Xiao Feng: From Distributed Ledger to the Future of Stablecoins

Author: Xiao Feng

Some time ago, I had dinner in Shanghai with Mr. Li Shanquan, a top global active managed gold fund manager. He has been deeply involved in the gold fund sector for decades, while I have been engaged in investments in cryptocurrencies like Bitcoin for over ten years. Naturally, the conversation revolved around gold and Bitcoin, which is referred to as "digital gold."

We all note a significant phenomenon: the group of gold investors is dominated by middle-aged and elderly people over 50 years old, while Bitcoin fans are mostly concentrated in the younger generation under 40. This reminds me of the book "The Monetary Pyramid" published by CITIC Press six years ago, which astutely captured this gap in wealth perceptions caused by generational change, and predicted that when the younger generation enters the mainstream of society, it will inevitably push their belief in Bitcoin into the mainstream asset allocation. What the author didn't expect was that it was an old man in his old age (meaning that BlackRock CEO Larry Fink led the approval of the Bitcoin spot ETF) that ultimately contributed to the inclusion of Bitcoin in the asset reserve.

The Millennium Evolution of Currency Attributes: Nature, Law, and Technology

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Thus, Brother Shanquan has outlined three crucial attribute transformations in the history of currency development, which is quite beneficial for our understanding of the essence of digital currency. The summary is as follows:

Natural Attribute Currency: A form of currency from thousands of years ago, whether it is shells, silver, or gold, its value is based on the scarcity of its physical existence and natural endowment.

Legal attribute currency: fiat currency (fiat money) that emerged hundreds of years ago, the value of which is endowed with compulsory force by national legislation, relying on the endorsement of national credit.

Technical Attribute Currency: The currently emerging digital currency, led by Bitcoin, whose value is supported and endorsed by a digital technology system including cryptography, blockchain (distributed ledger), digital wallets, and smart contracts.

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Distributed Ledger: The Cornerstone of Technological Attribute Currency and the Millennial Change in Accounting

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The core support of technical attribute currencies lies in distributed ledger technology. Looking back in history, the bookkeeping methods of human society can be regarded as a milestone event that changes once every thousand years:

The simplified bookkeeping method (circa 3500 BC): Originating from one of the cradles of human civilization, the Mesopotamian region (the Sumerian area between the Tigris and Euphrates rivers). The clay tablet accounting records discovered from 3500 BC are the earliest known form of bookkeeping visible to humanity.

Double-entry bookkeeping (around 1300 AD): With the flourishing maritime trade along the Mediterranean coast creating a demand for complex accounting practices, the Italian region developed double-entry bookkeeping, which has been optimized over hundreds of years and continues to be a pillar of modern accounting.

Distributed Ledger Technology (2009 - Present): As human society fully enters the digital age, Bitcoin blockchain emerged in 2009, officially marking the beginning of the third revolution in human accounting history - the era of distributed ledgers. The profound significance and value of this unprecedented change in accounting methods may still be beyond our full comprehension at present.

Bitcoin: The 'Hardcore' Digital Asset That Surpasses Gold

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From this point of view, Bitcoin can be called a "harder" hard asset than physical gold. This may be counterintuitive – after all, Bitcoin is incorporeal. However, full data such as global gold reserves, annual production, and total trading volume are always shrouded in fog and difficult to accurately grasp. The correspondence between paper gold (such as ETFs) and physical gold is highly dependent on the credit commitment of the issuer, and there is a risk of decoupling; Gold trading also faces the difficulty of color identification, which needs to rely on professional institutions or individuals. Bitcoin, on the other hand:

Total supply is fixed (21 million), block reward per block, daily global trading volume, everything is backed by distributed ledger technology, publicly transparent, immutable, traceable on-chain, and auditable by everyone.

There is no difference in quality; Bitcoin that circulates globally is essentially a completely homogeneous digital unit. Therefore, as a "digital gold" to combat inflation, Bitcoin, relying on the certainty and stability brought by distributed ledger technology, demonstrates potential advantages in its function as a store of value that surpass those of physical gold.

Distributed Ledger: Building the Infrastructure for the Next Generation Financial Market

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Since the Bitcoin blockchain mainnet went live in January 2009, this distributed ledger-based system has been running continuously and stably for over sixteen years. Even from the perspective of large engineering practices, it can be considered a new generation of financial market infrastructure (Financial Market Infrastructure, FMI) that has undergone countless rigorous "destructive tests" and is fully equipped for production environment conditions.

Regardless of new or old, the core mission of FMI is to establish efficient, secure, and reliable rules, systems, architectures, and regulatory frameworks for payments, transactions, clearing, and settlement. The reason why the FMI based on distributed ledger technology is referred to as "next generation" lies in its disruptive reconstruction of core rules:

Decentralized trading: Eliminate the central counterparty (CCP) to achieve true peer-to-peer (P2P) trading.

Gross Settlement: Abandon netting and adopt a gross settlement model.

