Stablecoins are a payment innovation that simplifies the way value is transferred. These digital currencies are usually pegged to the US dollar and serve as both a store of value and a medium of exchange. Although stablecoins have only been in development for about five years, they have become the "killer application" in the crypto space, with annual transaction volumes surpassing major payment networks and creating a market parallel to traditional financial infrastructure.

With millions of users and trillions of dollars in transactions, stablecoins have become an essential part of the financial ecosystem. However, the definition of this category and its significance are not yet fully clear, let alone the transformative role of PayFi.

By looking back at history, especially the rise and fall patterns of the banking industry, we can better understand the development trend of stablecoins and foresee the future of PayFi. A16z partner Sam Broner's article "A Useful Framework for Understanding Stablecoins: Banking History" provides a valuable perspective on the future development of stablecoins through an analogy with the history of the US banking industry, while also revealing the potential future of PayFi and other related fields.

From the history of banking to the future of PayFi

The historical path of banking

Like many innovations in the crypto space, stablecoins are likely to follow a similar trajectory to the banking industry, starting with the issuance of stablecoins, similar to early bank deposits and paper money, gradually covering on-chain DeFi activities, and ultimately driving the development of PayFi.

Sam Broner's article introduces the history of the US banking industry and provides valuable insights into the development of stablecoins. Before the establishment of the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC), the value of different forms of currency varied depending on the reputation of the issuing institution and the ease of exchange. Banks need to maintain a balance between using deposit investments to make profits and ensuring the safety of deposits. This tension is also reflected in the current stablecoin landscape.

If fiat-backed stablecoins represent the current, widely adopted phase of money issuance, asset-backed stablecoins are likely to be the next phase of credit creation in the crypto space. Today, banks use deposits to invest in a variety of assets (including loans) that are critical to increasing the money supply and improving capital efficiency. Similarly, stablecoins provide similar functionality to bank deposits and paper money in a decentralized, self-custodial format. As decentralized lending protocols mature, asset-backed stablecoins are expected to gain popularity, similar to how banks expand the money supply through loans.

This is where PayFi comes in. PayFi builds, expands, and deepens the stablecoin payment network. By leveraging blockchain and smart contract technology, PayFi integrates DeFi protocols to provide global on-chain financial services such as loans, wealth management, and investments. By integrating payments and financial services into a blockchain settlement layer, PayFi leverages the advantages of stablecoin payments and DeFi, improves efficiency, and enables seamless value transfer.

Types of Stablecoins

Sam Broner's article divides stablecoins into three categories: fiat-backed, asset-backed, and strategy-backed synthetic dollars (SBSD). Fiat-backed stablecoins are similar to paper money in the national bank era, which can be directly converted into legal tender and are backed by reserves. Asset-backed stablecoins mimic the way banks create new money through loans, using highly liquid collateral on the chain.

Due to technical structural reasons, SBSDs inevitably face regulatory challenges and user experience barriers. At present, they are mainly used as investment tools in DeFi products, and it is difficult to overcome the investment dilemma in traditional finance: the trade-off between returns, liquidity and risk. Therefore, they are not suitable as a reliable value storage or exchange medium.

Recent innovations, such as interest-bearing stablecoins backed by U.S. Treasuries and innovative models like PayFi, are breaking down these financial investment limitations. PayFi integrates DeFi into payments, turning every dollar into smart, autonomous money that turns idle funds into productive assets, generating returns while maintaining liquidity, making every dollar work.

As more economic activity moves to the blockchain, we can expect two major developments: a wider range of assets become applicable collateral for loan protocols, and asset-backed stablecoins will account for a larger portion of the on-chain money supply. Over time, other types of loans may be issued safely on-chain, further expanding the on-chain money supply. While stablecoins alone cannot achieve this transformation, PayFi can.

Key Takeaways

Although the innovation of stablecoins in the payment system may seem to subvert traditional finance, it is important to recognize that the basic attributes of money (as a unit of value) and its core function (as a medium of exchange) remain unchanged. Therefore, stablecoins can be regarded as a carrier or manifestation of money.

Given their monetary nature, the development patterns observed in the history of modern banking provide valuable insights into stablecoins. Sam Broner’s article is particularly important because it not only explores the issuance of money, but also emphasizes how banks use credit as a tool to create money. This perspective points the way forward for the future development of stablecoins, which are currently in the currency issuance phase.

Fiat-backed stablecoins represent the current stage, while asset-backed stablecoins are expected to become the next stage of credit creation. As more illiquid real-world assets (RWAs) are tokenized and enter the blockchain, their main role is not circulation, but as collateral to form the underlying assets that support these asset-backed stablecoins.

The synthetic dollars supported by the strategy are mainly used in DeFi income products, facing the dilemma of traditional financial investment: the trade-off between income, liquidity and risk. By integrating DeFi with payments in the crypto space, PayFi will ultimately transform every dollar into smart, autonomous funds, including SBSD, making every dollar count.

Ultimately, the focus is on the essence: creating stablecoins, synthetic dollars or special currencies, aiming to further strengthen the basic attributes of money through digital currency and blockchain technology. For PayFi, its goal is to enhance core functions, improve the efficiency of currency operations, reduce operating costs, strictly control risks, and make full use of the positive role of currency in promoting value exchange and promoting economic and social development.

Stablecoins have the potential to revolutionize the payments industry by providing a cheaper and more efficient way to send money. PayFi is further driving adoption by creating money supply and driving the next phase of stablecoin development, similar to the path that banks took.

For PolyFlow, its mission is clear: to build solutions that connect traditional systems with blockchain, so that every transaction is meaningful. As the infrastructure of PayFi, PolyFlow uses advanced blockchain technology to promote innovative applications, accelerate popularization, and guide users towards a new financial paradigm. It is consistent with the original vision of the Bitcoin white paper and unleashes the full potential of Web3.