a16z: Looking at the Future of Stablecoins Through the History of U.S. Banking
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a16z: Looking at the Future of Stablecoins Through the History of U.S. Banking
Stablecoins have created a market that runs parallel to traditional financial infrastructure, with annual trading volumes already surpassing those of major payment networks.
Navigating Web3 tides with focused insightsAuthor: Web3 Lawyer
Despite hundreds of millions of people already using stablecoins and trillions of dollars in value being transacted, the definition and public understanding of stablecoins as an asset class remain unclear.
Stablecoins serve as a store of value and medium of exchange, typically (but not necessarily) pegged to the U.S. dollar. Though stablecoins have only existed for about five years, their evolution along two key dimensions offers valuable insights: 1. from non-fully collateralized to over-collateralized models, and 2. from centralized to decentralized structures. Understanding these trajectories helps clarify the technological architecture of stablecoins and dispel market misconceptions.
As a payment innovation, stablecoins simplify the transfer of value. They have created a parallel market to traditional financial infrastructure, with annual transaction volumes surpassing even major payment networks.
History provides insight into change and continuity. To understand the limitations and scalability of stablecoin designs, one useful lens is the history of banking—examining what worked, what didn’t, and why. Like many products in cryptocurrency, stablecoins may replicate the historical development of banking: starting with simple deposits and notes, then expanding money supply through increasingly complex credit mechanisms.
This article compiles Sam Broner’s A Useful Framework for Understanding Stablecoins: Banking History, a piece by a16z partner, offering a perspective on the future of stablecoins through the lens of U.S. banking history.
The article first reviews recent developments in stablecoins, then draws comparisons with the history of American banking to enable meaningful parallels between stablecoins and traditional banking. Along the way, it examines three emerging forms of stablecoin-like instruments: fiat-backed stablecoins, asset-backed stablecoins, and strategy-backed synthetic dollars, providing outlooks for the future.
Key Takeaways
Through compilation, deeply inspired—the essence cannot escape the three fundamental tools of bank monetary theory.
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Although stablecoin payment innovations appear to disrupt traditional finance, the most important thing is to understand: the essential attributes of money (unit of account) and core functions (medium of exchange) remain unchanged. Therefore, stablecoins can be seen as carriers or manifestations of money.
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Since they are essentially money, the development patterns of modern monetary history over centuries offer highly relevant references. This is precisely where Sam Broner’s article excels—he looks beyond mere issuance of money and recognizes how banks later used credit as a tool for money creation. This insight directly points toward the next stage for stablecoins, which currently remain largely at the money issuance phase.
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If fiat-backed stablecoins represent today’s mainstream choice during the money issuance phase, then asset-backed stablecoins will likely become the preferred form in the upcoming credit creation phase. In my view, as more illiquid RWA-tokenized assets come on-chain, their primary purpose won’t be circulation but rather serving as collateral—acting as underlying assets for credit creation.
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As for strategy-backed synthetic dollars, due to their technical structure, they inevitably face regulatory challenges and user experience barriers. Currently, they are mostly used within DeFi yield products and struggle to overcome the impossible trinity in traditional finance: return, liquidity, and risk. However, we’re beginning to see innovations like interest-bearing stablecoins backed by U.S. Treasuries or new models such as PayFi breaking these constraints. PayFi integrates DeFi into payments, transforming every dollar into smart, autonomous capital.
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Finally, we must return to fundamentals: the emergence of stablecoins, synthetic dollars, or specialized currencies aims to further highlight the intrinsic properties of money, strengthen its core functions, improve operational efficiency, reduce costs, strictly control risks, and fully leverage money’s positive role in facilitating value exchange and socioeconomic development through digital currency and blockchain technology.
1. The Evolution of Stablecoins
Since Circle launched USDC in 2018, developments over the past few years provide sufficient evidence of what works and what doesn’t in the stablecoin space.
Early adopters primarily used fiat-backed stablecoins for transfers and savings. While stablecoins generated by decentralized over-collateralized lending protocols are functional and reliable, actual demand has been limited. To date, users show a strong preference for USD-denominated stablecoins over other denominations (whether fiat or novel).
