecoins can potentially monitor, freeze, and withdraw funds?
Will compliant stablecoins still avoid providing yields that may be classified as securities products, thereby preventing on-chain decentralized finance (DeFi) from benefiting from its massive expansion?
Given Ethereum's slow speed and its L2 reliance on a single sequencer, Solana's imperfect track record, and other popular chains' lack of long-term performance records, can any open blockchain truly handle large sums of money?
Does the separation of currency and jurisdiction introduce more chaos or opportunities?
The financial revolution led by stablecoins is both exciting and unpredictable before us — — a new chapter where freedom and regulation dance in a delicate balance.
