Stablecoins are not meant to improve the existing payment network; they are intended to completely disrupt traditional payment networks. Stablecoins allow businesses to bypass traditional payment channels entirely, meaning these traditional payment channels could very well be completely replaced one day in the future.

When the payment network is based on stablecoins, all transactions are just digital changes on the ledger. Many emerging companies have already begun to drive the reconstruction of funding 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 views, when I contemplate how companies and protocols will create and accumulate value in the future under the new paradigm, viewing stablecoins merely as a platform to connect existing payment channels actually underestimates their true potential. Stablecoin payments represent an incremental improvement and the possibility of reimagining payment channels from the ground up.

To understand the future direction, we need to look back at history, as it reveals the obvious evolutionary path.

The 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 the payment intermediary between merchants and cardholders. Before Diners Club, almost all payments were made directly between merchants and customers through cash or proprietary bilateral credit agreements.

After Diners Club's great success, Bank of America (BofA) saw a tremendous opportunity to expand its credit business and reach a wider customer base, launching the first consumer credit card for the mass market. BofA mailed over 2,000,000 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 emergence of the first credit card payment network. However, this came with enormous operational challenges and resulted in severe credit risk, with delinquency rates soaring above 20%. Meanwhile, rampant fraud nearly caused the entire project to collapse.

People began to realize that the challenges and chaos in the banking network could only be addressed by establishing a truly cooperative organization that would set the rules for managing systems and provide infrastructure. Members of the organization could compete on product pricing but needed to adhere to unified standards. This organization later became known as Visa. Another organization founded by a California bank, which competed with Bank of America, became Mastercard. This marked the birth of our modern global payment model and has become the dominant structure in the global payments industry.

From the 1960s to the early 21st century, almost all innovations in the payments industry revolved around enhancing, supplementing, and digitizing the current global payment model. After the internet thrived in the 1990s, many innovations shifted to software development.

E-commerce emerged in the early 1990s, with the purchase of Sting's CD on NetMarket being the first internet payment. Subsequently, PizzaNet became the first national retailer to accept online payments. Well-known e-commerce companies like Amazon, eBay, Rakuten, and Alibaba were established in the following years. The prosperity of e-commerce companies led to the emergence of many early independent payment gateway and processor companies. The most notable were Confinity and X.com, founded in late 1998 and early 1999, respectively; they merged to become today's PayPal.

Digital payments have spawned numerous household names with market capitalizations in the hundreds of billions. These companies connect offline merchants with online retail, including payment service providers (PSPs) and payment facilitators (PayFacs) like Stripe, Adyen, Checkout.com, and Square. They address merchants' issues by bundling gateways, processing, reconciliation, fraud compliance tools, merchant accounts, and other value-added software and services. But clearly, they have not brought about a disruptive change 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 primarily work to bring new companies into the existing banking networks and infrastructures, instead of disrupting the existing payment networks. However, many companies find that simply adding a software layer to existing infrastructure does not lead to true explosive growth.

Some companies are well aware of the limitations of traditional payment methods and foresee that payment solutions can be built completely independent of traditional banking infrastructure through native internet-based currencies, the most famous of which is PayPal. Many startups in the early 2000s focused on the development of digital wallets, peer-to-peer transactions, and alternative payment networks. By completely bypassing banks and card issuing alliances, these companies give end customers a degree of currency autonomy, including PayPal, Alipay, M-Pesa, Venmo, Wise, Airwallex, Affirm, and Klarna.

They initially focused on providing a better user experience, product mix, and cheaper transactions for groups overlooked by traditional finance, but gradually began to capture increasing market share. Traditional financial payment companies felt the threat from these alternative payment methods (APMs), followed by Visa and Mastercard launching Visa Direct and Mastercard Send, respectively, also focusing on providing real-time payment services for peer-to-peer transactions. Although these models have seen significant improvements, they are still plagued by constraints of existing infrastructure. These companies still need to pre-fund or bear foreign exchange/credit risk while needing to hedge their own capital pools, making it impossible to achieve instant transparent settlements.

Essentially, the evolution path of modern payments is: closed loop + trusted intermediaries → open loop + trusted intermediaries → open loop + partial personal autonomy. However, opacity and complexity still dominate, resulting in a worse user experience, with rent-seeking situations at every stage of the network.

The evolution of merchant payments

Businesses can bypass part or all of the traditional payment network's technical infrastructure using stablecoins. The diagram below is a simplified illustration of merchant payments:

Source: Rob Hadick, Dragonfly

And the responsibilities of each part in the stablecoin payment network:

Source: Rob Hadick, Dragonfly

Currently, Stripe can handle a large part of the work on the merchant side of payments, 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 collateral approved by the GENIUS Act. Stablecoins can achieve atomic settlements between consumer and merchant accounts via a transparent open-source ledger (blockchain). There would no longer be a need for payment card banks and acquiring banks; Stripe (or any other issuer) would only need one (or a few) banks to custody the collateral backing its issued stablecoins.

