PolyFlow is paving the way for PayFi.

Stablecoins, as a payment innovation, simplify the way value is transferred. These digital currencies are typically pegged to the US dollar, serving both as a store of value and a medium of exchange. Despite having only about five years of development history, stablecoins have already become a "killer application" in the crypto space, with annual transaction volumes surpassing major payment networks, creating a market parallel to traditional financial infrastructure.

With millions of users and trillions of dollars in transaction volume, stablecoins have become an essential part of the financial ecosystem. However, the definition and significance of this category remain unclear, let alone the transformative role of PayFi.

By reviewing history, particularly the rise and fall patterns of the banking industry, we can better understand the development trends of stablecoins and foresee the future of PayFi.

A16z partner Sam Broner's article "Understanding Stablecoins: A Useful Framework from Banking History" provides valuable perspectives on the future development of stablecoins through analogies with the history of the US banking industry, while also revealing potential futures for PayFi and other related fields.

The Historical Path of Banking

Like many innovations in the crypto space, stablecoins may follow a development trajectory similar to that of the banking industry. Their evolution begins with the issuance of stablecoins, akin to early bank deposits and paper currency, gradually encompassing on-chain DeFi activities and ultimately driving the development of PayFi.

Sam Broner's article introduces the history of the US banking industry, providing 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 based on the reputation of the issuing institution and the ease of exchange. Banks needed to balance the profitability of investing deposits with the security of those deposits. This tension is also reflected in the current landscape of stablecoins.

If fiat-backed stablecoins represent the current widely adopted stage of currency issuance, then asset-backed stablecoins are likely to become the next phase of credit creation in the crypto space. Today, banks invest deposits in various assets (including loans), which are crucial for increasing the money supply and enhancing capital efficiency. Similarly, stablecoins provide functionalities akin to bank deposits and paper currency in a decentralized, self-custodial form. 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 on-chain financial services globally, such as lending, wealth management, and investment. By integrating payments with financial services into a blockchain settlement layer, PayFi harnesses the advantages of stablecoin payments and DeFi, enhancing efficiency and enabling seamless value transfer.

Types of Stablecoins

Sam Broner's article categorizes stablecoins into three main types: fiat-backed, asset-backed, and strategy-backed synthetic dollars (SBSD). Fiat-backed stablecoins are similar to paper currency from the era of national banks, directly redeemable for fiat currency and supported by reserves. Asset-backed stablecoins mimic the way banks create new money through loans, utilizing highly liquid on-chain collateral.

Due to structural reasons, SBSD inevitably faces regulatory challenges and user experience barriers. Currently, they primarily serve as investment tools within DeFi products, struggling to overcome the investment dilemmas of traditional finance: the trade-off between yield, liquidity, and risk. Therefore, they are not suitable as reliable stores of value or mediums of exchange.

Recent innovations, such as yield-bearing stablecoins backed by US Treasury bonds and innovative models like PayFi, are breaking these financial investment constraints. PayFi integrates DeFi into payments, transforming every dollar into smart, autonomous funds, turning idle capital into productive assets while maintaining liquidity and generating returns, thus making every dollar work.

As more economic activities shift to the blockchain, two significant developments can be anticipated: a broader range of assets becoming applicable collateral for lending protocols, and asset-backed stablecoins occupying a larger share of the on-chain money supply. Over time, other types of loans may be securely issued on-chain, further expanding the on-chain money supply. While this transformation cannot be achieved solely through stablecoins, PayFi can facilitate it.

Key Points

While the innovation of stablecoins in payment systems may seem to disrupt traditional finance, it is essential to recognize that the fundamental properties of money (as a unit of value measurement) and its core functions (as a medium of exchange) remain unchanged. Therefore, stablecoins can be viewed as carriers or manifestations of money.

Given their monetary nature, the observed development patterns in modern banking history provide valuable insights for stablecoins. Sam Broner's article is particularly significant as it not only explores the issuance of money but also emphasizes how banks utilize credit as a tool for creating money. This perspective points the way 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 phase choice for credit creation. As more illiquid real-world assets (RWAs) are tokenized onto the blockchain, their primary role will not be circulation but rather serving as collateral, forming the underlying assets that support these asset-backed stablecoins.

Strategy-backed synthetic dollars, primarily used for DeFi yield products, face the traditional financial investment dilemma: the trade-off between yield, liquidity, and risk. By integrating DeFi with payments in the crypto space, PayFi ultimately transforms every dollar into smart, autonomous funds, including SBSD, thus making every dollar work.

Ultimately, the focus is on essence: the creation of stablecoins, synthetic dollars, or dedicated currencies aims to further reinforce the fundamental properties of money through digital currencies and blockchain technology. For PayFi, the goal is to enhance core functions, improve the efficiency of monetary operations, reduce operational costs, strictly control risks, and fully leverage the positive role of money in facilitating value exchange and promoting economic and social development.

PolyFlow is paving the way for PayFi

Stablecoins have the potential to revolutionize the payment industry by providing cheaper and more efficient remittance methods. PayFi, by creating a money supply and driving the next phase of stablecoin development, follows a path similar to that of banking development, further promoting its adoption.

For PolyFlow, the mission is clear: to build solutions that connect traditional systems with blockchain, making every transaction meaningful. As the infrastructure for PayFi, PolyFlow leverages advanced blockchain technology to drive innovative applications, accelerate adoption, and guide users toward a new financial paradigm. It aligns with the original vision of the Bitcoin white paper, unlocking the full potential of Web3.

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