Stablecoins have evolved from mere payment tools within the cryptocurrency market to become critical components for global fund transfers, savings, and yield management. Yet, they still face significant challenges including regulatory scrutiny and dependency on traditional banking systems.
These digital assets now account for two-thirds of all on-chain transaction volume, whether used for trading, decentralized finance (DeFi) operations, or simple peer-to-peer transfers. Initially, stablecoins gained prominence through Tether (USDT), the first widely adopted stablecoin. Tether was created to solve a practical problem: Bitfinex users faced banking restrictions that limited their access to convenient fiat transactions. The solution was USDTether, pegged 1:1 to the US dollar and backed by dollar reserves. From there, USDT spread rapidly, enabling traders to conduct arbitrage across different exchanges. Compared to traditional bank wires, which could take days to settle, Tether transactions confirmed in just a few blocks (minutes), making USDT a highly efficient payment instrument within crypto markets.
However, stablecoins have long outgrown their original purpose. They are now a core driver of daily capital movement across borders and are increasingly used for earning yield and facilitating real-world commerce. Currently, the total market capitalization of stablecoins represents about 5% of the entire cryptocurrency market. When accounting for the companies managing these assets and networks like Tron—which derive much of their value from stablecoin usage—their overall market influence approaches 8%.
Despite this rapid expansion, there is relatively little discussion about why stablecoins have become so popular. Tens of millions of users are opting for stablecoins over traditional financial systems, yet the underlying drivers remain poorly understood. Moreover, detailed research about the platforms, projects, and user segments fueling stablecoin adoption is scarce. This article explores the reasons behind the proliferation of stablecoins, identifies the key players in the ecosystem, examines the user groups advancing this trend, and analyzes how stablecoins may represent the next phase in the evolution of money.
A Brief History of the Dollar
What comes to mind when you think of money? Cash? Dollars? Price tags in a supermarket? Taxes? In all these contexts, money serves as a commonly accepted unit of account that measures the value of diverse goods and services.
Money has taken many forms throughout history—from seashells and salt to copper, silver, and gold coins, and eventually to modern fiat currencies like the US dollar.
Focusing on the Dollar
The US dollar (and modern fiat money in general, which is government-issued and not backed by a physical commodity) has passed through multiple phases. In the United States, the first dollar bills were actually private banknotes issued by individual banks. This system shared some similarities with the Hong Kong Dollar (HKD) system today. However, due to inherent instabilities, the US government eventually took over dollar issuance, pegging it to gold by law.
In 1871, Western Union executed the first wire transfer using the telegraph, eliminating the need to physically transport large sums of cash. This breakthrough dramatically improved the efficiency of the financial system by removing the physical constraints on moving money.
Key Milestones in the Dollar’s Development
- 1913: The Federal Reserve System was established to regulate dollar issuance and monetary policy.
- 1971: President Nixon ended the gold standard, making the dollar a free-floating fiat currency.
- 1950: The first credit card was introduced, launching the era of non-cash payments.
- 1973: The SWIFT payment network was created, enabling faster and more globalized dollar transactions.
- 1983: The first digital bank account was offered by Stanford Federal Credit Union, beginning the digitization of banking.
- 1999: PayPal emerged, providing a purely digital payment method that required no bank account.
- 2014: Tether launched the first dollar-backed stablecoin (USDT), laying the foundation for today’s stablecoin market.
This brief history highlights one essential truth: the form of money and how we use it are constantly changing.
Today, it’s perfectly normal to pay 20 dollars via PayPal, cash, Zelle, or bank transfer (though using a traditional bank wire might earn you some strange looks). In developing nations—and increasingly in developed economies—the same is becoming true for stablecoins.
Personally, I have paid salaries in stablecoins, exchanged them for cash, and now prefer using stablecoins over bank accounts for savings, leveraging protocols like @HyperliquidX’s HLP, AAVE, Morpho, and @StreamDeFi to manage my capital.
We live in a world where traditional financial systems often burden the most vulnerable. Capital controls, banking monopolies, and high fees are the norm. In this context, stablecoins have emerged as a powerful tool for financial freedom—not only making cross-border money movement easier but also gradually being used for direct payment for goods and services.
