Original Author: Ruisnakes, Crypto Kol
Original Translator: zhouzhou, BlockBeats

Editor's Note: This article discusses how stablecoins are transforming the payment and financial world, analyzing the value proposition of stablecoins, their advantages compared to traditional payment methods, their role in exchanges and cross-chain transactions, and highlighting some challenges such as regulation and technical issues. The article also mentions major companies like JPMorgan and PayPal entering the stablecoin space, the significant profits behind it, and the new possibilities brought by stablecoins in enhancing payment efficiency and expanding financial inclusion. Overall, stablecoins are driving a financial revolution but are also facing a balancing act between freedom and regulation.

The following is the original content (slightly reorganized for better readability):

With countries and institutions vying to enter the stablecoin space, trillion-dollar opportunities are emerging.

8 Major Opportunities Related to Stablecoins:

DeFi Applications of High-Yield Stablecoins

Expanding Yield through Various Means:

ethena labs creates yield through market volatility arbitrage.

CapLabs introduces MEV and arbitrage profit models.

usualmoney and withAUSD leverage their native token for compounding treasury yields.

reservoir employs a diversified high-yield asset basket strategy.

Implementing circular strategies on MorphoLabs and pendle fi.

However, with the growth of Total Value Locked (TVL), yields are gradually diluted, and projects need to explore sustainable yield models and real-world use cases. Currently, only USDT, USDC, and a small amount of DAI serve as primary trading pairs, with other stablecoins more often seen as financial products rather than currencies in circulation.

On-Chain Payments in Emerging Markets

USDT has a strong liquidity network in emerging markets, where locals rarely convert USDT back to fiat but rather treat it as a substitute for the US dollar. For example:

In Turkey, stablecoin transactions represent 3.7% of its GDP.

In Argentina, the stablecoin premium reaches 30.5%.

Nigeria has reached 22.1%.

Projects like Zarpay app and MentoLabs leverage local agents and payment systems, employing a grassroots market expansion strategy to attract more users to the blockchain ecosystem.

Licensed Stablecoin Issuers

Institutions rely on trusted stablecoin issuers to navigate the complexities of technology and regulation. Key players currently include:

Paxos (issuer of PYUSD, BUSD)

Brale xyz (issuer of USC)

Stablecoin (provider of B2B API services)

Integrated Stablecoin API

The future will face complexities in cross-currency, cross-asset, and cross-chain scenarios, with solutions gradually taking shape:

AMMs (Automated Market Makers) like Curve Finance and Uniswap provide flexible and efficient trading methods.

Companies like Perena are actively building infrastructure to streamline deployment, exchange, and liquidity management while supporting business use cases.

Distributor-Issued Stablecoins: Pinnacle of New Profit Models

Issuing stablecoins has created an unparalleled business model. For example, Tether, with only about 100 employees, has earned billions in profits by investing its reserves, sometimes surpassing the profitability of BlackRock.

Entry of Traditional Financial Giants:

JPMorgan: Launched its own stablecoin JPM Coin, focusing on institutional payments and settlement needs.

PayPal: Introduced PYUSD, aiming to enhance business value further through reserve returns.

Stripe: By acquiring stablecoin technology, it has shown interest in mastering the stablecoin core technology stack, not just integrating USDC.

Visa and Mastercard: They are testing stablecoin integration to explore the future possibilities of digital payments.

Core Driver: Stablecoins can significantly reduce payment costs and also generate continuous profit through investment of reserve assets. Therefore, distributors are not only intermediaries in the payment system but also key players in the new financial infrastructure.

On-Chain Solutions for the Forex Platform

This is currently one of the biggest market voids. The traditional forex market has a daily trading volume of over $7.5 trillion but faces the following issues:

Counterparty settlement risk

High costs of multi-bank systems

Global settlement time zone differences

Access restrictions

On-chain solutions provide the best transparency and efficiency through the use of oracles (such as Chainlink) and AMMs.

