While stablecoins are now used by millions of people and trillions of dollars in value are traded, the definition of the stablecoin category and its understanding remains unclear. Vague.

Learning from history, we can know the rise and fall. If we want to understand the design limitations and scalability of stablecoins, a useful lens is the history of banking, looking at what works, what doesn’t, and why. Like many products in cryptocurrencies, stablecoins may replicate the history of banking, starting with simple bank deposits and notes and then enabling increasingly complex credit to expand the money supply. Through the compilation, I was deeply inspired. Looking at its essence, there is no escape from the three pillars of banking and monetary theory.

Early adopters of stablecoins use fiat-backed stablecoins to transfer money and save. While stablecoins generated by decentralized overcollateralized lending protocols are useful and reliable, actual demand is lackluster. So far, users appear to be strongly favoring USD-denominated stablecoins over other (fiat or new) denominations.

We have also witnessed the rapid adoption of fiat-backed stablecoins such as Tether-USDT, Circle-USDC, etc. It's attractive for its simplicity and security. Adoption of asset-backed stablecoins, an asset class that accounts for the largest share of deposit investments in the traditional banking system, lags.

To understand how current stablecoins are evolving to mimic the banking system, it is especially helpful to understand the history of U.S. banking.

What is the reason? Because banks faced (and still face) the contradiction between maintaining profitability on deposit investments and ensuring the safety of deposits. In order to achieve profit from deposit investment, banks need to release loans and bear investment risks, but in order to ensure the safety of deposits, banks need to manage risks and hold positions.

Although retail banking customers may think that all their money is perfectly safe in a deposit account. But this is not the case. Looking back at the collapse of Silicon Valley Bank in 2023 due to capital mismatches, which led to the depletion of liquidity, is a bloody lesson for our market.

Banks earn interest margins by investing (lending) deposits to make profits. Banks balance making money and risks behind the scenes, while usersMost don’t know exactly how banks handle their deposits, even though banks can basically keep their deposits safe during turbulent times.

3. Stablecoins from the perspective of bank deposits

Stablecoins backed by legal currency Similar to U.S. Bank Notes during the U.S. banking era (1865-1913). During this period, banknotes were bearer instruments issued by banks; federal regulations required that customers redeem them for equivalent amounts in U.S. dollars (e.g., special U.S. Treasury bills) or other legal tender ("coins"). So while the value of a bank note may vary depending on the issuer's reputation, accessibility, and solvency, most people trust bank notes.

After all, stablecoins backed by fiat currencies are issued centrally, and it is easy to imagine the risk of a "bank run" when stablecoins are redeemed. In order to deal with these risks, stablecoins backed by legal currency are audited by well-known accounting firms, obtain local license qualifications, and meet compliance requirements. For example, Circle is regularly audited by Deloitte. These audits are designed to ensure that the stablecoin issuer has sufficient fiat currency or Treasury bill reserves to cover any short-term redemptions and that the issuer has sufficient total fiat collateral to support acceptances of each stablecoin at a 1:1 ratio .

3.2 Asset-backed stablecoins

In fact, most currencies in circulation, The so-called M2 money supply is created by banks through credit. Just as banks create money using mortgages, car loans, business loans, inventory financing, etc., on-chain lending protocols use on-chain assets as collateral, creating asset-backed stablecoins.

Traditional financial institutions use three methods to safely issue loans:

3. Provide thoughtful services and tailor-made underwriting services (commercial loans).

Users can evaluate mortgage agreements based on four criteria:

3. Smart Contract Security;

Additionally, the decentralization and transparency enabled by blockchain can mitigate the risks that securities laws are designed to address. This is important for stablecoins because it means that truly decentralized asset-backed stablecoins may be beyondScope of Securities Laws – This analysis may be limited to asset-backed stablecoins that rely solely on digital native collateral (as opposed to “real world assets”). This is because this collateral can be secured through autonomous protocols rather than centralized intermediaries.

Synthetic USD backed by 3.3 strategy

These properties make SBSD unsuitable for use as a reliable Store of value or medium of exchange, which are the primary uses of stablecoins. While SBSDs can be structured in a variety of ways, with varying levels of risk and stability, they all offer USD-denominated financial products that people may want to add to their portfolios.

Although we see that banks do implement simple strategies for deposits and actively manage them, this only represents a small portion of overall capital allocation. It is difficult to use these strategies at scale to support overall stablecoins because they must be actively managed, which makes these strategies difficult to reliably decentralize or audit. SBSD exposes users to greater risks than bank deposits. Users have reason to be skeptical if their deposits are held in such an instrument.

The era of stable coins has arrived. There are more than $160 billion in stablecoins traded globally. They fall into two broad categories: fiat-backed stablecoins and asset-backed stablecoins. Other USD-denominated tokens, such as strategy-backed synthetic dollars, have grown in awareness but do not meet the definition of a stablecoin as a store of value and medium of exchange.

While this kind of analysis may be useful, we should focus more on the current situation. Stablecoins are already the cheapest way to send money, which means stablecoins have a real opportunity to reshape the payments industry and create opportunities for existing businesses. More importantly, create opportunities for startups to build on a new frictionless and cost-free payments platform.