To understand how stablecoins achieved so much so quickly, we must first examine why they outperform traditional finance.
Stablecoins vs. Bank Transfers: A Tale of Two Systems
Stablecoins are essentially tokens backed by fiat currencies like the US dollar or euro.
Many readers likely reside in North America, Europe, or developed parts of Asia, where financial systems are relatively efficient, smooth, and stable. In the US, services like PayPal and Zelle are ubiquitous; in Europe, there’s SEPA; and across Asia, fintech innovations abound, with Alipay and WeChat Pay being the most prominent.
In these regions, people are accustomed to depositing money in banks without fearing that their balances will vanish overnight or be eroded by hyperinflation. Small transfers are typically processed quickly, and while larger sums might take longer, the delays are manageable. Moreover, most businesses require customers to use local banking systems because it’s considered safer and more convenient.
However, much of the world faces a very different reality.
In Argentina, bank deposits have been repeatedly confiscated by the government, and the national currency is one of the worst-performing in history.
In Nigeria, official exchange rates diverge sharply from black market rates, and moving money in or out of the country is extremely difficult—a problem that also applies to Argentina.
In the Middle East, bank accounts can be frozen at the government’s discretion, leading many ordinary citizens (especially those without political connections) to avoid keeping significant liquid assets in banks.
It isn’t just holding money that’s risky; transferring funds is often even harder. SWIFT cross-border transfers are expensive and cumbersome, and in these countries, many people don’t even have bank accounts due to the aforementioned issues.
As for alternatives like Western Union, while they facilitate cross-border remittances, they typically charge very high fees (check their fee calculator). Worse, they often use official exchange rates that are far less favorable than market rates, resulting in substantial hidden costs for users.
Stablecoins allow people to hold funds outside the local financial system because they are inherently global, relying on blockchain for transfers instead of local banking servers. This capability stems from their origins—cryptocurrency exchanges faced challenges with bank account access, large-scale deposits/withdrawals, and cross-exchange transfers.
A famous case is Japan. Due to bureaucratic hurdles and strict capital controls in the Japanese banking system, a persistent arbitrage gap emerged between global crypto prices and local Japanese prices.
In 2017, BN announced in its white paper that the exchange would support only stablecoin-crypto trading pairs to accelerate settlement. This move directly shifted market volume toward stablecoin pairs. In 2019, BN launched USDT perpetual contracts, allowing users to trade with USDT instead of BTC for margin trading, further cementing stablecoins’ dominance. Today, stablecoins are widely accepted as base assets in crypto markets, and this acceptance is gradually extending to applications beyond cryptocurrency.
Stablecoins vs. Fintech: Speed, Innovation, and Solving Global Financial Problems
When evaluated on transaction speed, innovative design, and ability to address global financial issues, stablecoins differ significantly from traditional fintech.
Thus far, fintech’s primary contribution has been to optimize and beautify existing payment infrastructure rather than overhaul its underlying architecture. Essentially, fintech adds a fresh coat of paint to the traditional financial system without resolving its inherent inefficiencies and complexities. Stablecoins, by contrast, represent the most significant transformation in global finance in 50 years.
- Fast, reliable, and transparent: Stablecoin transfers are much quicker than traditional banking, with on-chain verifiability enhancing efficiency.
- Low-cost remittances: Compared to bank wires or services like Western Union, stablecoins almost eliminate high fees (though this also means forgoing some protections offered by traditional finance).
- A competitor to cash and payment processors: Stablecoins can replace cash and compete with payment processors like Western Union, while being more secure and durable than physical currency.
- Resistant to destruction or theft: Stablecoins won’t disappear in a flood, fire, or theft and can be exchanged for local currency at any time.
- Minimal transaction fees: Transfer costs depend on the blockchain network but are usually under $2 and fixed, far lower than the fees charged by traditional systems like Western Union (typically ranging from 0.65% to over 4%).
All this indicates that stablecoins not only dominate within cryptocurrency but are also challenging the foundations of traditional finance.
As stablecoins gain broader acceptance and mature, they will inevitably fill gaps in the global financial system that traditional institutions have not addressed. As adoption grows, so do the financial services and sophisticated products built around stablecoins.
