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The programmable fintech stack

A letter to USDC, Base, & Daimo

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Key Takeaways

  1. There are two schools of thought when it comes to stablecoins: USDT seems to be leading the Eurodollar use case while USDC seems to be the prime candidate for the fintech use case.

  2. Rollups + EIP-4844 + Account Abstraction is now making stablecoin use possible at a large and efficient scale while abstracting away crypto UX.

  3. The combination of Base L2 and Circle-Coinbase partnership seems like an unstoppable force. As Base starts to attract more developers, we'll see a huge increase in the number of stablecoin products that work seamlessly like Daimo.

A letter to USDC, Base, & Daimo

A few weeks ago, I wrote a letter called Meet Stablecoin's dad: Mr. Eurodollar. The post was inspired by Nic Carter's talk at Token2049 where he discusses the parallels between the rise of Eurodollars to what's happening with stablecoins right now.

The key takeaway from that post was that people and businesses outside of America have wanted to interact with dollars without American oversight since the 1950s. It can be tough for Americans to understand the importance of stablecoins for the rest of the world. This is one of the few technologies that makes sense to everyone else first.

Now here's the thing. I believe there's more to the picture. In this letter, I'm going to discuss how we're at the start of a new race in the stablecoin world. And this time around, there's another horse that might be worth betting on.

Today's letter will have 3 sections:

  1. Pulse check

  2. Stablecoin's version of BTC vs. ETH

  3. Programmable Fintech

Let's dive in 🚀


Pulse Check

To get started, let's look at the stablecoin metrics to better understand where we are today.

Last summer, Brevan Howard Digital put together this brilliant report providing more stablecoin data than you could imagine.

After going through the 40 page analysis, I want to emphasize two main takeaways:

  1. Stablecoins are here to stay

  2. Tether dominates the stablecoin world

Stablecoins are here to stay

In the last 6 years, stablecoin usage has significantly increased. As someone who always ignored stablecoins as an essential crypto use case, seeing the numbers below blew my mind. It was a reality check and helped me realize that crypto is a lot bigger than my corner on crypto twitter Farcaster.

There are over 25 million wallets that hold over $1 in stablecoins. Of these, 80% hold between $1 and $100. For a sense of scale, a US bank with 25 million accounts would rank as the 5th largest bank.

Unique Weekly Active Adresses

In 2022, stablecoins settled $11tn onchain, dwarfing the volumes processed by PayPal ($1.4tn), almost surpassing the payment volume of Visa ($11.6tn)....It is remarkable that in just a few years, a new global money movement rail can be compared with some of the world's largest and most important payment systems.

USDT dominates the stablecoin world

In the little time that I did care about and use stablecoins, it was always centered around USDC. I've never used Tether nor have interacted with Tron and Binance. Once again, it turned out I was in the minority.

In terms of activity, the clear winner here is Tether on Tron. 76% of stablecoin transactions currently use USDT while only 19% use USDC.

# of Transactions by Stablecoin
Weekly Active Adresses - Blockchain / Coin

There's also a couple of points I'd like to add from Liam Horne's incredible blog post from a few weeks ago to help us get a full pulse check on stablecoins:

  • Stablecoins today make up 70% of all cryptocurrency transaction volumes despite only composing 10% of the entire cryptocurrency market cap

  • More than a third of Latin American consumers say they have made a payment for an everyday purchase with stablecoin

  • Since the end of 2021, stablecoin transaction volumes have dropped only 11%, compared to centralized exchange volumes, which are down 64%

Liam sums it up perfectly: "Global access to the US dollar has really turned out to be a killer app".

It may seem as if the stablecoin race is over. Tether has won and the rest of the world is increasingly adopting stablecoins to transact with vendors and hedge against their national currency.

But I believe there's a few developments happening in America that will start shifting the tide in USDC's favor.

To better understand this, let's add some context on USDT and USDC.


Stablecoin's version of BTC vs ETH

For those of you that don't know stablecoin history, it's important to realize that Tether was the first stablecoin and launched in 2014 while Circle launched USDC in 2018. That means Tether had a first mover advantage for 4 years to get USDT out to the masses before anyone else. There was literally no competition.

Along with the time advantage, Tether benefited from Justin Sun's mission to make Tron blockchain the goto settlement layer for USDT. This made it practical to use Tether for most people around the world - Tron was quick and cheap to use by a long shot compared to Ethereum. This partnership that formed in 2019 was crucial in proliferating USDT before the others even had a chance to play.

With these points in mind, the 76% Tether domination that exists today in the stablecoin market starts to make sense.

With that being said, things haven't always been smooth sailing for Tether. There has been plenty of controversy around their lack of transparency and auditing, banking issues, market manipulation, and other regulatory actions against them.

Tether has always been tainted by a shady iFinex (Tether's parent company) that's based out of the British Virgin Islands. The reality is that Tether has no real commitments to the U.S. government and can operate at their own will. And you know what? For many people in Asia or Russia, that freedom from American oversight is a Tether feature not a bug.

But for American institutions, it's simply too risky to interact with USDT. In fact Bluechip rates Tether as a "D" grade stablecoin.

Bluechip

There is a clear need for an alternative stablecoin that is green flagged by D.C.

And that's where Circle & USDC come in.

Since Jeremy Allaire founded Circle in 2013, the north star has always been to be regulatory compliant. Very similarly to Coinbase, Circle has been playing the long game in terms of doing everything it needs to play fair and not overstep regulations.

