By Oak Grove Ventures

Mass adoption of cryptocurrencies has long been the "holy grail" of the cryptocurrency industry, and the payment system is the bridge between this technology and the "real" world. The traditional financial system has been plagued by problems such as high fees, slow transaction speeds and geographical restrictions.

Cryptocurrency payments can not only solve these problems, but also have the advantages of lower fees, faster processing time, borderless transactions, and more efficient and inclusive financial interactions. As the first report in this series on cryptocurrency payments, this study aims to analyze the stablecoin market landscape and the driving force of future growth.

Stablecoins play a pivotal role in the cryptocurrency payment ecosystem, serving as a bridge between innovation and usability. Stablecoins minimize the price volatility of various underlying assets such as fiat currencies, providing a reliable medium of exchange for users and businesses across Web2 and Web3. In addition, stablecoins are an integral part of all crypto-native applications, such as centralized exchanges, decentralized finance (DeFi) platforms, wallets, etc. Stablecoins provide lending, borrowing, and earning opportunities with a stable value within decentralized finance platforms (DeFi). In the B2B industry, we also see that traditional fintech companies are exploring stablecoin solutions to improve actual business efficiency. Although there is still uncertainty in regulation in many regions, more institutional capital is actively joining the industry. In short, stablecoins are crucial in promoting cryptocurrencies to become mainstream payment solutions and meet the needs of the current financial system and consumers.

The current landscape of stablecoins

Stablecoins can be roughly divided into three categories - fiat-collateralized, crypto-collateralized, and algorithmic-collateralized. Recently, many new projects have begun to adopt a hybrid model that mixes multiple assets or chooses real assets (RWA) as collateral.

Overview of the stablecoin ecosystem. Source: Berkeley DeFi MOOC

Stablecoins are more active than ever; they still dominate the market.

Data provided by Glassnode shows that as of mid-June 2024, the total market value of the stablecoin market (including multiple cross-chains including Ethereum) has grown to more than $150 billion. Among them, USDT coins account for about 74%, USDC coins account for about 21%, and the rest are various other stablecoins.

Total stablecoin supply, source: Glassnode

Volume figures vary; USDC and DAI see strong growth

However, it is worth noting that when it comes to trading volume, we find that different data sources have different calculation methods, which may or may not take into account the impact of zombie transactions, outliers, and maximum extractable value (MEV). For example, a report released by Visa in April this year showed that according to their calculation method, USDC coin trading volume has exceeded USDT coin trading volume, despite a considerable gap in market capitalization (21% vs. 74%). If we only consider Ethereum, although DAI coin has a lower market capitalization share than USDC and USDT coins, the report shows that DAI coin has the highest trading volume of the three, mainly due to the flash loan mechanism.

Stablecoin transaction volume, source: Glassnode

Currently, the transaction volume of stablecoins has exceeded that of Master Card, and may exceed that of Visa Card next.

On a broader scale, stablecoins have become widely accepted, with combined transaction volumes surpassing Bitcoin and even on the verge of surpassing the second-largest bank card network, Master Card. While Visa Card Company claimed in a recent report that more than 90% of transactions were from bots, we recognize that the growing adoption and liquidity of stablecoins still has its impact.

Annual transaction volume of Bitcoin/stablecoins and other financial systems, source: Visa

Current and future growth drivers of the stablecoin market

As USDT and USDC still dominate the stablecoin market, we break down the latest announcements from these two companies to analyze the current main growth drivers of the stablecoin market. In the future, we expect the current main growth drivers to continue, while the first entry into the DeFi market and innovation in DeFi will further drive the growth of the stablecoin market.

Stablecoins outside the Ethereum ecosystem are on the rise

Since the first half of 2024, the USDC transfer value on Solana has exceeded the USDC transfer value on Ethereum. However, it is worth noting that since most stablecoin transactions come from MEV arbitration, this volume may be mainly attributed to high-frequency trading rather than new user growth. This also means that stablecoins have greater liquidity, which is beneficial to DeFi trading activity, which is worth considering.

We expect this trend to continue with the launch of Circle’s Cross-Chain Transfer Protocol (CCTP), which enables secure transfers of native mint and redeemable USDC coins between different blockchain ecosystems. As of March, Solana developers can now swap USDC coins from Ethereum native to other EVM-compatible ecosystems, including Arbitrum, Avalanche, Base, Optimism, and Polygon. Several DeFi projects based on Solana have integrated CCTP early on. Support for non-EVM blockchains will also be available in the future. USDC has also expanded its issuance on ZKsync, Celo, and TON.

