Thread by @ChainLinkGod

1/ Stablecoins are the Trojan Horse that will bring smart contracts to the masses

Why?

They’re the probably the first and only real-world use-case of crypto today that is fully sustainable and rapidly scaling

A 🧵 on #Stablecoins and how they’ll take over the global economy

2/ Stablecoins are fundamentally a simple concept

A blockchain-based token whose value is pegged to another currency (typically the US dollar)

This results a superior form of fiat:

Programmable
Permissionless
Borderless
Low-cost
Fast settlement
Interoperable
Highly liquid

3/ Fully collateralized stabecoins can achieve these desired properties without external incentives

The economics incentives of DeFi have helped fuel their growth (subsidized yield)

But ponzinomics are not required for $USDT, $USDC, $BUSD, $DAI to exist and thrive

4/ In other words, collateralized stablecoins do not require new money to keep entering the system to stay afloat

Exchange rates on exchanges may temporarily slip, but redeemability for the underlying assets leads to repegs

Stability is naturally achieved and strengthened

5/ The total marketcap of stablecoins ($155B) would make it a top 25 bank in the United States by AUM

They simply cannot be ignored by institutions, academics, or regulators at this point

Stablecoins are the bridge between the crypto economy and the real-world economy

6/ However, stablecoin regulation is inevitable

This will probably include:
- Guidelines on what can be called a stablecoin
- Shutting down fraudulent schemes
- Require KYC/AML on specific actions

Regulation could go more strict, but I am optimistic

7/ It’s really not in a regulator’s best interest to crack down on stablecoins

They reinforce the dollar as the global reserve currency in this new economy (on the surface)

A CBDC (in the US) won’t happen for a long time and won’t have the properties that consumers care about

8/ But regardless, risk of a full regulatory crack down still exists and centralized stablecoins are by far the most at risk

It’s why so much focus have been put on decentralized stablecoins, but it’s an incredibly hard problem to solve

Generally there’s three approaches

9/ Overcollateralized is safe and stable, but capital inefficient and can’t meet demand without centralization

Undercollateralized is capital efficient, but much too risky and can easily death spiral collapse

1:1 collateralization is ideal balance, but inherently centralized

10/ Given their simplicity and efficiency, centralized USD-backed stablecoins remain by-far the most widely adopted

Hopefully one day, we overcome the challenges and create a decentralized stablecoins that safely exist at scale

But until then, USD-backed approach is the way

11/ Regardless of what the uncertain future of stablecoins will look like, one thing is true

Stablecoins are the Trojan Horse that will bring smart contracts to the masses

Once you experience the benefits firsthand, there is simply no going back

12/ There are still many improvements that need to be made around the user-experience and onboarding process

But the network effects of permissionless blockchains (+rollups) that stablecoins operate on are unparalleled

Such challenges can be solved

https://twitter.com/chainlinkgod/status/1527011257726996482

13/ The idealist would say that people should just ditch their dollars and begin transacting in crypto-native assets today

The purchasing power of the dollar has indeed collapsed -96% in the past 100 years

The dollar is the ultimate shitcoin (infinite supply, central issuer)

14/ But in reality, a more pragmatic transitionary phase is required

People get paid in dollars, price things in dollars, spend in dollars, and pay taxes in dollars

You can’t throw people into the deep-end, you have to walk with them

Stablecoins are the entry point

15/ A large part of this shift towards stablecoin usage will happen on the institutional front

First for internal operations, then for external operations

The ability to transmit dollars between institutions becomes frictionless and orders of magnitude faster and cheaper

16/ They can then being leveraging existing DeFi protocols

- Exchange one stablecoin for another (@CurveFinance)
- Earn yield on the stablecoins (@ConvexFinance)
- Borrow/lend the stablecoins (@AaveAave)

Again, first internally and then externally

17/ It just takes one institution to make the leap and the rest follow as they don’t want to be left behind

This will more than likely require identity protocols, and ideally one that is privacy preserving

At this point, the advantages of smart contracts are evidently clear

18/ Existing paper-based agreements begin to be replaced with deterministic smart contract agreements

With each deployed smart contract, interactions between counterparties become increasingly trust-minimized

Assets get tokenized and value-flow becomes entirely frictionless

19/ Likewise, there will probably be a parallel track focused on retail

This will be driven by greater education around self-custody and by a number of FinTechs focused on simplifying the experience

There will be a @Venmo scale app based entirely on transacting stablecoins

20/ This will evolve to merchants widely adopting stablecoins via Point-of-Sale solutions due to user demand and lower fees

@Visa is likely to lead or quickly join this bandwagon

This is the OG P2P digital cash narrative, but a reality for a large and growing number of people

21/ Users will then demand to be able to do more things with stablecoins, which will lead to the creation of full stack “superapps”

Like @Alipay in China, but self/MPC-custody and providing a simplified + holistic view into the Web3 economy including DeFi, P2E, NFTs, etc

22/ At this point, stabecoins and smart contracts will have become an integral part of the global economy

Just as we couldn’t imagine the world today without Internet

Naturally, Chainlink will play a crucial role in making this a reality both in its initial stages and at scale

23/
- Proof of Reserve for automated on-chain audits of collateral
- Price Feeds for DeFi apps using stablecoins
- CCIP for transferring stablecoins between blockchains
- Enterprise abstraction layer for enabling seamless access
- DECO for privacy-preserving identity credentials

24/ Ultimately, the end-result is a more trust-minimized society where people can exchange value freely

Crypto as a whole isn’t quite mainstream ready, but stablecoins are the most clear use-case that already meets real-world user demand today

25/ The path that I’ve laid in this thread is not necessary the future, but a future that I think has a high probably of occurring

More thoughts on the current state of the crypto ecosystem and what steps are needed going forward are below 👇

https://twitter.com/ChainLinkGod/status/1524073601434996737