a16z Investor Deeply Analyzes the Evolution of Stablecoins: The Future of Stablecoins Through the Lens of 250 Years of Banking History
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a16z Investor Deeply Analyzes the Evolution of Stablecoins: The Future of Stablecoins Through the Lens of 250 Years of Banking History
Stablecoins could rapidly reenact banking history.
Navigating Web3 tides with focused insightsAuthor: Sam Broner
Translation: TechFlow
Millions of people have transacted trillions of dollars using stablecoins, yet definitions and public understanding of this category remain unclear.
Stablecoins are stores of value and mediums of exchange, typically pegged to the U.S. dollar—but not necessarily so. They can be understood across two dimensions: from under-collateralized to over-collateralized, and from centralized to decentralized. This framework helps clarify the relationship between technical structure and risk, and dispels misconceptions about stablecoins. I will build on this framework to offer another useful way of thinking about them.
To understand the richness and limitations of stablecoin design, we can draw lessons from banking history: what has worked, what hasn't, and why. Like many products in crypto, stablecoins may rapidly retrace the evolution of banking—from simple paper notes to increasingly complex lending mechanisms that expand the money supply.
First, I’ll review recent stablecoin history, then take you back through banking history to draw meaningful comparisons between stablecoins and traditional bank structures. Stablecoins deliver a user experience similar to bank deposits and paper currency—convenient, reliable stores of value, media of exchange, and vehicles for lending—but in a disintermediated, “self-custodied” form. Along the way, I’ll evaluate three types of tokens: fiat-backed stablecoins, asset-backed stablecoins, and strategy-backed synthetic dollars.
Let’s dive in.
A Brief Recent History of Stablecoins
Since the launch of USDC in 2018, the most widely adopted U.S. stablecoin has provided enough evidence to show which designs succeed and which do not. It's now time to clearly define this space. Early users relied on fiat-backed stablecoins for transfers and savings. While decentralized over-collateralized lending protocols produced useful and reliable stablecoins, demand remained muted. To date, consumers have shown a clear preference for dollar-denominated stablecoins over alternatives denominated in other fiat or novel currencies.
Certain categories of stablecoins have failed outright. Decentralized under-collateralized stablecoins, though more capital-efficient than their fiat-backed or over-collateralized counterparts, ended in disaster in their best-known cases. Other categories remain nascent: yield-bearing stablecoins intuitively sound appealing—who doesn’t like yield?—but face hurdles in user experience and regulation.
Other dollar-denominated tokens have emerged by leveraging the product-market fit achieved by stablecoins. Strategy-backed synthetic dollars (described in more detail below) represent a new product category that, while resembling stablecoins, fails to meet key standards of safety and maturity. Their higher-risk yields are accepted by DeFi enthusiasts as investments rather than as stable value instruments.
We’ve also seen rapid adoption of fiat-backed stablecoins, favored for their simplicity and perceived safety, while asset-backed stablecoins have lagged in adoption despite traditionally dominating deposit investments. Viewing stablecoins through the lens of traditional banking structures helps explain these trends.
Bank Deposits and the U.S. Dollar: A Bit of History
To understand how modern stablecoins mimic bank structures, it’s helpful to know the history of U.S. banking. Before the Federal Reserve Act (1913), and especially before the National Banking Acts (1863–1864), different forms of the U.S. dollar were not treated equally. (For those interested in learning more, the U.S. went through three eras before establishing a national currency: the Central Bank Era [First Bank 1791–1811 and Second Bank 1816–1836], the Free Banking Era [1837–1863], and the National Banking Era [1863–1913]. We’ve tried nearly every model.)
Prior to the creation of the Federal Deposit Insurance Corporation (FDIC) in 1933, deposits had to be individually assessed for bank-specific risk. The “real” value of banknotes (cash), deposits, and checks could vary based on the issuer, ease of redemption, and the issuer’s reliability.