For example, @MountainUSDM has introduced real-world asset (RWA) yields on multiple platforms in Argentina, and @ethena_labs enables users to earn through delta-neutral strategies without exposure to traditional banking or exchange custody.
Today, stablecoins are used for far more than simple payments or hedging; increasingly, people are earning yield with stablecoins and even using them for local payments. As this trend develops, stablecoins are becoming integral to global financial planning and even corporate balance sheets.
Notably, many stablecoin users aren’t even aware they’re using crypto technology—a testament to recent innovations in stablecoin product design. Companies continue to refine user experiences, making stablecoin usage more seamless and intuitive, which further drives global adoption.
Key Companies Driving Stablecoin Adoption
The major stablecoin projects are first and foremost the companies that issue them. These include:
- @Circle, issuer of USDC
- @Tether_to, issuer of USDT
- @SkyEcosystem, issuer of DAI and USDS
- PYUSD, co-issued by @PayPal and @Paxos
Many other stablecoins exist, but the above are the most significant for payment purposes. These companies typically maintain bank accounts, accept traditional bank wires, and convert these funds into stablecoins for users.
How Stablecoin Funding Works
Stablecoin issuers hold user-deposited funds and charge very low fees (usually 1–10 basis points). Users can transfer these assets at any time, while issuers earn interest on the bank-held funds (akin to "float yield" or "yield" in DeFi terminology).
Trading firms play a crucial role by handling large-scale conversions between fiat and stablecoins (on/off ramps). As more exchanges crack down on users who only move stablecoins in and out without paying trading fees, these firms become even more critical.
- Trading firms often offer better prices than local exchanges, enhancing the efficiency and competitiveness of stablecoins.
- Because all major trading firms compete intensely in this market, they continuously improve liquidity and service quality.
- Stablecoin issuers earn interest instead of charging users high fees, which is central to their business model.
It’s worth noting that @SkyEcosystem (formerly Maker) operates differently.
- SkyEcosystem uses a hybrid model where its stablecoin USDS is backed by multiple collateral assets (including other currency reserves).
- Users can deposit these collateral assets and borrow USDS at predetermined rates.
- They may choose to deposit into a "savings rate module" (similar to a risk-free rate), lend USDS on platforms like @MorphoLabs and @Aave, or simply hold USDS.
- This model lets users opt for safer yield options or take on more risk for higher returns.
User Growth: Not Direct-to-Consumer
Currently, most major stablecoin issuers do not serve end-users directly but instead work through various financial service companies. This approach resembles MasterCard—it partners with banks but doesn’t interact directly with consumers.
You may rarely hear names like @LemonCash, @Bitso, @Buenbit, @Belo, or @Rippio in crypto circles, but they are important players in stablecoin trading. For instance:
- The above Argentine platforms alone have over 20 million KYC-verified users, nearly half of Coinbase’s user base, even though Argentina’s population is only one-seventh that of the US.
- Lemon Cash processed $5 billion in volume in 2023, much of it in stablecoin-to-stablecoin or ARS (Argentine peso)-to-stablecoin trading.
These platforms serve as the entry point for most non-P2P stablecoin transactions and hold significant crypto trading volume and stablecoin deposits. However, with the exception of Rippio, most do not maintain their own order books but instead rely on order routing systems.
This model is quite similar to Robinhood—which is not a true exchange but routes prices through liquidity providers. I call these platforms "retail venues" because they focus on optimizing user experience and retail products rather than building exchange infrastructure.
- Robinhood’s API does not allow high-frequency traders or market makers because it targets ordinary investors, not professionals.
- Similarly, BuenBit and Lemon don’t attract market makers; their primary audience is everyday consumers, not trading firms or high-frequency traders.
In this way, stablecoins are entering the global financial system through a low-cost, efficient model that impacts not only crypto markets but also traditional payment and remittance industries.
Next, let’s examine the blockchains where stablecoins operate—where transfers, transactions, and balances are recorded. The primary networks for stablecoin activity include:
- @justinsuntron’s @trondao (Tron)
- @binance’s BN Smart Chain (BSC)
- @solana (Solana)
- @0xPolygon (Polygon)
These chains are used mainly for value transfer and don’t necessarily involve DeFi interactions or yield generation.