Certain categories of stablecoins have failed completely. For example, Terra-Luna—a decentralized, low-collateral stablecoin—appeared more capital-efficient than fiat-backed or over-collateralized alternatives but ended in disaster. Other types remain unproven: while interest-bearing stablecoins are intuitively appealing, they face hurdles in user experience and regulation.
Leveraging current product-market fit among successful stablecoins, other USD-denominated token types have emerged. Ethena’s strategy-backed synthetic dollars (Strategy-Backed Synthetic Dollars) represent a new category not yet fully defined. Though similar to stablecoins, they haven’t reached the safety standards or maturity level required of fiat-backed stablecoins and are mainly adopted by DeFi users seeking higher returns at greater risk.
We’ve also witnessed rapid adoption of fiat-backed stablecoins like Tether-USDT and Circle-USDC. These attract users due to simplicity and perceived security. Adoption of asset-backed stablecoins lags behind, despite this category dominating deposit investments in traditional banking systems.
Analyzing stablecoins through the lens of traditional banking helps explain these trends.
2. History of U.S. Banking: Bank Deposits and American Money
To understand how current stablecoins mirror the development of banking systems, studying the history of U.S. banking is particularly helpful.
Prior to the Federal Reserve Act of 1913—and especially before the National Banking Acts of 1863–1864—different forms of money carried varying degrees of risk and thus had different real values.
The “actual” value of banknotes (cash), deposits, and checks could vary significantly depending on three factors: the issuer, ease of redemption, and credibility of the issuer. Before the establishment of the FDIC in 1933, deposits needed special insurance against bank-specific risks.
During that era, one dollar ≠ one dollar.
Why? Because banks faced (and still face) a tension between making deposit investments profitable and ensuring deposit safety. To generate profits, banks must extend loans and take investment risks; to ensure safety, they must manage risk and hold reserves.
It wasn’t until the Federal Reserve Act of 1913 that, in most cases, one dollar = one dollar.
Today, banks use dollar deposits to buy government bonds and stocks, issue loans, and engage in simple strategies like market-making or hedging under the Volcker Rule. Introduced after the 2008 financial crisis, the Volcker Rule limits proprietary trading by banks to reduce speculative activity in retail banking and lower bankruptcy risk.
Retail bank customers may assume all their money is safely held in deposit accounts. But this isn’t true—consider the 2023 collapse of Silicon Valley Bank due to asset-liability mismatch and liquidity failure, a stark lesson from our markets.
Banks earn spreads by investing deposits (i.e., lending), balancing profit and risk behind the scenes. Most users don’t know exactly how their deposits are managed, though banks generally guarantee safety during turbulent times.
Credit plays a crucial role in banking—it’s how banks increase money supply and enhance economic capital efficiency. Despite improvements in federal oversight, consumer protection, widespread adoption, and risk management, consumers now treat deposits as relatively risk-free, uniform balances.
Returning to stablecoins, they offer users experiences similar to bank deposits and notes—convenient and reliable stores of value, mediums of exchange, and lending capabilities—but in a disintermediated, self-custodial format. Like their fiat predecessors, stablecoins will begin with simple deposits and notes. As decentralized on-chain lending protocols mature, however, asset-backed stablecoins are expected to grow increasingly popular.
3. Viewing Stablecoins Through the Lens of Bank Deposits
With this background, we can evaluate three types of stablecoins—fiat-backed stablecoins, asset-backed stablecoins, and strategy-backed synthetic dollars—through the lens of retail banking.
3.1 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 them to be redeemable for equivalent U.S. dollars (e.g., specific U.S. Treasury securities) or other legal tender (“coins”). While the value of banknotes varied based on the issuer’s reputation, accessibility, and solvency, most people trusted them.
Fiat-backed stablecoins follow the same principle. They are tokens directly redeemable for understandable, trustworthy fiat currency—but with similar caveats: just as paper banknotes were bearer instruments redeemable by anyone, holders might not live near the issuing bank and may find redemption difficult. Over time, people accepted that they could trade with others who would accept the notes and convert them into dollars or coins. Similarly, users of fiat-backed stablecoins are gaining confidence that platforms like Uniswap, Coinbase, or other exchanges can reliably connect them with high-quality stablecoin counterparties.