Citibank is developing its on-chain forex platform in Singapore.

Binance has launched a peer-to-peer order book product, further exploring the possibilities of the on-chain forex market.

Withdrawals, Asset Management, and Margin Deposits

Banks are the core entry point for fiat-backed stablecoins: Standard Chartered has started supporting withdrawal services, and more banks are expected to join. Banks offer asset management services to institutions and are likely to use stablecoins for stock trading margin deposits.

RWA Investment for Stablecoin Reserve Yield

RWA is still in its early stages. Tether earns billions annually by investing its reserves like a bank. Currently, most stablecoins' reserves are invested in short-term government bonds managed by BlackRock and RWA products issued by Securitize. BlackRock and FTI US offer more on-chain financial product portfolios, with more complex high-yield on-chain products expected in the future while maintaining manageable risks.

Unresolved Questions:

Will regulation compromise "Open Finance"? Could compliant stablecoins be monitored, frozen, and seized, posing a threat to openness?

In order to maintain a non-security status, will compliant stablecoins avoid providing returns? As a result, would DeFi be unable to benefit from its expansion?

Can any open blockchain truly handle large-scale funds and real-world transaction throughput (TPS)?

Will the separation of currency and jurisdictions bring more chaos or opportunities?

Dive into these questions now:

Stablecoin Playbook: Flipping from Billions to Trillions

Starting Chapter: Distribution

The younger generation is a digital native, and stablecoins are their native currency. With AI and the Internet of Things driving billions of automated microtransactions, the global finance sector needs adaptive currency solutions. As a "currency API," stablecoins seamlessly transmit like internet data. By 2024, the transaction volume has reached $4.5 trillion. More institutions are realizing that stablecoins offer an unparalleled business model—Tether earned $5.2 billion in profit through investment reserves in the first half of 2024, a number expected to continue growing.

In the stablecoin competition, distribution and true adoption are key, not complex cryptographic mechanisms. Stablecoin adoption manifests in three main areas: the native crypto world, fully banked, and underbanked worlds.

Native Crypto World ($2.9 trillion):
In the $2.9 trillion native crypto world, stablecoins act as DeFi gateways critical for trading, lending, derivatives, liquidity mining, and RWA. Crypto-native stablecoins compete through liquidity incentives and DeFi integration.

Fully Banked World ($400+ trillion):
Stablecoins enhance financial efficiency, primarily used in B2B, P2P, and B2C payment sectors. In this realm, stablecoins focus on compliance, permissioning, and distribution through banks, card networks, payment systems, and merchants.

Unbanked World:
Stablecoins provide users with access to the dollar, promoting financial inclusion. Stablecoins are used for savings, payments, forex trading, and yield generation. Grassroots market promotion is crucial in this field.

Indigenous to the Native Cryptocurrency World

By the second quarter of 2024, stablecoins will account for 8.2% of the total crypto market capitalization. Maintaining pegged stability remains a challenge, and a unique incentive mechanism is key to expanding on-chain distribution. The current key issue is the limited usability of on-chain applications.

Stablecoin Pegging Battle

· Fiat-Backed Stablecoins Rely on Banking Relationships:

93.33% of stablecoins are fiat-backed stablecoins, which offer greater stability and capital efficiency. Banks hold the ultimate decision-making power by controlling redemption rights. Regulated issuers like Paxos have become the issuer of PayPal's USD due to their reliable redemption of billions of BUSD.

· CDP Stablecoins Improve Collateralization and Liquidation Mechanisms to Maintain Better Pegging Stability:

3.89% of stablecoins are Collateralized Debt Position (CDP) stablecoins, using cryptocurrency as collateral, but facing scalability and volatility issues. By 2024, CDP stablecoins have increased their risk resilience by accepting a wider range of liquid and stable collateral.