Source: Artemis

Demand for stablecoins is strong in emerging markets

Emerging markets have been critical to the growth of USDT and USDC, the world’s top two stablecoin issuers, highlighting the economic stability, financial inclusion, and cross-border transaction capabilities that stablecoins can provide in an era of rising inflation.

As local currencies depreciate, USDT has been widely adopted in emerging markets as an alternative to the US dollar and has become the most trusted digital dollar in many emerging markets. For example, in Brazil, USDT accounts for 80% of all cryptocurrency transactions in the country, and the same is true in many other countries. This shift highlights the strategic importance of USDT in ensuring financial stability and accessibility in economies facing currency instability. In June 2024, Tether announced an investment of US$18.75 million in Taiwan startup XREX, which specializes in cross-border payments for SMEs in emerging markets and B2B cross-border stablecoin payments.

Innovation and growth in the DeFi market

Innovation in new applications provides more use cases for financial activities involving stablecoins. The development of liquid pegging platforms like Lido Finance and perpetual exchanges like Synthetix Perps (a newly launched platform by Synthetix) provides stablecoin holders with opportunities to earn returns. In March of this year, Sparklend, a lending platform that is a child-DAO of MakerDAO, issued so much DAI in recent weeks that it needed to authorize more loans.

Ethena, the fastest growing stablecoin in 2024, has partnered with centralized exchanges and DeFi platforms such as Lido Finance, Curve, MakerDAO, and Injective Protocol to form an ecosystem with huge yield opportunities and user experience.

Major institutions are ready to participate in the DeFi market

It is expected that the Federal Reserve will cut interest rates in the next two years, which gives financial institutions more motivation to seek higher returns from the DeFi market.

Although DeFi startups are still in the seed stage, we have seen an increase in investment activities from BlackRock, Fidelity, and Franklin Templeton in DeFi startups in the primary market, which is not common compared to the previous cycle. These DeFi startups that have received investment have recently focused on liquidity staking and risk-weighted assets.

These institutional giants have also begun to explore on-chain activities. Franklin Templeton, a $14 billion fund company, launched a tokenized mutual fund on Polygon, competing with BlackRock, which previously launched a similar fund on Ethereum.

Fintech companies are issuing their own stablecoins

Fintech companies, especially those with large payment networks, have an incentive to launch their own stablecoins in order to add value. PayPal launched the PayPal USD stablecoin in August last year and began offering it to users of its Venmo payment service a few weeks later. In April, Ripple revealed plans to launch a stablecoin pegged to the US dollar, 100% backed by US dollar deposits, short-term US government Treasuries and other cash equivalents. In addition to stablecoins pegged to the US dollar, Nomura Holdings has also launched a yen stablecoin, and Colombia's largest bank, Banco de Colombia, has also launched its own stablecoin, COPW, which is backed 1:1 by the Colombian peso. In Europe, Societe Generale, France's third-largest bank, first launched its own euro stablecoin in December last year.

Synthetic collateral, including RWA-backed stablecoins, continues to grow

Stablecoin projects are increasingly different from the traditional collateralized debt position (CDP) model that emerged in the last market cycle. For example, Tether’s aUSDT is a synthetic dollar overcollateralized by XAUT (Tether Gold) on the company’s new open platform Alloy on Ethereum, which allows users to mint collateralized synthetic assets. Other newer projects that use RWA as collateral are listed in the Appendix below.

Another example is USDe by Ethena Labs. This is the superstar of 2024, having attracted over $3 billion in total value locked (TVL) to date. USDe generates USD value and yield through two main strategies: Leveraging stETH and its inherent yield; Shorting Ether (ETH) positions, balancing delta and leveraging perpetual/futures funding rates. The strategy combines spot deposits of locked Ether (stETH) with corresponding short positions by allowing the creation of a delta-neutral collateralized debt position (CDP) through partnerships with centralized exchanges (CEXs) such as Bitcoin and Binance. Holding Ethena's sUSDe (locking USDe coins) essentially becomes a base transaction, balancing locked Ether (stETH) spot positions and Ether (ETH) short positions on the market. This setup provides users with the yield difference between these positions, which currently yields about 27%.

Stable assets with built-in yields: Internet bonds, source: EthenaLabs Gitbook

The latest technological developments that enhance stablecoins

Bitcoin Ecosystem

Bitcoin scaling has spawned multiple Bitcoin second-layer chains as well as first-layer innovations (e.g., Runes). The development of Bitcoin DeFi has also created more use cases for these native Bitcoin stablecoins.

