The Upshot

“The proliferation of dollar stablecoins - rendered possible by the ubiquity of smartphones and the cryptography of blockchains - could become the greatest experiment in financial empowerment humanity has ever undertaken.”

-Ritchie Torres

The Problem

Today's payment landscape, not so efficient. In 2023, the global payments industry processed 3.4 trillion transactions, generating $2.4 trillion in revenue while handling $1.8 quadrillion in value. The cost of this system falls heavily on businesses:

• When customers spend $2 on coffee, the shop only gets $1.70-$1.80 while card companies take ~15% ($0.20-$0.30) just to process the payment
• Walmart's $648B annual revenue yields $15.5B in profit, while paying about $10B (1.5%) in credit card processing fees
• Of Stripe's 2.9% + $0.30 fee per transaction, over 70% goes to Visa and the issuing bank, with Stripe keeping less than 30%
• Sending $200 from US to Colombia costs less than $0.01 using stablecoins, compared to $12.13 through traditional money transfer services
• Kroger's entire profit margin (below 2%) is less than credit card processing fees
• Chipotle pays $148M in credit card fees on $1.2B annual profit

The Solution

While traditional card payments bounce through 6 different companies taking fees over 1-3 days, stablecoins work like handing someone cash over the internet - direct, near-instant transfers for less than a penny.

Stablecoins are cheaper, faster money by cutting out the middleman.

Some Social Proof

• Stripe acquired Bridge.xyz for $1B
• Stablecoins already have 28.5M unique users making 600M transactions a month
• Stablecoin volume hit $8.5T in Q2 2024, 32% of crypto transaction volume
• Layer 2 solutions have reduced transaction costs from $12 to under $0.01 USDC

Adoption Flywheel

Three drivers create a feedback loop accelerating stablecoin adoption:

1. Businesses can cut back-office costs on payroll, subscriptions, and invoices without major changes to existing processes, because stablecoin orchestration is integrated into payment processors like Stripe. These savings cascade to consumers through structurally cheaper products as adoption scales.

2. Onramps like Venmo, Paypal, and Revolut make onboarding easier for users, and fiat-backed issuers like Circle, Paypal, and Tether share profits with businesses. This model mirrors how Visa shares fees with partners, enabling businesses to earn yield on stablecoin flows.

3. Frameworks like the EU's MiCA regulation provide clear guidance, increasing confidence in stablecoins. MiCA has already reshaped the European stablecoin market. In the U.S., bipartisan interest in legislation focuses on ensuring stablecoin issuers maintain high-quality reserves and meet compliance standards.

Feedback Loop

• Lower costs (1) incentivize businesses to adopt
• Shared profits and easy onboarding (2) attract users and businesses
• Regulatory clarity (3) reinforces trust, validating stablecoins as reliable solutions
• So each new participant strengthens the ecosystem, compounding adoption

Banks and Stablecoins

Historical Milestones

From the First Bank to USDC, financial systems tackle trust and scale. The timelines show how stablecoins compress centuries of banking evolution into years.

I'd say the main takeaway here is that: Stablecoins built-in transparency (auditable reserves, visible collateral) enables faster evolution of lending products compared to traditional banking. You can copy what worked in banking, paste it into stablecoins.

Types of Stablecoins

Stablecoins come in three main flavours: 1) Fiat-backed 2) Asset-backed 3) Synthetic dollars.

1. Fiat-backed stablecoins dominate the market ($150B, 94% share), led by Circle (USDC) and Tether (USDT). These tokens function as digital bearer instruments with 1:1 fiat redemption rights, backed by reserves of cash and treasuries. Accounting firms attest to those reserves each month (Circle) or quarter (Tether), but that is still trust in a third party, so emerging solutions like zkTLS aim to provide cryptographic proof of reserves.

• Off-chain (banks, exchanges)
• Smart contract
• Crypto asset
• Stablecoin

2. Asset-backed stablecoins are created through decentralized lending protocols like Sky Protocol (formerly MakerDAO), mirroring how traditional banks create money through fractional reserve banking. While banks create most of the M2 money supply through various loans, these protocols generate stablecoins against overcollateralized onchain assets. Unlike traditional banking, asset-backed stablecoins offer superior transparency - users can audit collateral directly through the blockchain. They may also fall outside securities law scope when using purely digital collateral managed by autonomous protocols rather than intermediaries. However, adoption remains limited while these protocols mature and establish the robustness seen in traditional lending over its 110-year evolution.

   Key evaluation criteria for lending protocols are: 1) Governance transparency 2) Collateral quality (ratio, volatility, liquidity) 3) Smart contract security 4) Real-time collateralization maintenance

3. Strategy-backed synthetic dollars are dollar-denominated tokens backed by active trading strategies, and they are not true stablecoins. They function more like shares in an open-ended hedge fund, utilizing strategies like the basis trade or AVS restaking.

   Key risks are: 1) Centralized, undercollateralized structure 2) Exposure to CEX risk and market volatility 3) Limited auditability of complex strategies 4) Potential for cascading DeFi failures upon depegging

   Notable regulatory context: The SEC has taken enforcement action against SBSD issuers, treating them as unregistered investment products rather than stablecoins. Despite yield potential, adoption remains limited due to these concentrated risks, which exceed typical bank deposit risk profiles.

I'm focusing on fiat-backed stablecoins, particularly USDC, because their regulated, monthly-attested approach and market leadership puts them in a unique position to reshape institutional finance for most of this writing.