They transact directly on the blockchain via wallets or initiate mint/redeem requests to Stripe (the issuer/central bank), subsequently settling 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 exchanging for other currencies/products can be programmed. With stablecoins and blockchain technology, the data transfer standards from banks to gateways, processors, and networks become easier. The transparency of data and reduction of stakeholders simplify costs and accounting.

In such a world, it seems that Stripe has nearly completely replaced the current payment model—possessing full infrastructure, providing accounts, issuing cards, credit, payment services, and networks, all built on better technology, thereby reducing intermediaries and allowing wallet holders to have nearly complete control over the flow of funds.

Simon Taylor: 'If you base everything on stablecoins, all transactions are just digital changes on the ledger. Merchants, gateways, PSPs, and banks previously needed to reconcile different ledger entries. With stablecoins, anyone operating with stablecoins is simultaneously a gateway, PSP, and acquiring bank; all transactions are just digital changes on the ledger.'

This sounds like science fiction. Are there many real issues related to fraud, compliance, the availability of stablecoins, liquidity/costs, etc.? Will there be incremental steps between today and this potential future? Technologies like Real-Time Payments (RTPs) will also have flaws; the 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. Leading issuers like Circle, Paxos, and withausd are expanding the functionalities of their products, and blockchain companies focused on payments like Codex, Sphere, and PlasmaFDN are also moving closer to end consumers and businesses. The future payment network will significantly reduce intermediaries while increasing autonomy, improving transparency, enhancing interoperability, and providing more value to customers.

Cross-border payments

B2B cross-border payments are currently one of the industries where the application of stablecoins has grown significantly.

Source: Rob Hadick, Dragonfly

Matt Brown wrote an article about cross-border payments last year, from which we can see:

Source: Rob Hadick, Dragonfly

In many cases, multiple banks are involved in cross-border transactions, all using SWIFT to transmit information. SWIFT itself has no issues, but the back-and-forth communication between banks incurs extra time costs, often involving other clearing counterparties. In fact, the clearing process typically takes 7 to 14 days to complete, undoubtedly bringing enormous 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 when transferring funds from the parent company in the U.S. to foreign subsidiaries. Additionally, there is foreign exchange risk between multiple counterparties, leading to an average increase of 6.6% in transaction costs. Furthermore, when a company's funds circulate cross-border, they are almost unable to earn interest.

Therefore, it is not surprising that Stripe recently announced the launch of stablecoin-based financial accounts. This enables businesses to access dollar financial accounts supported by stablecoins, directly mint/redeem stablecoins through Bridge, and transfer funds to other wallet addresses via the Stripe dashboard. Using the Bridge API for fiat currency inflows and outflows, issuing payment cards backed by stablecoin balances (depending on the region, currently using Lead Bank), exchanging for other currencies, and eventually directly redeeming for interest-bearing products for fund management.

Although many functionalities 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. Solutions for fiat currency inflows and outflows are similar to the current state of alternative payment methods (APMs), where companies like Wise and Airwallex have essentially created their own banking networks to hold funds in different countries and settle net amounts at the end of the day.

Jack Zhang, co-founder of Airwallex, correctly pointed this out last week, but he did not consider how the world would change if fiat currency inflows and outflows were no longer necessary.

If you are purchasing tokenized assets solely through stablecoins without needing to exchange for fiat currency, you are essentially bypassing the traditional agency model entirely. This will significantly reduce users' reliance on third parties that actually hold and send assets, allowing customers to capture more value and lower payment costs for everyone. Startups like Squads protocol, Rain cards, and Stablesea are working to enable the possibility of buying and selling tokenized assets directly with stablecoins, and all companies operating in this industry will eventually expand their capabilities across the entire network.

But if you want to exchange stablecoins for fiat currency, Conduit Pay can work directly with the largest forex banks in the local market to achieve seamless, cheap, and almost instant on-chain cross-border transactions. Wallets become accounts, tokenized assets become products, and blockchains become networks, significantly improving user experience; if fiat currency inflows and outflows are not needed, costs can be lower. All 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. This is why we will see the first trillion-dollar scale fintech companies based on stablecoins about to be born.

I know this article will provoke many reasonable criticisms, such as that I haven't considered certain issues. But please understand that I and many entrepreneurs starting in this industry are already aware of these issues and are working to solve them. Innovation is like this; building incrementally on old systems will never truly bring about a completely new system because vested interests will always obstruct its occurrence.

Closed loop + trusted intermediaries → open loop + trusted intermediaries → open loop + partial personal autonomy → truly open digital native systems, where everyone can compete in the entire payment network, and customers exercise autonomy through open networks.

This article represents the author's subjective views and does not necessarily reflect the views of Dragonfly or its affiliated companies. Dragonfly may have invested in some of the protocols or cryptocurrencies mentioned in this article.

  • This article is reprinted with permission from: (Foresight News)

  • Original title: (Stablecoins and the Collapse of the Legacy Payment Model)

  • Original author: Rob Hadick, Dragonfly

  • Translation: AididiaoJP, Foresight News

'Stablecoin Revolution: The Collapse of Traditional Payments is Imminent, and Trillion-Dollar Scale Stablecoin Companies are About to Emerge?' This article was first published in 'Crypto City'