Aave's GHO accepts any asset in Aave v3, while Curve's crvUSD recently added USDM (physical assets). Some liquidation mechanisms have been improved, especially crvUSD's soft liquidation, providing a buffer for further defaults, thanks to their customized AMMs. However, issues arise with the ve-token incentive model, as a large-scale liquidation led to a CRV devaluation, causing crvUSD's market cap to shrink.

· Synthetic Dollars Maintain Stability through Hedging:

Ethena USDe has individually captured 1.67% of the stablecoin market cap within a year, reaching $30 billion. It is a delta-neutral synthetic dollar that counteracts volatility by taking short positions in derivatives. It is expected to perform well in the upcoming bull market, with its funding rate expected to remain stable even after seasonal adjustments.

However, the long-term viability relying on CEX raises questions. With the proliferation of similar products, the impact of funds on Ethereum may diminish. These synthetic dollars may be affected by black swan events, and during a bear market, persistently low funding rates may pose risks.

· Algorithmic Stablecoins Reduced to 0.56%

Liquidity Bootstrapping Challenge

Crypto stablecoins leverage yields to attract liquidity, where fundamentally, their liquidity costs include risk-free rates and risk premiums. To remain competitive, stablecoin yields must at least align with sovereign bond rates—we have seen stablecoin borrowing costs decrease as bond rates hit 5.5%.

sFrax and DAI lead in sovereign bond exposure. By 2024, multiple RWA projects have propelled on-chain sovereign bond portfolio capabilities: CrvUSD collateralizes Mountain's USDM, Ondo's USDY and Ethena's USDtb are backed by BlackRock's BUIDL.

Based on bond rates, stablecoins have adopted various strategies to increase risk premiums, including fixed budget incentives (such as constraints and death spirals issued by DEXes); user fees (tied to lending and perpetual contract volumes); through volatility arbitrage (performing poorly when volatility decreases); leveraging reserve currencies such as pledging or re-pledging (unattractive).

2024 Innovative Liquidity Strategies

Maximizing On-Chain Revenue:
While many current revenue streams stem from self-consuming DeFi inflation incentives, increasingly innovative strategies are emerging. By operationalizing reserves as a bank, projects like CAP aim to direct MEV (Miner Extractable Value) and arbitrage profits directly to stablecoin holders, offering a sustainable and potentially more lucrative revenue source.

Compounding with Sovereign Bond Yields:
Through new composite capabilities of RWA projects, projects like Usual Money (USD0) offer "theoretically" infinite yields via their governance token, with sovereign bond yields as the base rate—attracting $350 million in liquidity providers and successfully entering the Binance Launchpool. Agora (AUSD) is also an offshore stablecoin with sovereign bond yield.

Balanced High-Yield Low-Volatility:
A novel stablecoin adopts a diversified asset allocation approach to avoid single-income and volatility risks, providing a balanced high yield. For example, Fortunafi's Reservoir allocates assets such as government bonds, Hilbert, Morpho, PSM, etc., and dynamically adjusts the ratios, integrating other high-yield assets as needed.

Is Your TVL Just a Flash in the Pan?
Stablecoin yields often face scalability issues. While fixed-budget yields can trigger volatility in the early stages, as TVL grows, yields will gradually be diluted, leading to diminishing returns over time. If there is no sustainable yield or real-world use in trading pairs and derivatives, once the incentives end, their TVL is likely unsustainable.

DeFi Gateway Dilemma

On-chain visibility allows us to truly examine the nature of stablecoins: are stablecoins truly meant to be a medium of exchange or are they simply financial products designed for yield?

·CEX Trading Pairs Limited to Optimal Yield Stablecoins
Despite about 80% of trades still occurring on CEX, these exchanges support their "preferred" stablecoin (e.g., Binance uses FDUSD, Coinbase uses USDC). Other CEXs rely on the overflow liquidity of USDT and USDC, with stablecoins also striving to become CEX margin deposits.

