Stablecoins represent 2/3rds of ALL on-chain transactions, either facilitating swaps, being used in DeFi or simply for transfers. Initially, stables gained traction via Tether — the first widely used stablecoin — which was made to combat the bank account restrictions crypto users at Bitfinex were facing. Bitfinex created USDTether, backed 1-1 by USD. From there, Tether spread as traders used USDT to more easily take advantage of arbitrage opportunities across exchanges. Tether transactions would process in a few blocks (e.g., minutes), whereas wire transactions would take days.

Despite this crypto-specific start, stablecoins have grown far beyond this original use case. They are now a tour de force for everyday currency transfers and are increasingly used to earn yield and facilitate real-world transactions. Stablecoins are approximately 5% of crypto’s total market cap, and if you include the value of the companies that manage these stablecoins or blockchains like Tron whose value primarily derives from their use, stablecoins account for close to 8% of all of crypto’s market capitalization.

Yet, with all this dramatic growth, there is still relatively limited content about WHY stablecoins are so prevalent, and why tens of millions of people around the world are replacing traditional financial systems with stablecoins. There is even less literature about the numerous platforms and projects that are enabling this incredible expansion, and the user types that are engaging with these apps. This article will thus explain WHY stablecoins are so prevalent, WHO the players in the space are, and the everyday users that are currently the primary users of these companies, and how stablecoins are becoming the preeminent next evolution of money.

A Brief History of The Dollar

When someone says money, what do you think of? Cash? Dollars? Prices at the supermarket? Taxes? In each of those cases, money is an agreed upon unit of measurement to attribute value to numerous different, heterogeneous items. Money started as shells and salt, then turned into copper, then silver, then gold, and now money is dollars / fiat.

Let’s focus on dollars. Dollars / modern fiat currencies (currencies created by governments rather than backed by commodities) have had multiple phases. In the United States, dollar notes (paper dollars, issued by banks) were initially private. Banks would print their own currency as they wished, somewhat similar to how the HKD works in Hong Kong. After some issues with this model, the government stepped in and took over, backing dollars by law with gold.

In 1871, using the telegraph, Western Union completed the first wire transfer, allowing for the transfer of funds without needing to physically move large amounts of bills. This was a huge unlock because it took away the physical barrier to money movement, making money — and the entire financial system — much more efficient.

A Brief History Overview:

• 1913: the Federal Reserve System was established.
• 1913: Nixon ended the gold standard, leaving the USD to be decoupled from gold and left to float on its own.
• 1950: the first credit card was invented.
• 1973: the SWIFT payment network was established, allowing for faster and more global dollar transactions.
• 1983: the first digital bank accounts were set up with Stanford Federal Credit Union.
• 1999: Paypal allowed for purely digital payments without needing a bank account.
• 2014:Tether introduced the first dollar-backed stablecoin, getting us to where we are today.

This little history lesson, more than anything, shows us one thing. Money, what it is and how we use it is always changing. Today, it is just as acceptable to pay someone $20 via Paypal, Cash, Zelle or a bank transfer, although the normal bank transfer might cause people to look at you funny. In the developing world, and increasingly in the developed world, this same applies to stablecoins. Personally, I pay wages in stablecoins, have used stablecoin transfers to get cash, and increasingly use them instead of bank accounts for my savings with protocols like @HyperliquidX’s HLP, AAVE, Morpho, and of course @StreamDeFi .

We exist in a world where many existing financial systems overburden the most vulnerable consumers. Capital controls, monopolistic and established banks, and high fees are the norm. In this environment, stablecoins are an incredible instrument for financial freedom. They have allowed for currency transfers across borders, and increasingly for direct payments for products. To see how this has happened in such a relatively short time frame, we must first understand why stablecoins beat traditional offerings.

Stablecoins vs Bank Transfer, Tale of Two Cities

At their core, stablecoins are tokens that are backed by fiat currency, such as USD or EUR. Many readers of this article may come from developed countries in North America, Europe or Asia, where the existing financial system is relatively fast, smooth, and efficient. The US has Paypal and Zelle, Europe has SEPA, Asia has a myriad of fintechs, notably AliPay and WeChat Pay. People in these regions feel comfortable putting money in their bank account without worrying about whether their balance will be there in the morning, and with no concern for hyperinflation. Small transfers can be processed quickly, and although larger transfers might take longer, it is never unmanageable. Most companies force customers to use the local banking system as it is deemed safer and easier than alternatives.