Five Takes on Stablecoins and What They Mean

Regulator Views

1. Grey wants stablecoins banned because they're unregulated bank deposits that need oversight.
2. Gorton & Zhang say stablecoins can't work, won't work, and violate monetary principles.
3. Massad says the US must regulate them to protect its sanctions power and can't ignore them.
4. Waller says they're good for dollar dominance because 99% are USD-pegged.
5. Brooks says they're key to maintaining USD reserve status and expand the dollar's reach.

There is an expanded table in the Appendix.

My Takeaway

Stablecoins are now a $160B float and more than 80% of on-chain settlement. The issuers are basically private Federal Reserves. Where Circle and Tether put their reserves, and who they share the yield with, decides how much liquidity DeFi has. And the bigger stablecoins get, the harder they are to regulate, since the money moves through protocols and cross-chain bridges that nobody is in charge of.

Stablecoins are both good and bad for the dollar. They push dollarization in markets like Argentina, Turkey, and Nigeria, but they also create a "shadow Eurodollar" system that the U.S. has no oversight of. So the dollar gets bigger and harder to control. And even though everything is on-chain, tokens get locked, wrapped onto other chains, and reused as collateral in a bunch of protocols, so being able to see every transaction still won't show you where the systemic risk is.

The one I find most interesting: stablecoins work like unofficial Federal Reserve swap lines built from the bottom up. A local exchange can act as an offshore dollar bank and supply dollars in a crisis, with no official oversight. It's a parallel monetary system with its own rules, and regulators don't have a playbook for it yet.

Market Research

Stablecoins have found product market fit and are the bedrock of today’s crypto infrastructure. I’ve sung their praises, but I do not want to be so dogmatic. I’ve spent a few days reading reports from other stablecoins in the industry (full doc here) and it's not all roses and rainbows.

I've tried to come to my own conclusions about the market based on quantitative data and yet to have found anything too novel.

Tether is the biggest by market cap and also has the lowest safety score. Its reserves are opaque, it depends on a handful of banks and custodians, and its oracle and governance setup has holes. USDC is safer. It's regulated, backed by cash and Treasuries, and attested every month. If I were Circle, I'd add more banking partners and build early-warning monitoring, something like a Composite Health Index.

Historical Studies

Terra Collapse

Terra’s algorithmic UST, backed solely by its sister token LUNA, imploded and wiped ~$60B in value. Possibly driven by a quant shop shorting LUNA and arbitraging UST during the depeg.

Anchor Protocol

Anchor funneled 75% of UST’s supply by offering a 20% APY and net 121.5% APR for borrowers via token incentives (Decrypt, Forum). With deposits surging 3,826% (June 2021-May 2022) as borrowing demand collapsed, the model became unsustainable. Had borrowing stayed above 50%, Terra might’ve softened the blow.

Events

In April 2022, switching from Curve 3pool to 4pool created severe liquidity gaps. On May 7, Terraform Labs withdrew 150M UST from 3pool, triggering a coordinated attack that saw an 85M UST wormhole bridge transfer and seven key wallets-one offloading 347M UST (Chainalysis).

The collapse unfolded in three phases (May 8-13):

1. ~$3B drained from Anchor pushed UST to ~$0.91 (Nansen).
2. 225M UST hit centralized exchanges before trading was halted.
3. The burn-mint mechanism expanded LUNA’s supply from 342M to 6.5T tokens (~8,000%+ surge).

The Luna Foundation Guard deployed 80,394 BTC in three tranches (22,189 on May 8, 30,000 on May 9, 28,205 on May 10) to defend the peg. The fallout included ₩48B in losses for 280,000 South Korean investors, an SEC lawsuit against Terraform Labs, and an Interpol Red Notice for Do Kwon. Terra’s on-chain governance lacked real-time crisis controls.

USDC vs. Terra

A sound stablecoin built from first principles mirrors USDC:

1. Full fiat backing (not algorithmic)
2. No synthetic yields (unlike Anchor’s 20% APY)
3. Multiple banking partners (avoiding single points of failure)
4. Transparent redemption processes (preventing death spirals)

Dashboard

Historical market data from CoinGecko. Coverage dates and fallback status are shown below.

Appendix

Perspectives

Greyism

Unregulated deposit taking leads to an asset-liability mismatch, which creates run risk. A run becomes a crisis, the crisis a bailout, and the bailout a burden on taxpayers. Therefore, regulate like banks now to prevent the crisis and protect taxpayers.

Gorton/Zhang

Gorton & Zhang: failing NQA leads to par value instability, which makes a poor MoE. That reduces adoption, and reliance on unstable instruments leaves systemic risk.

Massadism

Stablecoins resemble Eurodollars: they operate offshore, which weakens US leverage and threatens sanctions enforcement. As they drive global adoption, systemic risk increases. Therefore, regulate onshore to maintain US oversight, balancing enforcement, innovation, and privacy.

Wallerism

Stablecoins dominate crypto transactions, and 99% are USD-pegged. That reinforces the dollar’s global role, expanding its reach through crypto-dollarization and displacing weaker fiat currencies. Therefore, leverage stablecoins to strengthen USD dominance, ensure compliance and oversight, and mitigate risks to the dollar system and domestic banking.

Brooksism

$160B of stablecoins, 99% USD-denominated, expand dollar dominance in digital and emerging markets. That drives crypto-dollarization (e.g., Venezuela, Nigeria) and boosts US debt demand through Treasury-backed reserves. Therefore, leverage stablecoins to reinforce USD dominance, regulate for compliance, and mitigate banking and trade risks.