Using first principles to dismantle the crypto payment landscape: The super cycle of stablecoins has arrived

Original author: Nathan

Original translation: TechFlow

The stablecoin super cycle has arrived.

This is not just because the total supply of stablecoins has exceeded $230 billion, Circle has filed for an IPO, or I often mention that the super cycle has arrived. The more fundamental reason is that stablecoins are profoundly subverting the traditional payment system, and this subversion will continue at an exponential rate.

My point is simple: stablecoins will surpass traditional payment methods because they are better, faster, and cheaper.

However, the word “payment” covers a wide range. Today’s payment system is mainly dominated by traditional payment channels, banks and fintech companies, each of which plays a different role in the Web2 payment system. Although stablecoins provide a more efficient and easier-to-use alternative to the traditional system, the cryptocurrency payment system is gradually showing similar complexity to the Web2 system, so it is worth our in-depth analysis.

Currently, there are hundreds of companies developing on or around stablecoin payment channels.

@Dberenzon put together a great page that breaks down the on-chain payments ecosystem into nine different areas, which you can find below.

Related Links:

https://x.com/dberenzon/status/1889717634800758858

Dmitriy provides an in-depth and technical perspective, while others, such as Pantera in its report “ The Trillion Dollar Opportunity ,” break down the payment system into four tiers at a higher level.

In this article, I will provide another way to disassemble the payment system from the perspective of first principles native to cryptocurrencies. However, the hierarchical classification proposed by Dmitriy, Pantera, and others still provides valuable classification methods from other perspectives.

To provide some context, I think of the payments ecosystem as operating along a vertical line, with one type of user at the top and another type of user at the bottom. Furthermore, I think the highest goal of the payments ecosystem is to be able to serve billions of users, so the goal of this analysis is to target the average retail user who may not even know they are using cryptocurrency.

Cryptocurrency payment system

From first principles, stablecoins are tokens on a blockchain that represent a unit of fiat currency — most commonly the U.S. dollar. There are different types of stablecoins, including:

• Fiat currency support (such as USDT)

• Cryptocurrency-backed (e.g. DAI)

• Synthetic (such as USDe)

Among them, fiat-backed stablecoins are currently the largest type. This type of stablecoin is backed by highly liquid assets at a 1:1 ratio, including U.S. Treasury bonds, cash and other cash equivalents, held by custodians. Therefore, the bottom users of the payment system are traditional banks and payment systems.

As mentioned before, stablecoins are disrupting traditional payments because they are indeed better, faster, and cheaper. This advantage not only brings higher profit margins to fintech and payment companies, but also provides a better experience for end users. Therefore, the users at the top of the payment system are consumers.

At present, the structure of the payment system is as follows:

Next, lets look at the main use cases in the payment system. We have seen that a high retention rate use case for cryptocurrencies is off- ramping. Although on-ramping is also popular, the ability to easily spend cryptocurrencies (especially stablecoins) is always the main demand. In our system, deposit/withdrawal service providers are in the middle.

All the parts above these service providers are consumer-facing applications or tools that support consumers, which I call the consumer service layer. In contrast, the part from deposit/withdrawal services down to traditional banks is the part that integrates stablecoins into the existing financial system, which I call the financial integration layer.

It is worth noting that there are significantly more service consumer layers than financial integration layers. This is because building a financial integration layer requires licenses, structured operations, and compliance requirements, while the service consumer layer can leverage the services and relationships already established in the layers below it. While there may be other sub-layers of the service consumer layer, I have highlighted the ones that I believe play the most critical role in the payment system based on their functions and dependencies.

Service Consumer Layer

From a consumers perspective, the journey into the cryptocurrency payment system begins with a wallet. A consumer wallet is more than just a storage tool; it is also the entry point for users to save, spend, and earn cryptocurrencies. Wallets include debit card payments, virtual banking services, and peer-to-peer transfers, designed to meet the diverse needs of users. There are countless wallet options on the market, some with global coverage and others designed for different regional markets.

Developing a wallet is a complex task. It requires integrating multiple services while reducing the risk of being hacked, which is why many companies choose to use Wallet as a Service (WaaS) providers. These providers deliver audited, proven solutions with pre-integrated key features such as deposit/withdrawal services and card issuers.