The rest of the world lives in a different reality. In Argentina, bank deposits have been confiscated from savers numerous times, and the local currency is one of the worst performing in history. In Nigeria, there are official and unofficial exchange rates, and moving money into and out of the country can be excruciatingly difficult— ironically, the latter statement also applies to Argentina. In the Middle East, bank account balances can be frozen arbitrarily, leading to a culture where most non-politically connected people do not hold the majority of their liquid assets in a bank account. Besides holding money being risky, sending money is often even more difficult. SWIFT transfers are expensive and tedious, and many people in these countries (for the aforementioned reasons) do not have traditional bank accounts. Alternatives like Western Union can often charge a significant fee for international transfers(see their fee calculator here), commonly using the official local government exchange rates, which lead to massive “hidden” fees as the official exchange rates are set higher than real market rates.

Stablecoins allow people to hold money outside of their local financial systems as they are inherently global, transferred via blockchain rather than local bank servers. This reflects their history, as crypto exchanges struggled to get bank accounts and process massive volumes of deposits and withdrawals, as well as transfers across exchanges. Famously, an arbitrage between global crypto prices and prices existed in Japan, as a consequence of the overly bureaucratic Japanese banking system and its capital controls.

Binance released its whitepaper in 2017 stating it would only facilitate stablecoin-crypto trading pairs in order to ensure faster settlements. As a result of this, most volume began to be processed in stablecoin pairs. This was further solidified in 2019 when Binance listed USDT perpetual derivatives contracts, allowing users to margin with USDT instead of BTC. Stablecoins in crypto are already widely accepted as a base assets from other people around the world — now, this acceptance is starting to spread beyond purely crypto use cases.

For a second, let us compare stablecoins and fintechs: primarily on their speed, innovative design, and focus on solving global financial problems. Fintechs have largely, up until this point, only been able to beautify or paint-over the arcane and complex current payment infrastructure for users.

Stablecoins represent the first serious change to global financial systems in 50 years. Their speed, reliability, and verifiability make stablecoins perfect for storing value and for sending remittances without having to pay absurd fees (although, admittedly, at the expense of losing the traditional safeguards of the existing bureaucratic systems). Stablecoins can be viewed as competing with cash and with payment processors like Western Union while being more long-lasting and secure than cash. They can’t be swept away in floods or physically stolen in break-ins, and they are easily transferable for local currency. Fees (depending on the blockchain) are often sub $2 and flat, well below the lower bound for processors such as Western Union, which are variable but can go from 0.65% to as high as 4%+.

Once stablecoins became more accepted and mature, it was inevitable that they would come to be used to fill holes in the global financial system not yet filled by traditional vendors. With this steady adoption, there has also been an explosion in additional services and more complex products. @MountainUSDM has brought RWA yields to numerous platforms in Argentina, and @ethena_labs has allowed users to make money on the delta neutral trade without having exposure to the traditional banking system or exchange custody.

Increasingly, instead of just being used to process payments or hold value / sell the local currency, stablecoins are being used to earn yield and process local payments. As this happens, stablecoins are becoming a core part of financial planning and even company balance sheets around the world. Many of the users of stablecoins may not even know that they are using crypto in the background, and this is a testament to the massive leaps companies have made in the last few years when it comes to creating products around stablecoins.

The Companies that are Onboarding Stablecoin Users

The most main projects involving stablecoins are the issuing companies themselves. USDC’s @circle, USDT’s @Tether_to, DAI/USDS’ @SkyEcosystem, and PYUSD, the child of @PayPal and @Paxos. There are numerous others that I have not mentioned, but these are the primary ones used for payments purposes. Most of these companies have bank accounts, and receive traditional wires and convert these wires into stables which they give to the user.

