Everybody gets a stablecoin

Issuing stablecoins is good business. Issuers custody real cash on behalf of their customers, invest it into (hopefully) low-risk instruments and keep the interest without sharing it with their users. Said users hand over their funds because the issued stablecoin gives them something they value more than cash — access to USD, a safe asset in volatile DeFi markets, a way to move money quickly across borders. I expanded on how stablecoins enable cross-border payments in this article last year.

As such, it’s not surprising that every company with the means to do so is creating their own stablecoin. Just in the last month, we’ve seen JP Morgan (JPMD), Fiserv (FiUSD) and Revolut announce their own dollar-pegged assets.

While this is good for business, I’ve been considering how this trend — specifically stablecoins designed for mass adoption rather than closed-loop systems— impacts end users and the adoption of onchain payments as a whole.

The core thesis behind blockchain payments is that using public, shared ledgers (aka blockchains) that all participants can permissionlessly settle transactions on can make payments faster, more transparent and seamless. This effect only scales when a critical mass of customers and merchants use the same blockchains and tokens, but the explosion of new stablecoins and chains makes attaining that mass significantly harder by fragmenting the shared rails.

This fragmentation makes transactions slower, more expensive and worsens the experience for users, at least in the immediate term. It erases the default interoperability that onchain payments offer to end users as apps independently choose which chains and tokens to support. For instance, sending a transaction from Revolut to Accrue will require a coincidence of acceptance i.e. both support at least one identical token-chain pair. If they don’t, users must perform intermediate bridge and swap transactions, made even more costly by the fragmentation of liquidity.

This creates an opportunity for a new class of chain-agnostic payment networks to lower operational, financial, and cognitive costs for developers and users. In my opinion, DEX aggregators like 0x are in the perfect position to offer products like this as they already simulate interoperability by routing between tokens and chains.

However, I expect issuers to fight this kind of abstraction. They’re most incentivized to grow their own slice of the pie by getting more customers to hold and use their issued stablecoins. Abstraction commoditizes their products and removes the kind of differentiation that drives customers to choose them over others. Some approaches that I think we will see to combat these are:

• Adversarial behaviour from issuers who own their distribution through apps. They will try to create lock-in for their own apps by making design decisions that render other tokens incompatible. This might lead to pure issuers building vertical applications to control distribution and reduce vulnerability.
• Sharing yield via interest payments and cashback programs. We’re already seeing examples of these with Coinbase paying 4% per annum on holdings of USDC within the Coinbase Wallet and yield-generating stablecoins like USDe. This could evolve similarly to credit card rewards that create incentives to hold balances in one stablecoin over another.
• Network effects through merchant acceptance: Distribution is everything and issuers who win will be those who onboard merchants successfully by building the tools and programs they require.
• Competitiveness in local markets: Some USD stablecoins might outcompete others in certain markets because of deep liquidity between USD and local fiat for on/off-ramps, better GTM and partnerships etc. While I’ve heard a few arguments made for local fiat-based stablecoins (tokens pegged to local currencies e.g. Naira or Pesos stablecoins), I am not sold on them. In my opinion, unless governments enforce regulation to prevent dollarization, most people will converge on USD-pegged tokens. Access to USD is a critical feature that has driven stablecoin adoption, especially for key markets like Africa and LATAM. Additionally, existing liquidity for USD stablecoins to fiat in these markets makes it both counterintuitive and costly to swap to a local stablecoin before off-ramping.

In the long run, competition for distribution will likely lead to better outcomes for users, as the market converges around a few issuers with the most compelling products and strongest network effects, while less competitive players are phased out.

My thoughts on this topic are continuing to evolve and I’ll share them as they do. If you have opinions on it, DM me on X.