And if there's anything we've learned in the last year is that transparency and compliance are the crucial ingredients to long term success in crypto. There's a reason Coinbase has survived every crypto winter while FTX collapsed in a few years and CZ might be serving time in jail.

A few weeks ago, Circle filed for an IPO and is just waiting on SEC approval at this point. Polymarket thinks there's a 55% chance the company goes public by June.

Polymarket

This IPO, along with Coinbase's extensive USDC support, will play a huge role in changing the perspective of how American companies think about using stablecoins.

Okay, but now the question is...why would American companies even care about stablecoins?

Well, it's important to point out stablecoin's two school of thoughts. This was a big unlock for me in realizing Circle's roadmap ahead.

  1. Eurodollar use case: The first school of thought is what we've discussed above...the need for people outside of America to use dollars without U.S. oversight.

  2. Fintech use case: The second school of thought is the idea of using stablecoins and crypto rails to rebuild the fintech infrastructure that exists today.

To be clear, both of these school of thoughts obviously have overlapping principles and are directionally the same. However, there are subtle differences between each that attract separate crowds.

Think of this as stablecoin's Bitcoin vs Ethereum tribes. It's clear that both groups are passionate about core crypto principles. But within the ecosystem, the Bitcoin crowd tends to focus on the decentralization and anti-fiat aspects while the Ethereum crowed is focused on the web3 and consumer application side of things. Neither are right wrong, just different north stars.

Similarly, USDT seems to be the clear winner for the Eurodollar use case while USDC seems to be the prime candidate for the fintech use case. Once again...neither are wrong, just different north stars.

In fact, in a 2022 interview by Packy, Circle's VP of product Joao Reginatto mentions:

From the beginning of USDC’s development, Joao “wanted to build with APIs in mind, and with scalability from the developer’s point of view.” They needed APIs to handle issuance and redemption from the beginning. As soon as the team got USDC to market in 2018, most of it pivoted immediately towards building out APIs and developer tools and documentation.

But wait, Circle launched USDC in 2018....so why is all of this relevant now?

Because there is finally clarity around stablecoin regulations and the infrastructure is now able to meet the demand for crypto fintech use cases.

Rollups + EIP-4844 + Account Abstraction is now making stablecoin use possible at a large and efficient scale while abstracting away crypto UX.


Programmable Fintech

In the section above, I mentioned "rebuilding fintech with crypto rails" a few times. But what exactly does that mean?

Simply put, it means not being dependent on Banks that have heavy backends, janky APIs, and zero interoperability. My friend Kenan Saleh explained it to me like this:

"Most of fintech today is a set of thin wrappers that may seem clean at surface level but are a complete mess once you take a closer look"

In fact, I was shocked to learn that Plaid, a $14 billion company, is essentially a glorified web scraper company. Their product logs onto a financial institution's web interface and scrapes the relevant info needed with customer credentials in order to make the magic happen. This means that anytime a bank updates its UI, plaid will break and have to reconfigure the scraping.

The point is that the current tech is outdated and we now have technology that can totally flip the switch on fintech efficiency.

This doesn't translate to "we're anti-government" or "anti-fiat"...rather it's calling out the fact that there's now no need to have 3-5 day delays, intermediary fees, restrictions on cross border payments, etc. All of these issues can be fixed with the tools that two U.S. companies provide (Coinbase & Circle).

The combination of Base L2 + Coinbase exchange + Coinbase wallet + Circle/CB partnership seems like an unstoppable force.

Twitter

Daimo, a new payments app, is a prime example of a product that leans on this stack. The product runs on Base, enables users to instantly pay or receive USDC with anyone around the world, and transaction fees are covered by Coinbase to make it competitive with existing fintech products. Whenever I use Daimo, it feels like magic. I was shocked that I had just used a crypto app that seamlessly. No need to make a wallet and you can even text links (similar to Venmo) so other can pay you simply.

Daimo is showing us that there is a new race getting started in the stablecoin world. Can USDC attract the best developers to finally fulfill their goal of being "the http for money"? If they can, it's not crazy to think that USDC can catch up to Tether's market share in the next few years.

Note: this is not to say that Daimo won't add USDT and other chain support in their app later on but rather emphasizing that getting started with the Base + USDC combo made the most sense as the team wanted to prioritize trust and compliance.

This tweet by Salvino helped me realize that there's a golden opportunity for Coinbase to provide the initial momentum for developers to start building stablecoin infra on Base. It's similar to how AWS started the "AWS Activate" program in 2012 that incentivized thousands of developers to use AWS credits and get started on their projects.

Lastly, it's worth mentioning that Coinbase is already making waves around the world with the Coinbase wallet + USDC + Base L2 killer combo.

CB Blog

As Base starts to attract more and more developers, we'll see a huge increase in the number of stablecoin applications that work seamlessly like Daimo. And as American and western markets start picking up on the tech, it's not crazy to think that USDC network effects will proliferate in areas such as India, Latin America, etc.


That's all for today's letter, I know it was a bit long.

But if there's one thing you takeaway from this post, it should be the fact that the stablecoin race is far from finished. USDC is just now finding its footing and the L2 infrastructure is finally ready to support meaningful stablecoin applications on Ethereum.

Hope you all have a great rest of the week!

- YB

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