Why was this the case? Because banks face a fundamental tension between profitability and depositor safety.
To earn profits, banks must invest deposits and take risks; to ensure deposit safety, they must manage those risks and maintain adequate cash reserves. Until the late 19th century, different forms of money were seen as carrying different levels of risk—and thus had different real-world values. After the Federal Reserve Act of 1913, the U.S. dollar gradually came to be viewed as fungible (in most cases).
Today, banks use dollar deposits to buy government bonds and stocks, make loans, and engage in simple strategies like market making or hedging—all permitted under the Volcker Rule. Introduced in 2008, this rule aims to reduce bankruptcy risk by limiting speculative activities at retail banks. Lending is particularly important in banking and represents how banks increase the money supply and enhance capital efficiency in the economy.
Although ordinary bank customers may assume all their funds are sitting safely in deposit accounts, this isn’t true. Yet thanks to federal regulation, consumer protections, widespread adoption, and improved risk management, consumers treat their deposits as relatively risk-free whole balances. Banks balance profit and risk behind the scenes, and most users don’t fully understand what happens to their deposits—but even during economic turmoil, they remain confident in the safety of their deposits.
Stablecoins offer users many of the familiar experiences of bank deposits and paper money—convenient, reliable stores of value, media of exchange, and lending tools—but in a disintermediated, “self-custodied” form. Stablecoins will follow in the footsteps of their fiat predecessors. Their use will begin with simple digital notes, but as decentralized lending protocols mature, asset-backed stablecoins will grow in popularity.
Viewing Stablecoins Through the Lens of Bank Deposits
With this context, we can assess three types of stablecoins through the lens of retail banking: fiat-backed stablecoins, asset-backed stablecoins, and strategy-backed synthetic dollars.
Fiat-Backed Stablecoins
Fiat-backed stablecoins resemble U.S. banknotes during the National Banking Era (1865–1913). At that time, banknotes were bearer instruments issued by banks; federal regulations required customers to redeem them for equivalent greenbacks (specific U.S. Treasury notes) or other legal tender (“specie”). Although the value of banknotes could vary based on the issuer’s reputation, distance, and perceived solvency, most people trusted them.
Fiat-backed stablecoins operate on the same principle. They are tokens that users can directly redeem for a well-known, trusted fiat currency, subject to similar constraints: while banknotes were bearer instruments redeemable by anyone, holders might not live near the issuing bank. Over time, people learned they could find others willing to exchange banknotes for greenbacks or specie. Similarly, users of fiat-backed stablecoins now increasingly trust that they can reliably find counterparties—on Uniswap, Coinbase, or other exchanges—willing to trade high-quality fiat-backed stablecoins at par with one dollar.
Driven by regulatory pressure and user preferences, more users are shifting toward fiat-backed stablecoins, which now account for over 94% of total stablecoin supply. Circle and Tether dominate issuance in this category, jointly issuing over $150 billion in dollar-denominated fiat-backed stablecoins.
Why do users trust fiat-backed stablecoin issuers? After all, these stablecoins are centrally issued, and a run on stablecoin redemptions is easy to imagine. To mitigate these risks, fiat-backed stablecoin issuers increase trust through audits conducted by reputable accounting firms. For example, Circle undergoes regular audits by Deloitte. These audits aim to verify that stablecoin issuers hold sufficient fiat or short-term Treasury reserves to cover near-term redemptions and that each stablecoin is fully backed 1:1 by fiat collateral.
Verifiable proof of reserves and decentralized issuance of fiat-backed stablecoins are both possible but not yet realized. Verifiable proof of reserves would enhance audit transparency and is technically feasible today via methods such as zkTLS (zero-knowledge Transport Layer Security, also known as web proofs), though it still relies on trusted centralized authorities. Decentralized issuance of fiat-backed stablecoins may be feasible but faces significant regulatory hurdles. For instance, achieving decentralized issuance would require holding U.S. Treasuries on-chain with risk profiles similar to traditional ones—a currently infeasible setup. If achieved, however, it would further strengthen user trust in fiat-backed stablecoins.