Although Ethereum still leads in TVL (total value locked), its high transaction costs make it unattractive for most stablecoin transfers. Data shows:
- 92% of USDT transactions occur on the Tron network.
- About 96% of Tron’s transaction volume relates to stablecoins.
- On Ethereum, stablecoin transactions remain significant but account for only 70% of activity.
Additionally, new blockchains are emerging to handle stablecoin transfers efficiently and at low cost. One notable example is LaChain.
- LaChain is operated by a consortium including Ripio, Num Finance, SenseiNode, Cedalio, Buenbit, and FoxBit, focusing on users and platforms in Latin America.
- This reflects how, as the stablecoin market matures, the ecosystem is becoming more complex and diversified.
The Evolution of Stablecoin Payments: From Cross-Border Transfers to Local Use
Stablecoins have become a primary tool for cross-border remittances, but they are increasingly used for local payments as well.
This involves cryptocurrency payment gateways and portals that:
- Convert stablecoins to fiat, or
- Enable merchants to accept stablecoin payments while pricing goods in fiat.
For example, a merchant might "accept" crypto payments but actually have the cryptocurrency instantly converted to dollars before settlement into their bank account. Of course, businesses can also accept stablecoins directly.
However, because redeeming stablecoins still involves some friction (in time or cost), many companies are working to streamline this process, offering solutions ranging from simple and efficient to comprehensive and complex.
- Pomelo: A platform that enables crypto debit card payments, allowing users to spend stablecoins directly.
@zcabrams’ Bridge: Facilitates conversions between stablecoins, across chains, and into fiat, significantly reducing friction for merchants and payment platforms.
- @stripe even acquired Bridge to enhance its own payment system.
- Currently, payment gateways like Bridge are mostly used when merchants don’t directly accept USDC or USDT, handling the conversion for a fee.
As stablecoin payments become more common and their cost advantages over traditional cards and banking grow, stablecoin-to-stablecoin transactions will increase. In the future, more merchants will accept stablecoins directly to improve unit economics, driving the development of a post-banking payment system built on stablecoins.
The Financialization of Stablecoins: How to Make Stablecoins "Earn"
Beyond payments and remittances, a growing number of companies are exploring how to put stablecoins to work and improve capital efficiency. Examples include:
- Lemon Cash: Offers @aave deposit functionality, allowing users to earn yield on their holdings.
- @MountainUSDM’s USDM: Enables stablecoin holders to earn yield and is integrated with multiple exchanges and payment services in Latin America.
Many exchanges and retail finance platforms view stablecoin yield as a stable revenue source that can help balance income fluctuations across market cycles.
- Traditional exchanges rely heavily on trading fees, leading to revenue spikes in bull markets but precipitous drops during bear markets.
- By offering stablecoin deposit yields and related services, these platforms can generate more consistent revenue and reduce their vulnerability to market volatility.
The Future of Stablecoins?
Non-Crypto Uses: Expanding International Transfers and Payments
The primary non-crypto application of stablecoins is international transfers, and they are now increasingly used for payments. As infrastructure improves and adoption widens, stablecoins may also become popular for savings, especially in developing countries where this trend is already emerging.
Weeks ago, @tarunchitra shared a story: In Georgia, a convenience store owner accepts Georgian lari (GEL) from customers, converts it to USDT to earn interest, tracks customer balances in a paper ledger, and takes a cut of the yield. Customers can even pay using Trust Wallet QR codes. Notably, Georgia’s banking system is relatively healthy, yet this alternative financial model is still gaining ground.
In Argentina, the Financial Times (FT) estimates that citizens hold over $200 billion in US cash outside the traditional financial system. If even half of that entered the crypto ecosystem, the DeFi market would double, and the total stablecoin market cap would grow by about 50%—and that’s just one country. Similar conditions exist in China, Indonesia, Nigeria, South Africa, and India, where informal economies are large or trust in banking is limited.
More Potential Use Cases for Stablecoins
As stablecoin usage grows, so do their applications.
