Author: Rob Hadick, Partner at Dragonfly
Compiled by: AididiaoJP, Foresight News
Stablecoins are not meant to improve the existing payment network but to completely disrupt the traditional payment network. Stablecoins allow businesses to completely bypass traditional payment channels; in other words, these traditional payment channels are likely to be completely replaced someday in the future.
When payment networks are based on stablecoins, every transaction is just a digital change on the ledger. Many emerging companies have started to drive the reconstruction of fund flow methods.
Recently, there has been much discussion about how stablecoins can become a banking-as-a-service (BaaS) network platform, connecting existing payment channels, from issuing banks to merchant acceptance, and everything in between. While I agree with these viewpoints, I underestimate the true potential of stablecoins if I only consider them as a platform to connect existing payment channels when I think about how businesses and protocols will create and accumulate value in the future under the new paradigm. Stablecoin payments represent an incremental improvement, showcasing the possibility of rethinking payment channels from the ground up.
To understand the future direction, we need to look back at history, as history reveals the obvious evolutionary path.
Evolution of Modern Payment Channels
The origins of modern payment systems can be traced back to the early 1950s. Diners Club, founded by Frank McNamara, launched the first multipurpose charge card. This charge card introduced a closed-loop credit model, with Diners Club acting as an intermediary between merchants and cardholders. Before Diners Club, almost all payments were made directly between merchants and customers via cash or proprietary bilateral credit agreements.
After the great success of Diners Club, Bank of America (BofA) saw a huge opportunity to expand its credit business and gain a broader customer base, launching the first consumer credit card aimed at the mass market. BofA mailed over 2 million unsolicited, pre-approved credit cards to middle-class consumers, which could be used at over 20,000 merchants in California. Due to regulatory constraints at the time, BofA began licensing its technology to other banks in the U.S. and even expanding into international markets, leading to the first credit card payment network. However, this was accompanied by huge operational challenges and led to serious credit risks, with delinquency rates soaring above 20%. At the same time, rampant fraud nearly caused the entire project to collapse.
People began to realize that the challenges and chaos within the banking network could only be resolved by establishing a true cooperative organization that would set the rules for managing the system and provide infrastructure. Members of the organization could compete on product pricing but were required to adhere to unified standards. This organization later became what we know today as Visa. Another organization, founded by California banks to compete with Bank of America, later became Mastercard. This marked the birth of our modern global payment model and has become the dominant structure in the global payment industry.
From the 1960s to the early 21st century, almost all innovations in the payment space revolved around enhancing, complementing, and digitizing current global payment models. After the internet boomed in the 1990s, many innovations shifted towards software development.
E-commerce was born in the early 1990s, with the purchase of Sting's CD on NetMarket being the first online payment. Subsequently, PizzaNet became the first nationwide retailer to accept online payments. Well-known e-commerce companies like Amazon, eBay, Rakuten, and Alibaba were founded in the following years. The boom of e-commerce companies further gave rise to many early independent payment gateway and processor companies. The most famous ones are Confinity and X.com, founded at the end of 1998 and the beginning of 1999 respectively, which merged to become today’s PayPal.
Digital payments have spawned numerous household names with multibillion-dollar valuations. These companies connect offline merchants with online retail, including payment service providers (PSPs) and payment aggregators (PayFacs) like Stripe, Adyen, Checkout.com, and Square. They resolve merchant-side issues by bundling gateways, processing, reconciliation, fraud compliance tools, merchant accounts, and other value-added software and services. However, it is clear that they have not brought about disruptive changes to the traditional financial payment network.
Although some startups focus on disrupting traditional banking payment networks and card-issuing infrastructure, well-known companies like Marqeta, Galileo, Lithic, and Synapse are primarily dedicated to integrating new companies into existing banking networks and infrastructures rather than disrupting existing payment networks. However, many companies find that simply adding a software layer to existing infrastructure does not lead to true explosive growth.
Some businesses are well aware of the limitations of traditional payment methods and foresee that a payment solution can be constructed entirely independent of traditional banking infrastructure through internet-native currencies, with PayPal being the most famous example. Many startups in the early 21st century focused on developing digital wallets, peer-to-peer transactions, and alternative payment networks. These companies, including PayPal, Alipay, M-Pesa, Venmo, Wise, Airwallex, Affirm, and Klarna, completely bypass banks and card issuing alliances, giving end customers a certain degree of monetary autonomy.
They initially focused on providing a better user experience, product offerings, and cheaper transactions for groups overlooked by traditional finance, but gradually began to capture more and more market share. Traditional financial payment companies felt the threat from these alternative payment methods (APMs), prompting Visa and Mastercard to launch Visa Direct and Mastercard Send, respectively, which also focused on providing real-time payment services for peer-to-peer transactions. Although these models have seen significant improvements, they are still hampered by limitations of existing infrastructure. These companies still need to pre-fund or bear foreign exchange/credit risks while needing to hedge their own liquidity pools, making instant transparent settlement impossible.
Essentially, the path of modern payment evolution is: Closed Loop + Trusted Intermediary → Open Loop + Trusted Intermediary → Open Loop + Partial Personal Autonomy. However, opacity and complexity still dominate, resulting in a poorer user experience and the presence of rent extraction at various stages throughout the entire network.
Evolution of Merchant Payments
Businesses can bypass part or all of the traditional payment network's technical infrastructure through stablecoins. The following diagram is a simplified illustration of merchant payments:
And the responsibilities of each part in the stablecoin payment network:
Currently, Stripe can handle a significant portion of the work on the payment merchant side, including providing merchant accounts and various software for operating businesses and accepting payments. However, they have not formed their own issuing organization or issued payment cards.
