The Future of Stablecoins from the Perspective of the History of the American Banking Industry

Stablecoins have become an indispensable part of the cryptocurrency ecosystem. Despite their widespread use, there is still ambiguity in people's understanding of stablecoins. A stablecoin is a medium of value storage and exchange, typically pegged to the US dollar.

The development of stablecoins can be roughly divided into two dimensions: from under-collateralization to over-collateralization, and from centralization to decentralization. This evolution helps us understand the technological structure of stablecoins and dispels market misconceptions about them.

As a payment innovation, stablecoins simplify the way value is transferred, creating a market parallel to traditional financial infrastructure. Its annual trading volume has even surpassed that of major payment networks.

To gain a deeper understanding of the limitations and scalability of stablecoins, the historical development of the banking industry in the United States provides a useful perspective. Like many cryptocurrency products, stablecoins may follow a similar developmental path as the banking industry, starting with simple deposits and notes, gradually evolving into more complex credit expansion models.

The Development History of Stablecoins

Since Circle launched USDC in 2018, the development of stablecoins has shown some obvious trends. Early users mainly used fiat-backed stablecoins for transfers and savings. Although stablecoins produced by decentralized over-collateralized lending protocols are reliable and practical, actual demand is limited. Users seem to prefer dollar-denominated stablecoins over other denominations.

Some types of stablecoins have failed, such as decentralized, low-collateral stablecoins like Luna-Terra. Other types are yet to be observed, such as yield-bearing stablecoins that face user experience and regulatory challenges.

New types of dollar-denominated tokens have also emerged, such as strategy-backed synthetic dollars. These products are not yet fully defined, and their safety standards and maturity are inferior to those of fiat-backed stablecoins, mainly adopted by DeFi users to achieve higher yields.

Fiat-backed stablecoins like USDT and USDC have rapidly gained popularity due to their simplicity and security. Asset-backed stablecoins are relatively lagging behind, but they hold the largest share of deposit investments in the traditional banking system.

History of the Development of the Banking Industry in the United States

Before the enactment of the Federal Reserve Act in 1913, different forms of currency had varying risk levels and actual values. The value of banknotes, deposits, and checks depended on the issuer, the ease of redemption, and the issuer's creditworthiness.

It was not until after 1913 that the value of the US dollar began to unify. Modern banks earn interest rate spreads through deposit investments, seeking a balance between profit and risk. Credit is an important component of banking operations and a way to increase the money supply and the efficiency of economic capital.

Stablecoins provide users with an experience similar to bank deposits and notes, but in a self-custodial form. The development path of stablecoins may start with simple deposits and notes, and as on-chain decentralized lending protocols mature, asset-backed stablecoins will become increasingly popular.

Looking at Stablecoins from the Perspective of Bank Deposits

fiat-backed stablecoin

Fiat-backed stablecoins are similar to U.S. banknotes from the late 19th to early 20th century. They are tokens that can be directly redeemed for fiat currency, but redemption may be affected by the issuer's reputation and accessibility. Regulatory pressure and user preference have driven the popularity of fiat-backed stablecoins, which currently account for over 94% of the total supply of stablecoins.

To increase trust, fiat-backed stablecoin issuers accept audits and obtain relevant licenses. Future verifiable reserve proofs and decentralized issuance may become development directions, but still face technical and regulatory challenges.

asset-backed stablecoin

Asset-backed stablecoins mimic the way banks create new money through credit. They are issued by on-chain lending protocols, using liquid on-chain assets as collateral. This is similar to the fractional reserve banking system, which has gradually matured since 1913, allowing credit to dominate the money supply in the United States.

On-chain decentralized lending protocols are still in their infancy. Notable protocols such as Sky Protocol adopt transparent and conservative practices, with strict regulations on collateral assets, collateral ratios, and governance. Users can evaluate lending protocols based on governance transparency, collateral asset quality, smart contract security, and the ability to maintain collateral ratios.

As more economic activities move on-chain, asset-backed stablecoins are expected to take a larger share. Its maturity will take time, but in the future, it may be widely used like fiat-backed stablecoins.

strategy-supported synthetic dollar

The recently emerging strategy supports synthetic dollars (SBSD), representing a combination of collateral and investment strategies. They are typically centralized, under-collateralized tokens with attributes of financial derivatives. SBSD is more like the dollar shares in an open hedge fund and is not suitable as a reliable store of value or medium of exchange.

SBSD can be built based on various strategies, such as basis trading or participating in yield generation protocols. Users should have a deep understanding of its risks and mechanisms when using SBSD. Regulators have taken enforcement actions against "stablecoin" similar to investment fund stocks.

Conclusion

Stablecoins have become an important category of crypto assets, with a global circulation exceeding $160 billion. They are mainly divided into two categories: fiat-backed and asset-backed. Other dollar-denominated tokens, such as strategy-backed synthetic dollars, have seen growth but do not meet the core definition of stablecoins.

Referring to the history of the banking industry, stablecoins first need to be integrated around a clear, understandable, and redeemable form of currency. Over time, the number of asset-backed stablecoins may increase. The ongoing development of DeFi will create more SBSD for investors while improving the quality and quantity of asset-backed stablecoins.

Stablecoins, as the cheapest remittance method, have the potential to reshape the payment industry and create opportunities for existing enterprises and startups. They provide the foundation for building new payment platforms that are frictionless and low-cost.