Today, a combination of regulatory pressure and user preference appears to be driving more users toward fiat-backed stablecoins, which now account for over 94% of total stablecoin supply. Circle and Tether dominate issuance, collectively having issued over $150 billion in USD-dominated fiat-backed stablecoins.
But why should users trust issuers of fiat-backed stablecoins?
After all, fiat-backed stablecoins are centrally issued, making it easy to imagine risks of a “bank run” during redemptions. To mitigate these risks, fiat-backed stablecoin issuers undergo audits by reputable accounting firms, obtain local licenses, and comply with regulatory requirements. For example, Circle undergoes regular audits by Deloitte. These audits aim to verify that stablecoin issuers hold sufficient fiat reserves or short-term Treasury bills to meet short-term redemptions and that they maintain enough fiat collateral to back each stablecoin 1:1.
Verifiable proof of reserves and decentralized issuance of fiat stablecoins are feasible paths, but adoption remains limited.
Verifiable proof of reserves enhances auditability and can currently be implemented via 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 possible but faces significant regulatory hurdles. For instance, issuing decentralized fiat-backed stablecoins would require holding U.S. Treasuries on-chain with risk profiles similar to traditional ones—an impossibility today. If achieved, however, it would make fiat-backed stablecoins easier for users to trust.
3.2 Asset-Backed Stablecoins
Asset-backed stablecoins are products of on-chain lending protocols, mimicking how banks create new money through credit. Decentralized over-collateralized lending protocols like Sky Protocol (formerly MakerDAO) issue new stablecoins backed by highly liquid on-chain collateral.
To understand how this works, consider a checking account, where funds represent newly created money enabled by complex lending, regulatory, and risk management systems.
In fact, most circulating money—commonly referred to as M2 money supply—is created by banks through credit. Banks use mortgage loans, auto loans, commercial loans, inventory financing, etc., to create money. Similarly, on-chain lending protocols use on-chain assets as collateral to create asset-backed stablecoins.
The system enabling credit to create new money is called fractional reserve banking, whose true origins trace back to the Federal Reserve Act of 1913. Since then, fractional reserve banking has matured through major updates in 1933 (creation of the FDIC), 1971 (Nixon ending the gold standard), and 2020 (reserve requirement reduced to zero).
With each reform, consumers and regulators gained greater confidence in the credit-based money creation system. First, bank deposits became insured by the FDIC. Second, despite crises like those in 1929 and 2008, banks and regulators have steadily improved practices and processes to reduce risk. Over the past 110 years, credit has grown to dominate the U.S. money supply.
Traditional financial institutions employ three methods to safely issue loans:
1. Assets with liquid markets and fast liquidation practices (margin loans);
2. Large-scale statistical analysis of loan pools (mortgages);
3. Thoughtful, customized underwriting services (commercial loans).
On-chain decentralized lending protocols still represent only a small fraction of stablecoin supply because they are nascent and have a long path ahead.
The most prominent decentralized over-collateralized lending protocols are transparent, well-tested, and conservative. For example, Sky Protocol (formerly MakerDAO), the most renowned protocol, issues asset-backed stablecoins backed by on-chain, exogenous, low-volatility, and highly liquid (easy-to-sell) assets. Sky Protocol also imposes strict rules regarding collateral ratios and has robust governance and liquidation mechanisms. These features ensure that even under changing market conditions, collateral can be safely sold, protecting the redeemability of asset-backed stablecoins.
Users can evaluate collateralized lending protocols based on four criteria:
1. Governance transparency;
2. Proportion, quality, and volatility of assets backing the stablecoin;
3. Smart contract security;
4. Ability to maintain loan-to-collateral ratios in real time.
Like funds in a checking account, asset-backed stablecoins represent newly created money through asset-backed loans, but with more transparent, auditable, and understandable lending practices. Users can audit the collateral backing asset-supported stablecoins—unlike in traditional banking, where depositors must entrust investment decisions entirely to bank executives.
Moreover, decentralization and transparency enabled by blockchain can mitigate risks that securities laws aim to address. This is significant for stablecoins, suggesting that truly decentralized asset-backed stablecoins—especially those relying solely on digital-native collateral (rather than “real-world assets”)—may fall outside the scope of securities regulations. Such collateral can be secured through autonomous protocols rather than centralized intermediaries.
