Thread by @binji_x

everyone’s talking about stablecoins
but most people miss what’s actually happening under the hood.

we’re reviving one of the most radical ideas in banking history:

narrow banking, rebuilt onchain. ↓

to understand this shift, you need to know two models:

fractional reserve banking
vs
narrow banking

this ideas affect how money works, how credit flows, and what role banks play.

fractional reserve banking is what we use today.

banks keep a fraction of deposits in reserve (say 10%) and lend out the rest.

this lets them create money through credit.

but it also makes them fragile.

when too many people withdraw at once,

and the bank doesn’t have enough in reserves:

you get a bank run.

it’s happened over and over with the 2008 crisis perhaps being the most famous version in recent memory.

narrow banking is the opposite:

you don’t lend,

you just take deposits and hold 100% reserves in cash or government securities.

no leverage
no credit creation
no risk of a run

the idea goes back decades!

the “chicago plan” in the 1930s,

irving fisher,

keynes;

they all wanted a safer system.

but wall street didn’t.

lending was too profitable,

so the idea died.

but now it’s back thanks to stablecoins

major stablecoins, and initiatives like blackrock’s BUIDL are:

fully reserved,
transparent,
& always liquid.

these onchain systems don’t lend or create credit.

they just store value (usually in t-bills or cash)

they give users fast, stable money and they earn yield off of what are technically the safest assets in the world

(*imo this yield should be passed to users).

this model has serious upside:

- no bank runs

- instant payments

- native compatibility with smart contracts

- transparency (by being on a blockchain, which is an immutable open ledger)

- trustless collateral for new financial apps

but there are tradeoffs too:

- no lending = less credit creation

- limited ability to stimulate growth in a downturn

- regulators worry about systemic shadow banks forming outside the banking system

which is why policy is heating up

what makes blockchains different here?

transparency!

in the fiat system, you rely on quarterly audits and trust

by being onchain, you can check reserves in real time!

you can see where funds sit, how they move, and what backs them

this can be considered narrow banking with proof.

considered as a system that’s safer by design and one more transparent by default.

here, you don’t need to trust, you can verify.

and the composability is wild
onchain narrow banks plug into:

- defi
- global fx
- real-time settlements
- cross-border payroll
- tokenized treasuries
- programmable payments

and lots more..remember; composability and global access is the ultimate unlock.

stablecoins may seem “boring”

i certainly thought so at first

but it gets more interesting when you see that they’re not just new money;
they’re a new kind of bank

a better version of something we abandoned 100 years ago

and this time, it might actually work.

narrow banking is back

but now it’s faster

it’s global
it’s onchain
it’s transparent
and immutable

it’s not binary, we can have both.