Delivery vs Payment (DvP): No longer relying on net settlement, the atomic-level synchronous transfer of assets (such as tokens) and funds (such as stablecoins) is achieved through smart contracts, ensuring the finality of transactions is reached instantly. This architectural revolution brings significant advantages: substantial streamlining of processes, significant cost reduction, and geometric improvement in efficiency.

The reality confirms this efficiency gap: the NYSE and Nasdaq now account for less than 50% of total U.S. stock market volume. Emerging channels such as after-hours trading and dark pool trading continue to erode the share of traditional exchanges. Although the two major exchanges have announced extended trading hours to cope with the challenges, due to the traditional FMI clearing and settlement system (such as the current T+2 clearing system in the United States), the NYSE's share liquidation can only be close to 5×23 hours no matter how optimized it is (and it still needs to reserve about 1 hour of clearing window per day), otherwise the system will fall into chaos. The crypto asset exchange, relying on the new generation of FMI, has already achieved 24×7 round-the-clock, global trading capabilities. This is a vivid reflection of the difference between the old and the new financial market infrastructures.

The four "killer applications" bred by new infrastructure

On top of this solid new generation FMI, at least four "killer applications" with disruptive potential have already been nurtured:

Bitcoin: A New Asset Allocation Tool - Its application scenarios are expanding from household wealth allocation to corporate cash management, and even rising to the level of national strategic reserves discussions.

Stablecoins: Revolutionary Payment Settlement Tools - The on-chain transaction volume is expected to exceed 16 trillion dollars throughout 2024 and is still growing rapidly. China's cross-border e-commerce is a significant beneficiary of the cross-border payment dividends from stablecoins, with the proportion of overseas buyers using stablecoins for payments continuing to rise, and the amount of stablecoins received by Chinese merchants has also surged.

DeFi (Decentralized Finance): Efficient Financial Investment Tools - By the end of 2024, the total value locked (TVL) in DeFi protocols is expected to reach approximately $190 billion. The DeFi lending market is active, with the on-chain lending annualized interest rate for USDT stabilizing at around 8%. Its revolutionary aspect lies in the fact that lending activities on the blockchain are automatically executed by smart contracts, eliminating the intermediary steps of traditional finance. This not only significantly reduces trust costs and operational risks but also enhances fund turnover efficiency to more than 10 times that of traditional lending models, with the settlement and clearing efficiency achieving a qualitative leap.

Asset Tokenization (RWA): The Imminent Future - The recently popular "Real World Asset Tokenization" aims to map traditional financial assets and even physical assets onto the blockchain.

The Evolution of Asset Tokenization: From On-Chain Native to Everything on the Chain

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Asset tokenization is essentially the construction of a digital twin of an asset, which "maps" the assets of the real world (OffChain) onto the blockchain and mints them as corresponding tokens. Bitcoin, on the other hand, is a digitally native asset, created "out of nothing" on the blockchain, from zero to one. Since last year, a clear trend is emerging: on the one hand, digitally native crypto assets (such as Bitcoin) are moving from on-chain to off-chain (such as Bitcoin spot ETFs listed and traded on traditional stock exchanges); On the other hand, there is a wave of digital twins of traditional financial assets, moving from off-chain to on-chain, such as BlackRock's tokenized issuance of its U.S. Treasury funds and U.S. dollar money market funds.

The practice of asset tokenization can be traced back to about ten years ago:

Stage One: Currency Tokenization (Started in 2015) - Marked by the birth of the USDT stablecoin. The rapid rise and widespread application of stablecoins can be attributed to two core reasons: First, the crypto-financial ecosystem urgently needs a stable value measure to assess other assets and facilitate transactions; second, stablecoins cleverly combine the legal attributes of fiat currency (relying on fiat reserves and compliance frameworks) with the technological attributes endowed by tokenization (transparency, efficiency, programmability), forming a dual credit endorsement that significantly enhances market acceptance.

Stage Two: Tokenization of Financial Assets (Emerging in 2024) - The core challenge of this stage is to address "how to go on-chain"? That is, how to accurately and immutably register real-world asset data and rights on a distributed ledger, ensuring that on-chain tokens and off-chain asset status remain continuously synchronized and never disconnected. Financial assets (such as bonds and fund shares) are natural pioneers for the implementation of tokenization technology due to their mature legal frameworks, strong regulatory attributes, and credit endorsement provided by centralized registration and settlement systems.

Phase Three: Tokenization of Physical Assets (Future Direction) - This is a more challenging area, involving real estate, commodities, artworks, etc. The core difficulty lies in: how to utilize the technological attributes of distributed ledger to create a trustworthy digital mapping for physical assets in the real world? How to ensure that the ownership and status of the physical assets represented by on-chain tokens are clear and authentic? The Decentralized Physical Infrastructure Network (DePIN) is highly anticipated, as it may pave the way for large-scale, trustworthy tokenization of physical assets by combining IoT, Oracles, and blockchain technology to achieve dynamic perception, data on-chain, and automated management of physical assets.