As more economic activity moves on-chain, two things are expected: first, more assets will become collateral in on-chain lending protocols; second, asset-backed stablecoins will constitute a larger share of on-chain money. Eventually, other types of loans may be securely issued on-chain, further expanding the on-chain money supply.
Just as growth in traditional bank credit, reductions in reserve requirements, and maturation of lending practices took time, so too will the maturation of on-chain lending protocols. There is good reason to expect that in the near future, people will use asset-backed stablecoins as easily and widely as they currently use fiat-backed stablecoins.
3.3 Strategy-Backed Synthetic Dollars
Recently, some projects have launched $1-denominated tokens representing combinations of collateral and investment strategies. These tokens are often conflated with stablecoins, but strategy-backed synthetic dollars (SBSDs) should not be considered stablecoins. Here’s why:
Strategy-backed synthetic dollars expose users directly to trading risks associated with active asset management. They are typically centralized, under-collateralized tokens with characteristics of financial derivatives. More accurately, SBSDs resemble shares in an open-ended hedge fund—a structure that is hard to audit and may expose users to centralized exchange (CEX) risks and asset price volatility, especially during significant market swings or prolonged bearish sentiment.
These attributes make SBSDs unsuitable as reliable stores of value or mediums of exchange—the primary uses of stablecoins. While SBSDs can be structured in various ways with differing levels of risk and stability, they all offer dollar-denominated financial products that some investors may wish to include in their portfolios.
SBSDs can be built atop multiple strategies—for example, basis trades or participation in yield-generating protocols such as restaking protocols securing Active Validation Services (AVSs). These projects manage risk and returns, often allowing users to earn yield on cash positions. By managing risk through yield—assessing AVSs to minimize risk, identifying higher-yield opportunities, or monitoring inverted basis trades—projects can generate yield-producing strategy-backed synthetic dollars (SBSDs).
Before using any SBSD, users should thoroughly understand its risks and mechanisms (as with any new tool). DeFi users should also consider the consequences of using SBSDs in DeFi strategies, as depegging can trigger severe chain reactions. When assets depeg or suddenly depreciate relative to their reference assets, derivatives relying on price stability and steady yields can quickly become unstable. Moreover, when strategies involve centralized, closed-source, or unauditable components, assessing the risk of any given strategy becomes difficult or impossible.
While banks do apply simple, actively managed strategies to deposits, these represent only a small portion of overall capital allocation. It’s challenging to scale such strategies to support the entire stablecoin ecosystem because they require active management, making them hard to decentralize or audit reliably. SBSDs expose users to greater risk than traditional bank deposits. If someone’s deposits were held in such instruments, skepticism would be justified.
In practice, users remain cautious about SBSDs. Despite popularity among risk-tolerant users, few engage in transactions involving them. Additionally, the U.S. Securities and Exchange Commission has taken enforcement actions against entities issuing “stablecoins” that function more like shares in investment funds.
4. Conclusion
The era of stablecoins has arrived. Over $160 billion in stablecoins are used globally for transactions. They fall into two main categories: fiat-backed and asset-backed stablecoins. Other dollar-denominated tokens, such as strategy-backed synthetic dollars, are gaining awareness but fail to meet the definition of stablecoins as stores of value and mediums of exchange.
Banking history serves as a powerful framework for understanding the stablecoin asset class—stablecoins must first consolidate around a clear, understandable, and easily convertible form of money, much like how Federal Reserve notes gained public trust in the late 19th and early 20th centuries.
Over time, we should expect the volume of asset-backed stablecoins issued by decentralized over-collateralized lending protocols to grow, mirroring how bank credit expanded the M2 money supply. Finally, we should anticipate continued growth in DeFi, both creating more SBSDs for investors and improving the quality and quantity of asset-backed stablecoins.
While this analysis may prove useful, we must also focus on the present. Stablecoins are already the cheapest remittance method, meaning they have a real opportunity to reshape the payments industry—creating opportunities not only for existing businesses but also empowering startups to build on a frictionless, cost-free new payment platform.
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