Now imagine a world where Stripe becomes a central bank, issuing its own stablecoin backed by approved collateral through the GENIUS Act. Stablecoins can achieve atomic settlement between consumer and merchant accounts via a transparent open-source ledger (blockchain). You no longer need a card-issuing bank or acquirer; Stripe (or any other issuer) only needs one (or a few) banks to hold the collateral for its issued stablecoins. They transact directly on the blockchain through wallets or initiate minting/redemption requests to Stripe (the issuer/central bank), which are then settled on the blockchain. The clearing and settlement of funds are completed through a series of smart contracts that can handle refunds and disputes (see Circle's refund agreement). Similarly, payment routing and even conversions to other currencies/products can be programmed. Utilizing stablecoins and blockchain technology, data transmission standards from banks to gateways, processors, and networks become easier. The transparency of data and the reduction of stakeholders make fees and accounting simpler.
In such a world, Stripe seems to have nearly completely replaced the current payment model—possessing complete infrastructure, providing accounts, card issuance, credit, payment services, and networks, all built on better technology, thereby reducing intermediaries and allowing wallet holders nearly complete control over the flow of funds.
Simon Taylor: "If you are based on stablecoins, every transaction is just a digital change on the ledger. Merchants, gateways, PSPs, and banks need to reconcile different ledger entries. With stablecoins, anyone operating with stablecoins is simultaneously a gateway, PSP, and acquirer; all transactions are just digital changes on the ledger."
This sounds like science fiction. Do real issues exist regarding fraud, compliance, the availability of stablecoins, liquidity/costs, etc.? Will there be incremental steps from today to this potential future? Technologies like real-time payments (RTPs) also have flaws; programmability and interoperability of cross-border remittances are problems that RTP cannot solve.
In any case, the future is gradually arriving, and some companies are preparing for it. Top issuers like Circle, Paxos, and withausd are expanding their products, while payment-focused blockchains like Codex, Sphere, and PlasmaFDN are also moving towards end consumers and businesses. Future payment networks will significantly reduce intermediaries, increase autonomy, improve transparency, enhance interoperability, and bring more value to customers.
Cross-Border Payments
B2B cross-border payments are currently one of the areas where stablecoin applications are experiencing significant growth.
Matt Brown wrote an article about cross-border payments last year, from which we can see:
In many cases, multiple banks exist in cross-border transactions, all using SWIFT to transmit information. SWIFT itself is not the problem, but the back-and-forth communication between banks incurs additional time costs, often involving other clearing counterparties. In fact, the clearing process typically takes 7-14 days to complete, which undoubtedly brings significant risks and costs, and the process is extremely opaque. For example, it is not uncommon for JPMorgan to 'lose' millions of dollars for extended periods while transferring funds from its U.S. parent company to foreign subsidiaries. Additionally, there are foreign exchange risks among multiple counterparties, leading to an average increase in transaction costs of 6.6%. Furthermore, when a company's funds circulate cross-border, they almost cannot earn interest.
Therefore, it is not surprising that Stripe recently announced the launch of a stablecoin-based financial account. This allows businesses to access USD financial accounts supported by stablecoins, mint/redeem stablecoins directly through Bridge, and transfer funds to other wallet addresses through the Stripe dashboard. Using the Bridge API for fiat currency inflows and outflows, issuing payment cards supported by stablecoin balances (depending on the region, currently using Lead Bank), exchanging for other currencies, and ultimately directly exchanging for interest-bearing products for fund management. Although many functions still rely on traditional systems as temporary solutions, the sending, receiving, issuing, and exchanging of stablecoins and tokenized assets do not depend on traditional systems. The solutions for fiat currency inflows and outflows are similar to the current state of alternative payment methods (APMs), with companies like Wise and Airwallex essentially creating their own banking networks to hold funds in different countries and settle net amounts at the end of the day. Airwallex's co-founder Jack Zhang pointed this out correctly last week, but he did not consider how the world would change if fiat currency inflows and outflows were no longer needed.
If you purchase tokenized assets using stablecoins without needing to convert them to fiat, you essentially bypass the traditional agency banking model completely. This significantly reduces users' reliance on third parties that actually hold and transmit assets, allowing customers to capture more value and lower payment costs for everyone. Startups like Squads protocol, Rain cards, and Stablesea are working to realize the possibility of directly buying and selling tokenized assets through stablecoins, and all companies operating in this field will ultimately expand across the entire network.
However, if you want to exchange stablecoins for fiat currency, Conduit Pay can work directly with the largest foreign exchange banks in local markets to achieve seamless, low-cost, and nearly instant on-chain cross-border transactions. Wallets become accounts, tokenized assets become products, and blockchain becomes a network, significantly improving user experience; if fiat currency inflows and outflows are not needed, costs can be lower. All of this can be achieved through better technology, providing simpler reconciliations, more autonomy, higher transparency, faster speeds, stronger interoperability, and even lower costs.
So what does all this mean?
This means that a payment-native world existing on-chain, based on stablecoins (digital changes on the ledger), is coming. It will not only connect current payment models but will gradually replace them. That is why we are about to see the first trillion-dollar financial technology company based on stablecoins emerge.
I know this article will provoke many reasonable criticisms, such as not considering certain issues. But please understand that I and many entrepreneurs in this field are already aware of these issues and are working hard to address them. Innovation works this way; incremental building on old systems will never truly lead to brand new systems because vested interests will always obstruct such occurrences.
Closed Loop + Trusted Intermediary → Open Loop + Trusted Intermediary → Open Loop + Partial Personal Autonomy → Truly Open Digital Native Systems, where anyone can compete across the entire payment network, allowing customers to exercise autonomy through an open network.
This article only represents the author's subjective views and does not necessarily reflect the views of Dragonfly or its affiliates. Dragonfly may have invested in the companies mentioned in this article.