For example, Bitcoin second layer projects such as RSK (Rootstock) enable Bitcoin smart contracts. By enabling smart contracts, RSK opens the door to building stablecoins backed by Bitcoin. These stablecoins are pegged to the value of fiat currencies, but backed by Bitcoin, while still leveraging the security and trust of the Bitcoin network to provide price stability to users. A well-known project based on RSK is Sovryn. It uses this advanced Bitcoin capability to provide users with stablecoins that are pegged to the value of fiat currencies while being protected by the underlying Bitcoin network.

Stacks is a layer-two project (L2) that integrates smart contracts, decentralized applications (dApps), and Bitcoin. It builds stablecoins through its ecosystem, notably featuring USDA, a stablecoin developed by Arkadiko Finance. USDA is a decentralized, crypto-collateralized stablecoin that maintains stability by staking STX tokens (Stacks’ native token). Users can mint USDA by locking STX in the Arkadiko Finance protocol. The protocol uses a "transfer proof" consensus mechanism to support stablecoins with Bitcoin, thereby ensuring the value of stablecoins. USDA’s stability is backed by over-collateralization, ensuring its value is tied to real assets.

Cross-chain

Interoperability is critical to the accessibility and adaptability of stablecoins. Recent advances in cross-chain solutions have significantly improved the ability of stablecoins to operate seamlessly across different blockchain networks. This advancement allows users to effortlessly transfer stablecoins between different platforms, ensuring that stablecoins are more widely accepted and used in the decentralized financial ecosystem.

  • "Ondo Finance has partnered with Axelar to launch a cross-chain solution called Ondo bridge, which supports the issuance of native tokens including USDY in blockchain networks supported by Axelar."

  • USDC’s cross-chain protocol was developed in collaboration with Chainlink’s Cross-Chain Interoperability Protocol (CCIP), which significantly improves its utility and reach across various blockchain networks.

  • LayerZero’s OFT standard — and the recently launched stablecoin USDV — are examples of a new generation of stablecoins that promote interoperability across multiple blockchain community ecosystems, overcoming the dangerous prospect of a single dominant chain.

Outlook: Impact on native cryptocurrency CeFi

We note that stablecoins are a key strategy for Web2 and Web3 fintech companies, especially for crypto-native centralized finance (CeFi) platforms. We define crypto-native centralized finance (CeFi) platforms as centralized entities that provide payment, trading, lending and other services in the cryptocurrency space. By integrating stablecoins or partnering with relevant providers, these platforms can provide more stablecoin options to existing customers and attract new customers.

Alchemy Pay is a leading payment solutions provider that has become an important bridge between the traditional fiat currency system and the growing cryptocurrency industry. Its platform enables merchants and consumers to easily transact using both cryptocurrencies and fiat currencies.

Alchemy Pay’s expanded support for Celo-native USDC and USDT, facilitating easy conversions, demonstrates the company’s commitment to providing a variety of stable and reliable payment options. In June this year, Alchemy Pay also announced support for USDT on TON, expanding access for TON users.

Payment channels, source: Alchemy Pay

Founded in 2016, Crypto.com has grown to become one of the world's largest cryptocurrency platforms. The platform also issues the Crypto.com Visa Card, which allows customers to make daily purchases directly from their crypto accounts. Visa began testing how to use USD Coin (USDC) in financial operations in 2021. The company has partnered with Crypto.com on a pilot project and currently uses USDC to fulfill its settlement obligations on the Australian Visa Card. Visa's use of USDC settlement eliminates the need for Crypto.com to convert digital currencies into fiat currencies. USDC settlement improves capital management, which in turn helps Crypto.com achieve a range of additional business benefits.