The core value of stablecoins and their three strategic uses

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Stablecoins, as a successful example of the first phase of asset tokenization, have a value that goes far beyond serving as a "stability anchor" in the crypto world. They are not only a product of the perfect integration of the legal attributes of fiat currency and the technical attributes of tokens, but also an indispensable core component of the new generation of financial market infrastructure. A deeper analysis reveals that the strategic value of stablecoins is mainly reflected in three core uses:

1. Revolutionary payment settlement tool: Reshaping cross-border value circulation

Pain points of cross-border payments: The traditional cross-border payment chain is lengthy, with numerous participants (remitting banks, correspondent banks, clearing banks, receiving banks), high and opaque fees, long settlement periods (usually taking several days), and is constrained by bank operating hours and compliance review efficiency.

The breakthrough of stablecoins: Stablecoin payments based on distributed ledgers inherently have advantages such as peer-to-peer (P2P), 24/7 operation, near real-time finality of transactions (usually within minutes), and low, transparent fees. Remitters directly send stablecoins to the recipient's wallet, significantly simplifying the process, reducing costs, and increasing speed.

The practice of China's cross-border e-commerce confirms: As mentioned above, China's cross-border e-commerce is a significant beneficiary of stablecoin cross-border payments. Overseas buyers are increasingly inclined to use stablecoins such as USDT and USDC for payment, as they are far more convenient than traditional cross-border remittances. After receiving stablecoins, Chinese sellers can exchange them for fiat currency through compliant channels or directly use them for on-chain operations. This model effectively avoids the high friction costs of traditional cross-border payments and accelerates the return of funds, especially benefiting small and medium-sized cross-border merchants. In the future, with the improvement of compliance channels and the popularization of user habits, the application depth and breadth of stablecoins in B2B, B2C and even C2C cross-border scenarios will continue to expand.

2. Efficient and flexible investment tools: Unlocking a new ecosystem of on-chain finance

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The core fuel of DeFi lending: Stablecoins are the main underlying asset and valuation unit in the current DeFi lending market. Users can deposit idle stablecoins into DeFi lending protocols (such as Compound, Aave) and automatically lend them to borrowers in need through smart contracts, thereby earning considerable and transparent interest income (as mentioned, the annual yield of USDT is about 8%). This on-chain lending model features permissionless access, global openness, automated execution, transparent collateral ratios, and extremely high capital utilization. Investors can conveniently earn interest on their stablecoins without complicated account opening processes or credit checks, achieving returns that surpass traditional bank deposits.

General Certificate for Subscription of Tokenized Assets (RWA): As the tokenization of financial assets (Phase II) and the future tokenization of physical assets (Phase III) progress, stablecoins will become the main payment medium and pricing unit for subscribing to these on-chain tokenized assets. Investors can directly purchase tokenized U.S. Treasury bonds, money market fund shares, real estate REIT shares, and even future tokenized rare metals or energy products with stablecoins. This not only significantly lowers the investment threshold (allowing fragmented investments) and enhances asset liquidity but also simplifies the process of cross-border investments. In this scenario, stablecoins serve as a bridge connecting the traditional financial world with the emerging on-chain asset world, acting as a "pass" for investors to enter the RWA investment field.

4. The Payment Settlement Network of the AGI Era: The Cornerstone of Value Circulation in the Machine Economy

New Demands in the AGI Era: When General Artificial Intelligence (AGI) develops to a sufficient height, AI Agents begin to operate independently of humans, autonomously engaging in economic activities, creating value, and generating transaction demands. The demand for value exchange between "Embodied AI" machines (M2M) will inevitably arise with high frequency, in real-time, and in an automated manner without human intervention. For example, self-driving cars automatically pay for charging fees, smart factory equipment automatically settles energy or computing power rental fees, and AI services automatically purchase data or API calls.

Limitations of Traditional Payment Systems: Traditional banking account systems, credit card networks, etc., rely heavily on human identity verification, manual operations, and centralized clearing, making them completely unable to accommodate the payment settlement demands of the machine economy for high-frequency, small-amount, real-time, automated, and trustless transactions.

The ultimate advantage of stablecoins: the integration of programmable currency and smart contracts

Programmability (: As digital currencies, stablecoins can have their transfer rules, conditional payments (such as "cash on delivery," "milestone payments"), and revenue-sharing logic programmed and defined through smart contracts, achieving fully automated value transfer.

Machine-friendly interaction: Stablecoin trading based on blockchain addresses and API interfaces is inherently easy for AI programs and IoT devices to call and integrate.

Distributed Ledger Assurance: Provides transparent, tamper-proof transaction records and near real-time settlement, ensuring the immediate reliability of transactions between machines.

Borderless: A globally unified digital value standard that eliminates currency conversion barriers for machine cross-border transactions.

Core solution: Programmable stablecoins based on distributed ledgers and smart contracts, due to their technical attributes (automatic execution, high efficiency and transparency, seamless integration) and stability (unified value scale), will become the optimal solution for the value circulation network that supports the efficient operation of the machine economy driven by AGI in the future. It is not only a payment tool, but also the "blood" and "nervous system" of the machine economy.

Conclusion

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