·Few Stablecoins Used in DEX Trading Pairs
Currently, only USDT, USDC, and a small amount of DAI are used in trading pairs. Other stablecoins, such as Ethena's USDe, of which 57% is staked in its own protocol, are purely held as a financial product to earn yield, far from being a medium of exchange.

·Makerdao + Curve + Morpho + Pendle, Optimal Distribution Combination

Markets like Jupiter, GMX, and DYDX are more inclined to use USDC as a deposit because the minting and redemption processes of USDT are more complex. Lending platforms like Morpho and AAVE prefer USDC as it has better liquidity on Ethereum. On the other hand, PYUSD is mainly used in Solana's Kamino lending, especially when the Solana Foundation offers incentives. Ethena's USDe is primarily used for yield farming on Pendle.

·Undervaluation of RWA
Most RWA platforms (such as BlackRock) use USDC as the minting asset, for compliance reasons, and BlackRock is also a shareholder of Circle. The success of DAI in its RWA product is also noteworthy.

Expanding the Market or Exploring New Territories
While stablecoins can attract major liquidity providers through incentives, they face a bottleneck as DeFi usage is declining. Stablecoins are now at a crossroads: either they wait for the expansion of crypto-native activities, or they seek new use cases beyond these activities.

Outsiders in a Fully Banked World

Key Players are Taking Action

·Increasing Global Regulatory Clarity
99% of stablecoins are backed by the dollar, and the U.S. federal government holds ultimate sway in this area. The U.S.'s regulatory framework is expected to become clearer in the post-crypto-friendly Trump presidency era, with Trump promising lower interest rates and a ban on Central Bank Digital Currency (CBDC), a policy that could benefit stablecoins.

A report from the U.S. Treasury Department points out that stablecoins have impacted the demand for short-term government debt, with Tether holding $90 billion in U.S. Treasury securities. Preventing crypto-related crimes and maintaining the dollar's dominance are also regulatory drivers. By 2024, many countries have established stablecoin regulatory frameworks based on common principles, including approval for stablecoin issuance, reserve liquidity and stability requirements, restrictions on foreign currency stablecoin usage, and generally prohibitions on interest-bearing activity.

Key examples include the EU's MiCA, the UAE's PTSR, regulatory sandboxes in Hong Kong, MAS in Singapore, and PSA in Japan. Notably, Bermuda has become the first country to accept stablecoin tax payments and authorize interest-bearing stablecoin issuers.

·Licensed Issuers Gain Trust
The issuance of stablecoins requires technical capabilities, cross-jurisdictional regulatory compliance, and robust management. Major participants include Paxos (PYUSD, BUSD), Brale (USC), and Bridge (B2B API). Reserve management is handled by trusted institutions such as BNY Mellon, and USDC's reserves generate yield through investments in funds managed by BlackRock. BUIDL now allows more on-chain projects to earn rewards.

·Banks as Gatekeepers of Fiat Off-Ramp

While fiat-to-stablecoin on-ramps have become easier, off-ramping from stablecoin to fiat still faces challenges as banks struggle with verifying the source of funds. Banks prefer licensed exchanges like Coinbase and Kraken, which conduct KYC (Know Your Customer) and KYB (Know Your Business) and have similar AML (Anti-Money Laundering) frameworks.

High-reputation banks like Standard Chartered have started accepting stablecoin off-ramps, while smaller and mid-sized banks such as Singapore's DBS Bank are also swiftly moving. B2B services like Bridge, by integrating off-ramp channels, have managed billions in transaction volume for high-profile clients including SpaceX and the U.S. government.

·Distributors Hold Ultimate Decision-Making Power
As a leader in compliant stablecoins, Circle relies on Coinbase and is currently pursuing global licensing and partnerships. However, as institutions issue their own stablecoins, this strategy may face challenges as stablecoins prove to be an unparalleled business model—Tether, a company of 100 people, generated $5.2 billion in profit through investment reserves in the first half of 2024.

