In my previous post examining crypto’s PMFs and their durability, for editorial reasons I kept the stablecoins section simple. However, there’s a lot more detail to it, which also informs a lot of other usecases in crypto.

Stablecoins have three broad usecases:

1. In countries with hyperinflating currencies and restricted access to USD/EUR

2. Evading capital controls cross-border, or to/from countries with poor financial infra

3. Transferring between CEXs/DeFi etc.

First, stablecoins have achieved product-market fit not due to “decentralization” in itself. This is clearly evident from a vast majority of stablecoins in active use being USDT and USDC, which are defacto centralized. Further, in terms of volumes, the market is largely split between Ethereum/L2s and Tron. Tron is relatively centralized too, but it doesn’t really matter because USDT’s centralization is the bottleneck.

What most consumers of stablecoins want is easy access to USD - that’s all.

So, the real feature of public blockchains being leveraged here is a regulatory gap - there was no method to offer your currency to foreign individuals this easily before. But as Project Dunbar has proven, the technology to enable this is quite simple, and significantly more efficient than public blockchains. There are three ways this can go:

1. The US Fed launches a CBDC and makes it easily accessible to foreign banks and individuals

2. The US Fed continues with USDT and USDC, but USDT and USDC run their own (permissioned) networks. Indeed, USDC is experimenting with their own chain.

3. Some combination of all three, with public blockchain stablecoins continuing to persist in niches

There are elegant and democratic designs possible for CBDCs, too. My favourite is using ZKPs so all transactions are private below a large amount. And even beyond that, the ZKP verifies some conditions, without anyone knowing exact details of the transaction beyond what is required for law enforcement. This would be actually be more private than physical cash. Of course, it remains to be seen if a central bank is savvy enough to implement such a solution anytime soon. I’m sure it’ll happen though - there’s a big demand for physical cash in many countries still, and CBDCs with ZKPs are the only way to replicate that I’m aware of.

Either way, privacy is a significant step forward over both current digital fiat currencies and public blockchain stablecoins. Even if bridged a private rollup, they’ll still be under the control of USDC or USDT - and it could be they’ll prohibit use on private chains.

So, a well-designed, democratic CBDC offers a great option for people who just want access to USD. It’s also more private and actually more decentralized than a blockchain stablecoin - as you have to only deal with the Federal Reserve and optionally a custodian, rather than a private stablecoin issuer, a blockchain (like Tron, which is quite centralized), optionally a custodian, and Federal Reserve/US Treasury etc.

One usecase this may not replace is transferring funds between CEXs, or for use in DeFi. Once again, I expect a well-designed CBDC to be compatible with public blockchains. However, I can see crypto traders and DeFi users lean towards blockchain stablecoins. Particularly DeFi users may opt for (relatively) decentralized stablecoins like DAI - though this is probably going to be a small niche. Criminal activity may also prefer to use decentralized stablecoins, but this too will be a small niche.

The biggest problem about all of this is the crypto industry has become very complacent about its biggest consumer usecase. Today, everyone and their grandmas are throwing money at infra plays, while very, very few are investing in stablecoins. Most consumer use of stablecoins are on USDT/Tron and USDC/USDT on Ethereum L1. Both are expensive, and Tron is fragile and relatively centralized. This makes it very easily disruptible by CBDCs or USDT/USDC launching their own networks. It’s imperative that we move consumer stablecoin usage to more sustainable solutions like Ethereum L2s, as well as expand usage and introduce more competition to the market. A lot of work also needs to be done to improve UX and custodial solutions, so people don’t just default to storing their stablecoins on Binance. The less the crypto industry pays attention to stablecoins, the more fragile the PMF eventually becomes.

This post is not just about stablecoins, of course, but generally informs blockchain applications. A lot of purported usecases for blockchains don’t actually require blockchains; and even the ones that do are neglected in favour of infra speculation. No one seems to care that all this infra obsession is completely useless if you don’t focus on applications - the hour is already late.

In some cases, applications’ features are simply better accomplished by other solutions, while in others it may just be a regulatory gap that’ll eventually get filled. It’s imperative to analyse each usecase and application, exactly what features they require, and make pragmatic choices on the best solution.

There are only a handful of applications which need to be mostly or fully onchain - most applications are better off hybrid, using only one or two elements for public blockchains, while using peer-to-peer or traditional solutions elsewhere. This can lead to an application that’s much faster, cheaper, more feature-rich, better UX, and/or yes, more decentralized.