By leveraging Visa’s USDC settlement capabilities, Crypto.com can:

  • Reduced prepayment of funds from 8 days to 4 days

  • 20-30 basis points reduction in foreign exchange fees

  • Focus on company strategy, not day-to-day operations

Issuers (Crypto-native companies/Exchanges and Fintechs)

  • Helps drive more payment options and transaction volume

  • Support USDC currency exchange to help better manage settlement capital resources

Acquirer

  • Help expand product and acceptance, attracting crypto-enthusiastic merchants and customers

  • Ability to receive payments in USDC and conduct transactions on the blockchain

[Appendix 1] Market-leading projects and case studies

Collateralized Debt Positions (CDPs) MakerDAO vs. Liquity vs. Curve

Recently, several major stablecoin projects, including MakerDAO, Liquity, Curve, AMPL, and Frax, have made significant progress in enhancing their protocols and expanding their ecosystems. These projects have launched a number of new features, established various strategic partnerships, and integrated with other blockchain networks, improving stability and utility, and attracting a wider user base. The main developments and milestones achieved by these projects in the past year are as follows:

MakerDAO

1) GUSD PSM Adjustment: In June 2023, MakerDAO voted to adjust the parameters of the GUSD Peg stable module, including lowering the maximum debt ceiling and reducing the transaction fee rate to 0%.

2) Launch of Spark Protocol: MakerDAO launched the Spark protocol in September 2023. The protocol aims to enhance the DeFi functionality of the ecosystem by integrating multiple stablecoins and providing yield optimization.

3) New Collateral Types: In early 2024, MakerDAO introduced several new collateral types to the platform, including tokenized real estate and other physical assets, to diversify and stabilize DAI support.

Liquity

1) Integration with Aave: In August 2023, Liquity announced its integration with Aave, allowing users to use LUSD as collateral in the Aave ecosystem, thereby increasing its practicality and adoption.

2) LUSD on Optimism: In December 2023, Liquity deployed LUSD on the Optimism second-layer network, increasing transaction speed and reducing user costs.

3) Protocol Upgrade: In May 2024, Liquity made a major upgrade to the protocol to improve stability and security, including improvements to the liquidation mechanism and stabilization pool.

Curve

1) Launch of crvUSD: In October 2023, Curve Finance launched its own stablecoin crvUSD, with the aim of deeply integrating Curve’s liquidity pool and governance mechanism.

2) Cooperation with Yearn Finance: In January 2024, Curve cooperated with Yearn Finance to optimize the yield farming strategy and combine Curve’s liquidity pool with Yearn’s insurance vault.

3) Cross-chain expansion: By June 2024, Curve will expand its operations to multiple blockchains in the network, including Avalanche and Solana, to increase liquidity and user base.

AMPL（Ampleforth）：

1) Launch of Geyser V2: In July 2023, Ampleforth launched Geyser V2, an upgraded liquidity mining program that provides more flexible and generous rewards for providing liquidity to decentralized exchanges.

2) AMPL on Ethereum’s second layer: In November 2023, Ampleforth expanded its business to Ethereum’s second layer solution, improving scalability and reducing transaction fees for AMPL users.

3) Cooperation with Chainlink: In February 2024, Ampleforth announced a partnership with Chainlink to use its Oracle service to provide more accurate, decentralized data and improve AMPL's adaptive supply mechanism.

Frax

1) Launch of Fraxlend: In September 2023, Frax Finance launched Fraxlend, a decentralized lending protocol that allows users to borrow and lend stablecoins at dynamic interest rates.

2) New Collateral Types: In December 2023, Frax added a variety of new collateral types, including tokenized gold and synthetic assets, to support the issuance of FRAX.

3) Governance token upgrade: In April 2024, Frax upgraded its governance token FXS and added some new features such as staking rewards and improved voting mechanisms.

[Appendix 2] Evaluation indicators of stablecoins

Startups and Due Diligence Checklist

Investors are advised to evaluate emerging stablecoin issuing companies from two dimensions: mechanism design and cooperative resources.

Mechanism design: focus on collateral-to-debt ratio, liquidation method, cross-chain support, etc.

Collateral design: collateral composition, collateral type, collateral health, transparency and stability

Partners: Access to major DeFi partners, first batch of users, and expectations for liquidity

Market capitalization: A high ratio reflects the size and market adoption of a stablecoin. Generally speaking, a higher market capitalization indicates greater trust and usage.

Liquidity: High liquidity ensures minimal slippage during trading, which is crucial to maintaining the peg.

Collateralization: A high collateralization ratio determines the security and stability of the stablecoin.

Redemption mechanism: A good redemption mechanism ensures redemption back to the underlying asset, maintaining trust in the value of the stablecoin. Metrics include related fees and historical redemption success rates.

Adoption rate: Widespread adoption indicates trust and usefulness within the ecosystem.

Transparency: Transparency builds trust among users and regulators.

Security: Good security ensures the safety of user funds and the integrity of stablecoins.

Community Support: A strong community drives adoption and innovation.

