The New Wave of Stablecoins and Investment Opportunities

Stablecoins are essentially a set of standardized smart contracts that are pegged to the value of fiat currencies, primarily the US dollar. However, they are neither equivalent to fiat currency nor are they central bank digital currencies (CBDC).

The previous U.S. government had a friendly attitude towards stablecoins, believing they would help solidify the global position of the dollar. In contrast, they opposed CBDCs, fearing they could threaten individual freedoms. The EU and China, on the other hand, hold the opposite stance, supporting CBDCs but regulating stablecoins more strictly.

With the clarification of the stablecoin regulatory framework in the United States, the stablecoin network will be more deeply integrated into the dollar system. This indicates that the stablecoin market will face unprecedented fierce competition. Many financial institutions have already begun to enter this field.

Stablecoins are mainly used for value storage, medium of exchange, and payments. These functions fundamentally stem from their pegging to fiat currencies. However, the fast confirmation and programmable features of stablecoins make their efficiency in cross-border transactions and settlements far exceed that of traditional SWIFT systems. Currently, the annual settlement total of stablecoins is twice that of a well-known payment network.

During the first wave of stablecoins from 2018 to 2019, project teams were overly focused on licenses and assets, neglecting liquidity network effects and user experience, which led to the failure of most projects. In the upcoming second wave, due to the clarity of the regulatory framework, project teams will pay more attention to asset scale, liquidity network effects, and user experience.

In addition to the stablecoin projects launched by some large financial institutions, a large number of new stablecoin projects will also emerge in the market.

For ordinary investors, this wave has brought two main investment opportunities: one is to participate in yield farming for decentralized CDP stablecoin protocols, and the other is to focus on stablecoin infrastructure projects. The latter is relatively easier to grasp.

The infrastructure projects for stablecoins can be mainly divided into two categories: projects that provide liquidity support and projects that develop new application scenarios for stablecoins. These could become important components of the future stablecoin ecosystem.