Asset-Backed Stablecoins
Asset-backed stablecoins originate from on-chain lending. They mirror the mechanism by which banks create new money through loans. Decentralized over-collateralized lending protocols like Sky Protocol (formerly MakerDAO) issue new stablecoins backed by highly liquid collateral on-chain.
To understand how this works, consider checking accounts. Funds in checking accounts are part of a complex system of loans, regulation, and risk management that creates new money. In fact, most of the circulating money supply—what economists call M2—is created through bank lending. While banks create money via mortgages, auto loans, commercial loans, and inventory financing, lending protocols use on-chain tokens as collateral to generate asset-backed stablecoins.
This system of creating new money through lending is known as fractional reserve banking, formally established with the Federal Reserve Act of 1913. Since then, fractional reserve banking has matured significantly, with major updates in 1933 (creation of the FDIC), 1971 (Nixon ending the gold standard), and 2020 (reserve requirement ratios reduced to zero).
Each change increased consumer and regulatory confidence in the system of money creation through lending. Over the past 110+ years, lending has generated an ever-larger share of the U.S. money supply and now dominates it.
Consumers don’t think about these loans when using dollars for good reasons. First, deposited funds are protected by federal deposit insurance. Second, despite major crises like 1929 and 2008, banks and regulators have continuously improved practices and processes to reduce risk.
Traditional financial institutions employ three main methods for safe lending:
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Against assets with liquid markets and fast liquidation practices (margin loans)
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Using large-scale statistical analysis of bundled loans (mortgages)
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Through careful, customized underwriting (commercial loans)
Decentralized lending protocols still represent a small share of stablecoin supply because they are early in development. Leading decentralized over-collateralized lending protocols are transparent, well-tested, and conservatively designed. For example, Sky—the most prominent collateralized lending protocol—issues asset-backed stablecoins backed by on-chain, exogenous, low-volatility, and highly liquid (easily sellable) assets. Sky also enforces strict rules around collateral ratios and has robust governance and auction mechanisms. These features ensure collateral can be safely sold even under adverse conditions, protecting the redemption value of its stablecoins.
Users can evaluate collateralized lending protocols based on four criteria:
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Transparency of governance
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Ratio, quality, and volatility of assets backing the stablecoin
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Security of smart contracts
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Ability to maintain loan-to-collateral ratios in real time
Like funds in checking accounts, asset-backed stablecoins represent newly created money via asset-backed loans—but with far greater transparency, auditability, and comprehensibility. Users can audit the collateral backing asset-backed stablecoins, whereas with traditional banks, they must simply trust executives’ investment decisions.
Moreover, blockchain’s decentralization and transparency can mitigate risks that securities laws aim to address. This is critical for stablecoins, as truly decentralized asset-backed stablecoins relying on digital-native collateral (rather than “real-world assets”) may fall outside securities regulation. This analysis likely applies only to asset-backed stablecoins using digital-native collateral, as such collateral can be protected through autonomous protocols without reliance on centralized intermediaries.
As more economic activity moves on-chain, two developments are foreseeable: first, more assets will become viable candidates as collateral in lending protocols; second, asset-backed stablecoins will claim a larger share of on-chain money. Other types of loans may eventually be issued safely on-chain, further expanding the on-chain money supply. Still, while users can evaluate asset-backed stablecoins, this does not mean every user will want to bear that responsibility.
Just as the growth of traditional bank lending, reduced reserve requirements, and maturation of lending practices took time, so too will the maturation of on-chain lending protocols. Therefore, it will take time before asset-backed stablecoins are as easy to use as fiat-backed stablecoins.
Strategy-Backed Synthetic Dollars
Recently, some projects have begun offering tokens with a face value of one dollar, combining collateral with investment strategies. While often categorized as stablecoins, strategy-backed synthetic dollars should not be considered stablecoins. Here’s why.