[Appendix 3] Stablecoin startups that have recently completed funding

1）Agora：https://www.agora.finance/

Agora Finance provides a yield-bearing stablecoin backed by VanEc, emphasizes regulatory compliance and actively obtains necessary licenses. Currently, its services are limited to certain markets outside the United States.

Agora holds its reserve fund in trust and entrusts it to one of the world's largest custodians, which is regularly audited to ensure a high level of security. Assets are protected from bankruptcy, which enhances investor confidence.

Dragonfly Capital led the investment in Agora, demonstrating strong support and confidence in its potential. Recent news shows that Agora is expanding its partnerships with financial institutions to enhance liquidity and accessibility, further consolidating its market position.

2）Midas：https://midas.app/

Midas has launched a stablecoin backed by U.S. Treasuries, while also planning to launch its stUSD token on DeFi platforms such as MakerDAO, Uniswap, and Aave soon. Midas uses BlackRock to purchase Treasuries and Circle’s USDC coin, with the goal of providing a secure and stable digital asset.

MIdas’ main partners include custody technology provider Fireblocks and blockchain analytics provider Coinfirm. Its recent business introduction shows that Midas is focusing on integrating advanced security measures and extending its business to more DeFi platforms to maximize the utility and adoption of StUSD coins.

3）Angle：angle.money。

Angle’s USDA stablecoin is backed by U.S. Treasury bills and tokenized Treasury notes. Angle’s USDA token holders can earn rewards with a target yield of at least 5% from the token’s reserve assets and lending platform revenue.

Angle is also working on creating an A16z-backed FX trading hub to enable seamless conversions between USD and EUR-pegged stablecoins. Recent developments include increasing staking rewards, expanding the FX trading hub to include more currency pairs, and establishing strategic partnerships to improve protocol security and user engagement.

4）Yala： https://yala.org/

Yala is revolutionizing Bitcoin liquidity with its innovative meta-yield stablecoin, YU. YU is a BTC-backed stablecoin that leverages the power of Bitcoin in decentralized finance (DeFi) to generate yield across multiple blockchains.

Using the Ordinals protocol, Yala issues YU directly on Bitcoin and integrates it with a decentralized index network and oracle through a meta-protocol. This setup ensures the borderlessness and accessibility of Bitcoin liquidity, allowing users to generate income from various blockchain ecosystems without leaving the Bitcoin environment.

Yala uses the Ordinals protocol to issue YU directly on Bitcoin and integrate it with a decentralized index network and Oracle through a meta-protocol. This setup ensures the borderlessness and accessibility of Bitcoin liquidity, allowing users to generate income from various blockchain ecosystems without leaving the Bitcoin environment.

Yala’s latest developments include the implementation of a mapping and minting mechanism, which enhances the ability of users to seamlessly utilize cross-chain benefits. This approach not only enhances Bitcoin’s utility in DeFi, but also makes Yala a pioneering force in the decentralized financial space.

5）BitSmiley: https://www.bitsmiley.io/

BitSmiley is building a comprehensive financial ecosystem on Bitcoin through its Fintegra framework, which includes a decentralized over-collateralized stablecoin protocol, a trustless native lending protocol, and an on-chain derivatives protocol. The first step of the framework is to launch an on-chain stablecoin generated through Bitcoin over-collateralization, namely, bitUSD.

bitUSD will serve as the cornerstone of the BitSmiley ecosystem, launching first on the first BTC second-layer platform in partnership with BitSmiley, and eventually expanding to other second-layer solutions. bitUSD's overcollateralization mechanism is similar to MakerDAO's model, which eliminates the unfamiliarity of DeFi users. Recently, BitSmiley received investments from OKX Ventures and ABCDE, highlighting the project's credibility and potential in the field of decentralized finance.

6）BitStable：https://bitstable.finance/

BitStable is a decentralized asset protocol based on the BTC network. The platform allows anyone, anywhere to generate $DALL stablecoins from collateral assets within the BTC ecosystem. BitStable uses a dual token system ($DAII and $BSSB) and a cross-chain compatible structure. $DAII is a stablecoin (BRC 20) whose value and stability come from the robustness of assets in the BTC ecosystem, including BRC 20, RSK, and Lightning Network.

In BitStable's vision, $DAII's cross-chain capabilities connect the Ethereum community with the BTC ecosystem. The total supply of $DAII is capped at 1 billion tokens. $BSSB serves as the platform's governance token, enabling the community to maintain the system and manage $DAII. In addition, BitStable incentivizes $BSSB holders through dividends and other measures.