The stablecoin issuer holds the transferred funds, charging a very small fee (normally 1-10 bps) to the user. The user can now transfer these assets and the issuer receives a float (or yield for those more DeFi natives here) on the assets in the bank account. Trading firms increasingly do large volumes on and off ramping USD-stablecoin volume, especially as many exchanges have cracked down on users that use them exclusively to on/off ramp without paying fees. Trading firms often offer better pricing at scale than local exchanges, and further increase the efficiency and competitive advantage of stablecoins in a unique environment where all major trading firms are in open competition with each other to facilitate these flows. All the while, the stablecoin issuer is earning interest on user funds, allowing them to monetize the float rather than charging high fees to users.

It is important to mention here that @SkyEcosystem (FKA Maker) is somewhat different. Sky uses a mixed model of having multiple collateral types as well as collateral reserves of other currencies backing USDS, their stablecoin. Users deposit these collateral types and borrow SUSDS from the protocol at a predetermined rate. Users can earn something equivalent to a “Risk Free Rate” by depositing into the Savings Rate module, or they can lend SUSDS on various platforms such as @MorphoLabs and @aave, or simply holding it in their account. This system allows for a safer yield option, or a riskier option.

Currently, most major stablecoin issuers are not direct to consumer. Rather, they interact with consumers through various different companies, similar to how MasterCard works with your bank but not directly with you. @LemonCash, @Bitso, @buenbit, @Belo, and @Rippio are not names that we hear a lot on CT. Despite this, just these Argentine exchanges mentioned collectively have more than twenty million KYC’d users. That is half the size of Coinbase’s user base, in a country with 1/7th the population. Last year, Lemon Cash processed around $5B in total volume, of which a significant percentage was stablecoin-stablecoin or ARS-stablecoin. Venues like Lemon function as the gateways for how most non-P2P stablecoin transactions are processed. These venues also have significant crypto volume and stablecoin deposits, although most of them (with the exception of Rippio) do not have their own orderbooks for 90% of their markets, functioning instead by routing orders.

This is similar to how Robinhood is not an exchange and instead manages pricing by routing via market makers. I call these platforms Retail Venues. This is because they focus on user experience and product for retail users, and do not have their own exchange infrastructure. The same way Robinhood will not have a Market Maker using their app or API (Robinhood actually bans you if you make enough API requests), neither would BuenBit or Lemon; it is simply not their customer base or their target audience.

Next, we have the actual blockchains where these transactions happen, i.e. where the stablecoins are sent and where transactions and balances are kept track of. This is dominated by @justinsuntron’s @trondao, @binance’s Binance Smart Chain, @solana, and @0xPolygon. These are chains that are used for users to transfer value, not necessarily to interact with DeFi or earn yield.

Ethereum still maintains a large lead in TVL, however its high cost makes it unattractive for most stablecoin transfers. 92% of all USDT transactions happen on Tron and approximately 96% of all Tron transactions are stablecoin-related, compared to a still high but much lower 70% of value transferred on Ethereum. Additionally, there are various newer chains working to efficiently and cheaply process stablecoins, notably LaChain, which is actually a consortium made up of Ripio, Num Finance, SenseiNode, Cedalio, Buenbit and FoxBit, and which primarily targets LatinAmerican users and platforms. This shows how much more complex and intricate the stablecoin space is becoming as it continues to mature.

As stablecoins have become established for remittances, they are increasingly being used for local payments. This is where payment portals and gateways a la crypto come in, which I define as systems used to allow for converting stables to fiat or enabling payments in fiat terms. For instance, a merchant could “accept” crypto, but in reality is selling this crypto for dollars that it will receive into its bank account, or it could accept stablecoins directly.

Given there is always a little bit of friction around redeeming stablecoins, whether it be time-related or fee-related, there are numerous companies that make this process easier for users and for platforms. These range from relatively simple but incredibly useful products, such as Pomelo (https://www.pomelogroup.com/), which allows crypto debit card transactions to be processed, to more extensive projects like @zcabrams’s Bridge. Bridge allows for easy transfers between stablecoins,chains, and native currencies, reducing friction for platforms and merchants so much so that @stripe acquired Bridge as a way to make their own payments system more efficient. Systems like Bridge only have to exist right now wherever a merchant does not actually accept say USDC or USDT, and thus the portal / gateway has to convert stables for the user and will often have working capital to enable this in exchange for a fee. As stablecoin payments expand, and given the lower fees many of these platforms have compared to card and banking systems, stablecoin-stablecoin volume between currencies and for end products will increase as merchants accept the stablecoins to increase their unit economics. This is how stablecoins could start to shape a post-banking dominated payments world.