Strategy-backed synthetic dollars (SBSDs) expose users directly to actively managed trading risks. They are typically centralized, under-collateralized tokens combined with financial derivatives. More accurately, SBSDs are shares in open-ended hedge funds—an arrangement that is difficult to audit and may expose users to centralized exchange (CEX) risks and asset price volatility, especially during periods of significant market stress or prolonged negative sentiment.
These characteristics make SBSDs unsuitable for core stablecoin functions—reliable store of value or medium of exchange. Although SBSDs can be built in various ways with differing risk and stability profiles, they all offer a dollar-denominated financial product that might belong in an investment portfolio, but not as foundational money.
SBSDs can be constructed using a range of strategies, such as basis trading or participation in yield protocols like restaking protocols securing active validation services (AVSs). By managing risk and return—assessing slashing risks of AVSs, seeking higher-yield opportunities, or monitoring reversals in basis trades—projects can generate yield-bearing SBSDs.
Before using any SBSD, users should, as with any novel tool, deeply understand its risks and mechanics. DeFi users should also consider the consequences of using SBSDs within DeFi strategies, as a depeg could trigger severe cascading effects. When assets depeg or suddenly decline relative to their reference assets, derivatives relying on price stability and continuous yield may abruptly become unstable. However, when strategies include centralized, closed-source, or unauditable components, assessing and underwriting risk may be difficult or impossible. To underwrite risk, you must understand what you’re insuring.
While banks do run simple strategies with deposits, these are actively managed and constitute a small portion of overall capital allocation. Such strategies are poorly suited to support stablecoins because they require active management, making reliable decentralization or auditing difficult. SBSDs expose users to more concentrated risks than allowed in bank deposits. If users’ deposits were held this way, they would have good reason to be skeptical.
In practice, users have remained cautious toward SBSDs. Though popular among risk-seeking users, actual transaction volume remains low. Moreover, the U.S. Securities and Exchange Commission (SEC) has taken enforcement actions against issuers of “stablecoins” that functionally resemble shares in investment funds.
Stablecoins have already gained widespread adoption. The total value of stablecoins used in global transactions exceeds $160 billion. They primarily fall into two categories: fiat-backed stablecoins and asset-backed stablecoins. Other dollar-denominated tokens, such as strategy-backed synthetic dollars, despite growing awareness, fail to meet the definition of stablecoins intended for transactions or value storage.
Banking history serves as a useful reference—stablecoins must first consolidate around a clear, easily understandable, and readily exchangeable instrument akin to banknotes, just as Federal Reserve notes gained recognition in the 19th and early 20th centuries. Over time, we can expect the number of asset-backed stablecoins issued by decentralized over-collateralized lending protocols to grow, much like how bank lending expanded the M2 money supply. Finally, we can expect DeFi to continue evolving—not only by creating more SBSDs for investors but also by improving the quality and quantity of asset-backed stablecoins.
Yet this analysis—while potentially useful—can only take us so far. Stablecoins have already become the cheapest way to send dollars, meaning they have the potential to reshape industry structure in payments and enable existing companies, especially startups, to build on a new, frictionless, cost-free payment platform.
Acknowledgments: Special thanks to Eddy Lazzarin, Tim Sullivan, Aiden Slavin, Robert Hackett, Michael Blau, Miles Jennings, and Scott Kominers for their thoughtful feedback and suggestions that helped shape this article.
Sam Broner is a Partner on the investing team at a16z crypto. Prior to joining a16z, Sam was a software engineer at Microsoft and was a founding member of the Fluid Framework and Microsoft Loop teams. Sam also attended MIT Sloan School of Management, where he participated in the Boston Fed’s Project Hamilton, led the Sloan Blockchain Club, advised on Sloan’s inaugural AI Summit, and received MIT’s Patrick J. McGovern Award for building entrepreneurial communities. You can follow him on X at @SamBroner.
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