- Credit lending: Currently, stablecoins are mainly used in fully collateralized lending, which is highly unusual in global credit markets. However, new tools from institutions like Coinbase might use KYC data to expand credit markets and potentially introduce negative credit reporting (where defaults impact credit scores).
Yield distribution: Stablecoin issuers are increasingly allowing yield to "pass through" to holders, for example:
- USDC offers a 4.7% annual yield
- Ethena’s USDe has a dynamic yield, often exceeding 10%
Cross-fiat transactions: Many transactions now use a "two-step conversion"—for instance,
- Local currency is first converted to a dollar stablecoin, then
- Converted to the target currency (like Argentine pesos or Nigerian naira).
- This means users pay fees twice, but as blockchain technology matures, direct conversion to target currency stablecoins may reduce costs.
As more capital flows into stablecoins, the variety of on-chain financial products will expand, making cryptocurrency applications more mainstream in daily life.
Challenges Facing Stablecoins
When discussing the future of stablecoins, we must also address some overlooked issues.
1) Dependence on the banking system
- Currently, almost all stablecoins rely on bank accounts to hold their backing assets.
But the banking system isn’t perfectly safe, as shown when:
- USDC briefly depegged in 2023 due to the collapse of Silicon Valley Bank (SVB), demonstrating that even the most trusted stablecoins are exposed to banking risks.
2) Use in circumventing capital controls and money laundering
- If you acknowledge that stablecoins are used to bypass capital controls and escape local currency devaluation, you’re also admitting that—under local legal frameworks—this activity could be classified as money laundering.
- This is an open secret, but its legal and ethical implications remain underexplored.
3) Freezing and non-reissuance of stablecoins
- Currently, neither Circle (USDC) nor Tether (USDT) allows stablecoins to be reissued.
- If user funds are frozen for legal reasons (e.g., suspected criminal activity or being deemed illicit), these assets are not returned to victims, even if they hold court rulings.
- This approach is highly controversial morally and may be unsustainable in the long run.
4) Government regulatory pressure & CBDC substitution risk
- Governments might impose stricter regulations on stablecoins, making them "seizable".
- Long-term, central bank digital currencies (CBDCs) could become official alternatives to stablecoins.
- This is a broad topic that deserves further exploration in a separate article.
Truly Decentralized Stablecoins: A Potential Future Solution
In the coming years, government pressure on stablecoin regulation will likely spur the development of truly decentralized, privacy-preserving stablecoins.
- These stablecoins would be immune to government freezing or seizure and fully decentralized.
- This could ignite a new financial technology race, with stablecoins evolving from regulated financial instruments to truly decentralized money.
- Of course, this also implies new compliance challenges.
Regarding the "darker side" of stablecoins, I plan to explore this vast and impactful topic in greater depth in future writing.
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Frequently Asked Questions
What are stablecoins?
Stablecoins are digital currencies pegged to stable assets like the US dollar or euro. They combine the benefits of cryptocurrency—such as fast, borderless transactions—with the price stability of traditional fiat currencies.
How do stablecoins maintain their peg?
Most stablecoins are backed by reserves of fiat currency or other assets held in bank accounts. Some use algorithmic mechanisms or collateralized debt positions to maintain their value relative to the target currency.
Why are stablecoins becoming popular in developing countries?
In nations with unstable currencies, banking restrictions, or high inflation, stablecoins offer a way to preserve wealth and conduct transactions outside the traditional financial system. They provide access to dollar-denominated value without requiring US bank accounts.
Can stablecoins be used for everyday purchases?
Yes, through payment processors and crypto debit cards, stablecoins can be used for daily transactions. Some merchants directly accept stablecoins, while others convert them to local currency automatically during transactions.
What risks do stablecoins pose?
Key risks include dependency on traditional banking systems for reserve holdings, regulatory uncertainty, potential depegging events, and use in circumventing financial regulations. Users should research each stablecoin's backing mechanism and issuer transparency.
Are stablecoins better than central bank digital currencies (CBDCs)?
Stablecoins offer more decentralization and privacy than most proposed CBDCs, which are typically government-controlled and programmable. However, CBDCs may enjoy stronger legal recognition and integration with existing financial systems.