Decomposing the encryption payment landscape using first principles: the Supercycle of stablecoins has arrived.

Original Author: Nathan

Original compilation: Deep Tide TechFlow

The super cycle of stablecoins has arrived.

This is not only because the total supply of stablecoins has exceeded $230 billion, Circle has submitted an IPO application, or that I often mention that the "super cycle has arrived." The more fundamental reason is that stablecoins are profoundly disrupting traditional payment systems, and this disruption will continue at an exponential pace.

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

However, the term "payment" covers a wide range. Today's payment system is primarily dominated by traditional payment channels, banks, and fintech companies, each playing different roles in the Web2 payment system. Although stablecoins offer a more efficient and user-friendly alternative compared to traditional systems, the cryptocurrency payment system is gradually exhibiting a complexity similar to that of the Web2 system, making it worth our in-depth analysis.

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

@Dberenzon has organized a great page that segments the on-chain payment ecosystem into nine different areas, and you can find the relevant content below.

Related links:

Dmitriy provided an in-depth and technical perspective, while other institutions, such as Pantera in its report "The Trillion Dollar Opportunity", categorized the payment system into four levels from a higher perspective.

In this article, I will provide another method for deconstructing payment systems from the perspective of the first principles inherent in cryptocurrency. However, the hierarchical classifications proposed by Dmitriy, Pantera, and others still offer valuable categorization from other angles.

To provide some background information, I believe the payment system operates along a vertical line, with one type of user at the top and another type of user at the bottom. Furthermore, I believe the ultimate goal of the payment system is to be able to serve billions of users, so the objective of this analysis is aimed at ordinary retail users who may not even realize they are using cryptocurrency.

Cryptocurrency Payment System

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

• Fiat currency supported (e.g. USDT)
• Cryptocurrency supported (such as DAI)
• Synthetic (e.g., USDe)

Among them, fiat-backed stablecoins are currently the largest type. These stablecoins are backed by high liquidity assets at a 1:1 ratio, including U.S. Treasury bonds, cash, and other cash equivalents, held by custodians. Therefore, at the lowest level of the payment system, the users are traditional banks and payment systems.

As mentioned earlier, 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, at the top of the payment system, the user is the consumer.

Currently, the structure of the payment system is shown in the figure below:

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Next, let's look at the main application scenarios in the payment system. We have already seen that a high retention use case for cryptocurrencies is "off-ramping." While "on-ramping" is also quite popular, the ability to easily use cryptocurrencies (especially stablecoins) for consumption has always been the primary demand. In our system, the deposit/withdrawal service providers are positioned in the middle.

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All parts above these service providers are aimed at consumer applications or support tools for consumers, which I refer to as the "Service Consumer Layer." In contrast, the part from deposit/withdrawal services down to traditional banking is the part that integrates stablecoins into the existing financial system, which I refer to as the "Financial Integration Layer."

It is worth noting that the number of service consumer layers is significantly greater than that of the financial integration layer. 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 by its lower layers. Although the service consumer layer may have other sub-layers, I would like to highlight here those based on functions and dependencies, which I believe play the most critical role in the payment system.

Service Consumer Layer

From the consumer's perspective, the journey into the cryptocurrency payment system begins with a wallet. A consumer wallet is not just a storage tool; it is also the entry point for users to save, spend, and earn cryptocurrency. The functions of a wallet include debit card payments, virtual banking services, and peer-to-peer transfers, aimed at meeting the diverse needs of users. Currently, there are countless wallet options available in the market, some with global coverage capabilities 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 that come pre-integrated with key functionalities such as deposit/withdrawal services and card issuers.

In order for consumer wallets to truly function, they must rely on various enterprise-grade stablecoin payment service providers. Core components include:

• Invoice Services: These platforms allow individuals to issue invoices to employers in fiat currency or cryptocurrency. They are responsible for generating invoices, receiving funds, and converting currencies when necessary, then depositing the corresponding currency into the wallet.
• Payment Flow Platform: As companies become more globalized, these platforms support seamless and regular payments using stablecoins. This is particularly useful for employees in countries without local banking options.
• Card Issuers: As cash payments decline, cryptocurrency cards have become essential. By partnering with networks like Visa or Mastercard, card issuers enable wallet providers to issue branded debit or credit cards, enhancing convenience for everyday use.

Compliance plays a key role at this level. To protect consumer wallets, many platforms have integrated strict "Know Your Customer" (KYC) and Anti-Money Laundering (AML) measures, as well as on-chain fraud detection services. The providers of these services play an important role in the consumer layer, ensuring safety and compliance.

In addition, the service consumer layer also includes peer-to-peer (P2P) payment networks. These networks operate somewhat independently of the payment system, directly connecting individuals and businesses for cryptocurrency and fiat transactions. P2P solutions provide an alternative to traditional channels, achieving significant adoption in developing regions. However, P2P payment networks are less efficient, and the volume of funds settled is much lower than that of the entire payment system.

Finally, the deposit/withdrawal aggregator is located at the bottom of the service consumer layer. It integrates multiple deposit/withdrawal service providers into a single, 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 pillar part of the cryptocurrency payment system.

In many other payment systems, the part I am about to discuss is usually referred to as the "aggregation and coordination layer". However, to achieve aggregation and coordination, there must be support from lower layers. Therefore, my point is that the aggregation and coordination layer sits at the very top of this category.

Beneath this layer are the companies and services that help facilitate the seamless flow of stablecoins and fiat currencies as much 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 allow businesses to offer bank-like functionalities without having to hold a license themselves by managing compliance and backend operations.
• Over-the-counter (OTC) counters: OTC counters handle large trades, providing 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 the settlement of large transactions more practical.
• Liquidity Providers: Liquidity providers work closely with OTC desks to ensure that there is sufficient capital globally to settle trades. They eliminate much of the complexity involved in the fiat-to-crypto conversion process by abstracting the liquidity sourcing process.

In many cases, no company is willing to hold or manage wallets that may contain millions of dollars worth of stablecoins (or other crypto assets) on their own. Therefore, they rely on custodians to store liquidity in a trustworthy and insured manner. Custodians are positioned at the lower layer of the payment system, as nearly all applications and services depend on them to store stablecoins as securely as possible.

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

At the very bottom of the cryptocurrency payment system are the minting and redemption services or companies. Tether operates through a limited network, allowing it to mint and redeem USDT, receiving cash directly in bank accounts or stablecoins through custodians. On the other hand, Circle's Circle Mint allows qualified companies to mint and redeem USDC through "Know Your Business" (KYB) checks.

Complete Picture

The payment system is dynamic and highly interwoven. Each layer relies on the tools, services, and providers of the layer below it. Overall, the cryptocurrency payment system is as follows:

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Summary Thoughts

Stablecoin-supported payments are one of the most influential and adoptable use cases of cryptocurrency aside from BTC as a store of value.

@PlasmaFDN As a blockchain specifically designed for stablecoin payments, it is in a favorable position, but I expect that almost all blockchains will ultimately pivot towards the stablecoin and payment space. To achieve this, they must rethink their payment systems, as merely being EVM (Ethereum Virtual Machine) compatible is no longer sufficient.

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