a16z Report: The Liquidity, Sovereignty, and Credit Challenges Behind the Rise of Stablecoins

The influence of stablecoins is increasing, and traditional finance is gradually integrating them. This article discusses the challenges brought by stablecoins in terms of liquidity, sovereignty, and credit, and raises issues such as 'currency unity,' the global impact of USD stablecoins, and the potential impact of government bonds as collateral, laying the foundation for the future financial system. This article is based on a piece written by a16z crypto partner Sam Broner, compiled and written by Deep Tide TechFlow. (Background: Ripple applied for a 'US banking license,' CEO: Once approved, $RLUSD will become the new standard for stablecoins) (Background supplement: The US House of Representatives started a 'Crypto Week' legislative marathon on the 14th: stablecoins, regulatory boundaries, anti-CBDC!) Traditional finance is gradually integrating stablecoins into its system, and the trading volume of stablecoins is also continuously increasing. Due to their fast, almost zero-cost, and easy-to-program characteristics, stablecoins have become the best tool for building global fintech. The transition from traditional technology to new technology means we will adopt fundamentally different business models. However, this transformation will also bring new risks. After all, the self-custody model based on digital assets is a disruptive change to the banking system that has relied on registered deposits for hundreds of years. So, during this transformation process, what broader monetary structure and policy issues need to be addressed by entrepreneurs, regulators, and traditional financial institutions? This article delves into three major challenges and potential solutions, where both startups and builders in the traditional finance sector can find current focal points: the unity of currency; the application of USD stablecoins in non-USD economies; and the potential impacts of a better currency supported by government bonds. 1. 'Unity of Currency' and the Construction of a Unified Currency System 'Unity of Currency' refers to the ability for various forms of currency within an economy to be exchanged at a fixed ratio (1:1), regardless of who issues the currency or where it is stored, and to be used for payment, pricing, and contract fulfillment. The unity of currency indicates that even if multiple institutions or technologies issue similar currency tools, there is still a unified currency system within the economy. In practice, whether you have dollars in your JPMorgan account, dollars in your Wells Fargo account, or a balance on Venmo, they should always equal stablecoins and maintain a 1:1 ratio. This principle holds true even if these institutions differ in how they manage assets and have significant but often overlooked differences in their regulatory status. The history of the US banking industry, to some extent, is a history of ensuring the interchangeability of dollars and continuously improving related systems. Global banks, central banks, economists, and regulators advocate for the 'unity of currency' because it greatly simplifies transactions, contracts, governance, planning, pricing, accounting, security, and everyday transactions. Today, both businesses and individuals have long taken the unity of currency for granted. However, 'currency unity' is not how stablecoins currently operate, as stablecoins have not yet been fully integrated with existing infrastructure. For example, if Microsoft, a bank, a construction company, or a homebuyer tries to exchange $5 million of stablecoins on an Automated Market Maker (AMM), due to slippage caused by insufficient liquidity depth, the user will not achieve a 1:1 exchange ratio, and the final amount obtained will be less than $5 million. If stablecoins are to fundamentally transform the financial system, this situation is clearly unacceptable. A universal par-value exchange system would help stablecoins become part of a unified currency system. If stablecoins cannot serve as part of a unified currency system, their potential function and value will be greatly diminished. Currently, the way stablecoins operate is that issuing institutions (such as Circle and Tether) provide direct redemption services for their stablecoins (USDC and USDT, respectively), primarily aimed at institutional customers or users through a verification process, usually accompanied by a minimum transaction amount. For example, Circle offers Circle Mint (formerly Circle Account) for enterprise users to mint and redeem USDC; Tether allows verified users to redeem directly, usually requiring a certain threshold (e.g., $100,000). The decentralized MakerDAO allows users to exchange DAI for other stablecoins (such as USDC) at a fixed exchange rate through its Peg Stability Module (PSM), effectively acting as a verifiable redemption/exchange mechanism. While these solutions are effective, they are not universally available and require integration with each issuing institution individually. Without direct integration, users can only exchange or 'get out of positions' between stablecoins through market execution, without settling at par value. In the absence of direct integration, some businesses or applications may claim to maintain an extremely narrow exchange range, such as always exchanging 1 USDC for 1 DAI at a spread of 1 basis point. However, this promise still depends on liquidity, balance sheet space, and operational capabilities. In theory, Central Bank Digital Currencies (CBDCs) could unify the currency system, but they come with numerous issues: privacy concerns, financial surveillance, restricted money supply, slowing innovation, etc., so a better model that mimics the existing financial system is almost destined to win. For builders and institutional adopters, the challenge lies in how to construct a system that allows stablecoins to become 'pure currency' like bank deposits, fintech balances, and cash, despite differences in collateral, regulation, and user experience. The goal of incorporating stablecoins into currency unity presents the following construction opportunities for entrepreneurs: 1. Widely Available Minting and Redemption Mechanisms Stablecoin issuers need to closely collaborate with banks, fintech companies, and other existing infrastructures to create seamless and par-value funding on/off ramps. Achieving par-value interchangeability of stablecoins through existing systems can make stablecoins indistinguishable from traditional currency, thus accelerating their global adoption. 2. Stablecoin Clearing Centers Establish decentralized cooperatives, similar to a stablecoin version of ACH or Visa, to ensure immediate, frictionless, and transparent exchange experiences. MakerDAO's Peg Stability Module (PSM) has provided a promising model, but if the protocol could be expanded based on this to ensure par-value settlements between participating issuers and with fiat USD, it would be a more revolutionary solution. 3. Developing a Credible Neutral Collateral Layer Transfer the interchangeability of stablecoins to a widely accepted collateral layer (such as tokenized bank deposits or wrapped government bonds), allowing stablecoin issuers to innovate in branding, marketing, and incentive mechanisms while enabling users to easily unpack and convert as needed. 4. Improved Exchanges, Trading Intentions, Cross-Chain Bridges, and Account Abstraction Utilize improved versions of existing or known technologies to automatically find and execute the best funding on/off ramps or exchange methods to achieve optimal rates. Construct multi-currency exchanges that minimize slippage. At the same time, hide these complexities to provide stablecoin users with a predictable fee experience even under large-scale use. 2. The Global Demand for USD Stablecoins: A Lifeline Amid High Inflation and Capital Controls...