In order for consumer wallets to truly function, they must rely on a variety of business-to-business stablecoin payment service providers. The core components include:

• Invoicing services: These platforms allow individuals to invoice their employers in fiat or crypto. They are responsible for generating the invoice, receiving the funds, converting the currency if necessary, and then depositing the corresponding currency into the wallet.

• Payment Flow Platforms: As companies become more global, these platforms enable seamless, recurring payments using stablecoins. This is particularly useful for employees in countries without local banking options.

• Card Issuers: As cash payments decline, cryptocurrency cards become essential. By partnering with networks such as Visa or Mastercard, card issuers enable wallet providers to issue branded debit or credit cards, making them more convenient for everyday use.

Compliance also plays a key role in this layer. To protect consumer wallets, many platforms integrate strict Know Your Customer (KYC) and Anti-Money Laundering (AML) measures, as well as on-chain fraud detection services. Providers of these services play an important role in the consumer service layer, ensuring security and compliance.

Additionally, the service consumer layer includes peer-to-peer (P2P) payment networks. These networks operate somewhat independently of the payment system, directly connecting individuals and businesses to trade cryptocurrencies and fiat currencies. P2P solutions offer an alternative to traditional channels and have gained significant adoption in developing regions. However, P2P payment networks are less efficient and settle far less money than the entire payment system.

Finally, deposit/withdrawal aggregators sit at the bottom of the service consumer layer. They aggregate multiple deposit/withdrawal service providers into an easy-to-integrate API, allowing wallet providers to automatically select the best option based on a combination of speed, cost, and regional service.

Financial Integration Layer

Entering the financial integration layer, we come to the backbone of the cryptocurrency payment system.

In many other payment systems, the part I’m about to talk about is often referred to as the “aggregation and coordination layer.” However, in order for aggregation and coordination to happen, there must be support at a lower level. Therefore, my view is that the aggregation and coordination layer is at the very top of this category.

Below this layer are companies and services that help stablecoins and fiat currencies flow as seamlessly as possible. Here are three key layers that are typically aggregated and coordinated:

• Banking-as-a-Service (BaaS) providers: These platforms offer modular financial infrastructure that enables companies to integrate virtual bank accounts, cards, and payment services into their products. BaaS providers manage compliance and back-end operations, allowing businesses to offer bank-like functionality without having to hold their own licenses.

• Over-the-Counter (OTC) Desks: OTC desks handle large trades and provide a liquidity bridge for companies that lack direct relationships with major exchanges or liquidity providers. They efficiently convert stablecoins into cash and vice versa, making settlement of large trades more practical.

• Liquidity Providers: Liquidity providers work closely with OTC desks to ensure that there is enough funds to settle trades globally. They remove many of the complexities of fiat-to-crypto conversions by abstracting the liquidity sourcing process.

In many cases, no company wants to hold or manage wallets that could contain millions of dollars of stablecoins (or other crypto assets) themselves. Therefore, they rely on custodians to store liquidity in a trusted, insured manner. Custodians are located at the lower level of the payment system because almost all applications and services rely on them to store stablecoins as safely as possible.

Centralized exchanges (CEXs) also play a key role in the financial integration layer. They settle large-scale cryptocurrency and cash transactions by working with liquidity providers and minting/redemption services. CEXs hold stablecoins and cash reserves, effectively facilitating transactions between both parties.

Finally, at the bottom of the cryptocurrency payment system are minting and redemption services or companies. Tether operates through a limited network that can mint and redeem USDT, receiving cash directly in a bank account or receiving stablecoins through a custodian. On the other hand, Circles Circle Mint allows qualified companies that have passed the Know Your Business (KYB) check to mint and redeem USDC.

The complete picture

The payment system is dynamic and highly intertwined. Each layer relies on the tools, services, and providers of the layers below it. Overall, the cryptocurrency payment system looks like this:

Concluding Thoughts

Stablecoin-backed payments are one of the most impactful and adoptable use cases for cryptocurrencies beyond BTC as a store of value.

@PlasmaFDN is in a good position as a blockchain designed for stablecoin payments, but I expect almost all blockchains will eventually move to stablecoins and payments. To do this, they must rethink their payment systems, because simply being compatible with the EVM (Ethereum Virtual Machine) is no longer enough.

In summary, stablecoins are truly a trillion-dollar opportunity, and those players that play a key role in the payment system will reap the greatest benefits.

This article is sourced from the internet: Using first principles to dismantle the crypto payment landscape: The super cycle of stablecoins has arrived

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