Banks like JPMorgan have already launched the JPM Coin for institutional transactions. On the payment app front, Stripe acquired Bridge, showing its interest in owning a stablecoin ecosystem rather than just integrating USDC. PayPal also issued PYUSD to capture reserve revenue. Card networks Visa and Mastercard are testing the feasibility of adopting stablecoins.

Efficiency Driver

With trusted issuers, strong bank relationships, and a distributor network, stablecoins can enhance efficiency in the large-scale financial system, especially in the payments sector.

Traditional systems face efficiency and cost limitations, with in-app or interbank transfers offering instant settlement but restricted to their own ecosystems. Cross-bank payments typically incur around a 2.6% fee (70% to the issuing bank, 20% to the acquiring bank, 10% to the card network) and take over a day to settle. Cross-border transaction fees are higher at about 6.25%, with settlement times potentially extending up to five days.

Stablecoins, by eliminating intermediaries, enable peer-to-peer instant settlements through stablecoin payments. This not only accelerates fund transfer and enhances capital efficiency but also provides programmable features such as conditional automatic payments.

·B2B Payments (Annual Transaction Volume: $120-150 Trillion)
Banks are well-positioned to drive stablecoin adoption, with JPMorgan Chase having developed JPM Coin on its Quorum blockchain. As of October 2023, JPM Coin is used in transactions totaling around $1 billion daily.

·P2P Payments (Annual Transaction Volume: $1.8-2 Trillion)
Payment wallets and mobile payment apps are favorably positioned to drive stablecoin adoption. PayPal has introduced PYUSD, currently valued at $6.04 billion on Ethereum and Solana. PayPal enables end-users to access and send PYUSD for free.

·B2C Commerce (Annual Transaction Volume: $5.5-6 Trillion)
Stablecoins need to collaborate with POS systems, bank APIs, and card networks. Visa became the first payment network to accept USDC settlement transactions back in 2021.

Innovators in a "Low-Banked" World

Shadow Dollar Economy

In emerging markets facing severe currency devaluation and economic instability, there is a critical need for stablecoins. In Turkey, stablecoin purchases represent 3.7% of its GDP. People and businesses are willing to pay a premium for stablecoins over the fiat dollar, with premiums reaching 30.5% in Argentina and 22.1% in Nigeria. Stablecoins provide these regions with dollar access and financial inclusivity.

The dominant position of Tether in this field is undeniable, given its reliable ten-year track record. Even in the face of complex banking relationships and redemption crises—Tether admitted in April 2019 that only 70% of USDT was backed—the peg remained stable.

This is because Tether has built a robust shadow dollar economy: in emerging markets, people rarely convert USDT to fiat but perceive it as dollars, especially evident in regions like Africa and Latin America, where it is used to pay employees, bills, etc. Tether has achieved this without the need for additional incentives through its longevity and ongoing utility, and every stablecoin should aspire to this ultimate goal of credibility and wide acceptance.

Dollar Access

·Remittances: Remittance inequality hinders economic growth. In Sub-Saharan Africa, an economically active individual sending remittances to low- and middle-income countries (LMICs) and developed countries typically faces an 8.5% remittance fee. For businesses, the high cost of remittances, long processing times, cumbersome procedures, and exchange rate risks are direct obstacles to business growth and competitiveness.

·Dollar Access: Currency volatility has caused 17 emerging market countries to lose $1.2 trillion of GDP between 1992 and 2022, approximately 9.4% of their total GDP. Local financial development is crucial for dollar access. Many crypto projects are dedicated to facilitating deposits through grassroots "DePIN" methods, leveraging local agents to facilitate cash-to-stablecoin transactions in Africa, Latin America, and Pakistan.

·Foreign Exchange Market: Currently, the foreign exchange market trades over $7.5 trillion daily. In the Global South, individuals often convert local fiat to dollars through the black market, mainly because black market rates are more favorable than official channels. Binance's P2P trading has started to gain adoption, but lacks flexibility due to its order book model. Many projects like ViFi are developing on-chain Automated Market Maker (AMM) forex solutions.