Increasingly, there are also companies and projects focused on putting stablecoins to work and attempting to move current stablecoin users to save on-chain or via some of the previously mentioned platforms. Lemon Cash, for example, has an option where users can deposit their funds on @aave to earn yield. @MountainUSDM’s USDM earns yield on stables and is integrated on various Latin American Retail Venues and exchanges. Many Retail Venues and exchanges see stablecoin yield generation and the fees that come with it as a lucrative potential way to stabilize the boom and bust revenue swings that are caused by a reliance on trading fees and thus trading volumes in bull markets, which lead to far fewer revenues (by orders of magnitude) during bear markets.

What’s Next for Stablecoins?

The non-crypto specific use for stablecoins is international transfers and, increasingly, payments. However, as infrastructure around the use of stablecoins continues to improve and they become more omnipresent, it is likely that savings could also move into crypto, especially in the developing world, where this is already starting to happen. A few weeks ago @tarunchitra told me a story about how a bodega owner in Georgia would take deposits of Georgian Lari from customers, convert it to USDT and earn interest on it, keeping track of balances in a crude physical ledger and taking a fee on the interest. In this same bodega, payments could be processed using Trust Wallet QR codes, and it is worth noting that this happened in a country which has a relatively healthy banking system. In countries like Argentina, citizens have an estimated $200B+ in USD according to the FT in cash outside of the traditional financial system. If even half of this would come on chain or into crypto, it would double the size of DeFi and increase total stablecoin MC by ~50%, and this is just one relatively small country among numerous others, such as China, Indonesia, Nigeria, South Africa and India, all of which have significant 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, one of the most uncommon forms of credit in the world. However, with new tools from Coinbase and others, KYC information can be used to extend capital to users and potentially lead to negative credit reports if payments are not made. Stablecoin Issuers are increasingly allowing for yield to “pass through” to stablecoin holders, as seen with USDC’s 4.7% yield and Ethena’s variable but normally 10%+ yield on USDe. There are also increasing volumes of cross fiat transactions, i.e. transactions starting for one currency, converted to a USD stablecoin, and then converted into a third currency. As this continues, it makes sense for this to start to happen more on chain to avoid paying two fees instead of just one by converting directly to the underlying currency fiat stablecoin. As more capital accrues into stablecoins, more and more products will become available in crypto and on chain, and this will help to drive everyday uses for crypto becoming increasingly mainstream.

Challenges Ahead

I will close with some points I do not think are discussed enough when it comes to dialogue around stablecoins. One is that almost every stablecoin today is in some way dependent on a bank account, and the banking system— as we saw with the USDC depeg and the collapse of Silicon Valley Bank in 2023— is not always safe.

Additionally, stablecoins at the moment are heavily heavily used for money laundering. If you have agreed with me that stablecoins are used to avoid capital controls and get out of local currencies, then you have unknowingly acknowledged that this use case, in the local country, constitutes money laundering. This is an open secret with strong implications. Currently, neither Circle nor Tether allow for reissuance. That is, if a user’s stablecoin balance is frozen due to legal action / the assets being identified as stolen, they cannot be returned to the person who has the court order for them. The basis for this currently is morally dubious at best, and untenable at worst long term. Governments will increasingly demand or enforce regulations that will make stablecoins seizable. Potentially, this could functionally mean the replacement of stablecoins via CBDC, Central Bank Digital Currencies, although I will discuss this in a follow on piece.

Inevitable government pressure in the coming years will create opportunities for truly decentralized and private stablecoins which can continue to operate in an entirely decentralized way and regardless of government action. I will likely write a more in depth article about this dark side of stablecoins at a later point, as it is a rather extensive topic.

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