Industry Pain Points

1.1 Issues with Traditional Stablecoins

The dominant stablecoins in the market, such as USDT (Tether) and USDC (USD Coin), are issued and managed by centralized entities. These stablecoins are pegged to fiat currencies (e.g., USD), but due to the lack of full transparency in their asset reserves, users cannot verify whether they are sufficiently backed in real time. Furthermore, the centralized nature of these stablecoins means that issuers have the power to freeze assets at any time or comply with regulatory restrictions. For example, in 2022, USDC was subject to U.S. regulatory restrictions, leading to certain user accounts being frozen—highlighting the trust issues associated with centralized stablecoins.

Ideally, stablecoin issuers should maintain reserves equivalent to the circulating supply to ensure full convertibility. However, some stablecoins have failed to provide comprehensive proof of reserves, leading to concerns over potential insolvency. USDT, for instance, has faced scrutiny over the years for its opaque reserve disclosures and has been investigated by regulators multiple times. The lack of transparent asset backing creates a systemic risk—if a centralized issuer faces insolvency or legal challenges, users may find their funds inaccessible or significantly devalued.

1.2 Risks of Algorithmic Stablecoins

Algorithmic stablecoins aim to maintain their peg to fiat currencies through smart contracts and market-driven mechanisms. However, many of them lack tangible asset backing, relying instead on supply and demand adjustments or mint-and-burn mechanisms to stabilize prices. This approach makes them highly susceptible to market shocks. The collapse of UST (TerraUSD) in 2022 demonstrated the fragility of algorithmic stablecoins—when investors began mass-selling UST, its algorithmic mechanism failed to stabilize the price, causing the entire Terra ecosystem to implode and leading to billions of dollars in losses.

One of the core issues with algorithmic stablecoins is their dependency on market confidence. When sentiment weakens, or liquidity dries up, these stablecoins often struggle to maintain their peg. Several early algorithmic stablecoins, such as Basis Cash, failed due to extreme price volatility, ultimately leading to their collapse. This volatility significantly limits their use as a reliable financial instrument, restricting their adoption in real-world financial applications.

1.3 High Costs and Inefficiencies in Cross-Border Payments

The current international payment infrastructure largely depends on centralized financial networks like SWIFT (Society for Worldwide Interbank Financial Telecommunication) for cross-border transactions. However, SWIFT transactions involve multiple intermediary banks, leading to excessive fees—typically ranging from 6% to 10% per transaction. For individuals and businesses, these high costs pose a significant financial burden. Additionally, some banks impose additional foreign exchange conversion fees, further increasing the cost of international payments.

Beyond high costs, inefficiency is another major issue with cross-border transactions. Under the traditional banking system, international remittances can take 3-5 business days to settle. This delay is primarily due to compliance checks, anti-money laundering (AML) procedures, and the involvement of multiple banking intermediaries. For businesses requiring rapid liquidity turnover, these long settlement times can severely impact cash flow, hinder global trade, and slow down economic activities. In contrast, DeFi and blockchain technology offer near-instant settlement, but due to the limitations of existing stablecoin infrastructure, they have not yet been able to fully replace traditional payment systems.

According to the World Bank, approximately 1.7 billion people worldwide lack access to reliable banking services. This issue is particularly severe in developing regions where financial infrastructure is underdeveloped. Many individuals and small businesses struggle to access fundamental financial services, leading to a severe financial divide. While DeFi has the potential to address these gaps, existing stablecoin models—both centralized and algorithmic—have yet to offer a fully sustainable financial inclusion solution.