·Humanitarian Aid Distribution: Refugees from the Ukraine War can receive humanitarian aid in the form of USDC and store it in a digital wallet or exchange it locally. In Venezuela, frontline healthcare workers purchased medical supplies with USDC during the COVID-19 pandemic to address the escalating political and economic crisis.

Conclusion: Interwoven

Interoperability

·Foreign Exchange (FX)

Traditional FX systems are inefficient and face several challenges: counterparty settlement risk (although CLS has improved, it remains cumbersome), multi-bank system costs (e.g., purchasing yen in Australia involves coordination among six banks), global settlement timezone differences (e.g., the overlapping time for the Canadian and Japanese banking systems is less than 5 hours per day), and access restrictions to the forex market (fees paid by retail users are 100 times higher than those of large institutions). On-chain FX, however, offers significant advantages:

1. Cost, Efficiency, and Transparency: Oracles like Redstone and Chainlink provide real-time price feeds. Decentralized exchanges offer more cost-effective and transparent services, with Uniswap's Constant Product Market Maker (CPMM) reducing transaction costs to 0.15%-0.25%, around 90% lower than traditional forex. Moving from T+2 bank settlements to instant settlement allows arbitrageurs to correct pricing errors using various strategies.

2. Flexibility and Accessibility: On-chain forex allows corporate treasurers and asset managers to access a variety of products without the need for multiple currency-specific bank accounts. Retail users can utilize wallets embedded with DEX APIs to obtain the best forex rates.

3. Currency and Jurisdiction Separation: Transactions no longer require a domestic bank, thus decoupling them from the underlying jurisdiction. This approach leverages digital efficiency while maintaining currency sovereignty, albeit with pros and cons.

However, challenges persist, including the scarcity of non-USD-denominated digital assets, oracle security, support for small-cap coins, regulatory issues, and a unified interface with on/off-chain flows. Despite these obstacles, on-chain forex still presents significant opportunities. For instance, Citibank is developing a blockchain-based forex solution under the guidance of the Monetary Authority of Singapore.

· Stablecoin Exchanges

Imagine a world where most companies issue their stablecoins; stablecoin exchanges face a challenge: how to pay a JP Morgan merchant using PayPal's PYUSD. While on/off-chain solutions can address this issue, they lose the efficiency promised by cryptocurrencies.

On-chain Automated Market Making (AMM) provides the best real-time and low-cost trading between stablecoins. For example, Uniswap offers multiple such pools with fees as low as 0.01%. However, once billions of dollars flow onto the chain, users must trust the security of smart contracts while also needing sufficient deep liquidity and instant performance to support real-world transaction activity.

· Cross-Chain Exchanges

Main blockchains have different strengths and weaknesses, leading to stablecoin deployments on multiple chains. This multi-chain approach brings about cross-chain challenges, with bridging posing significant security risks. In my view, the optimal solution for stablecoins is to launch their own Layer 0, such as USDC's CCTP, PYUSD's Layer0 integration. Moreover, we have witnessed USDT's token redemption bridging and may see the introduction of a Layer 0-like solution.

Unresolved Questions:

1. Will regulators compromise on "Open Finance" because compliant stablecoins may enable fund monitoring, freezing, and seizure?

2. Will compliant stablecoins also avoid providing returns that could be classified as securities, thus preventing on-chain DeFi from benefiting from its massive expansion?

3. Can any open blockchain truly handle large amounts of capital? Given Ethereum's slow speed, its L2's reliance on a single sequencer, Solana's imperfect uptime record, and the lack of long-term track records for other popular chains, is it achievable?

4. Will the separation of currency and jurisdictions bring more chaos or opportunities?

The financial revolution led by stablecoins is both exciting and full of uncertainty. This marks a new chapter where freedom and regulation dance in a delicate balance.

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