The truly natural network effect is exemplified by Tether. This network effect will continue to strengthen and is not easily replaced by a single channel.

Host: Alex, Research Partner at Mint Ventures

Guest: Minda, Founder of dForce

Recording Date: 2025.5.21

Statement: The content discussed in this podcast does not represent the views of the institutions of the guests, and the projects mentioned do not constitute any investment advice.

Hello everyone, welcome to WEB3 Mint To Be initiated by Mint Ventures. Here, we continuously question and deeply think, clarifying facts, exploring realities, and seeking consensus in the WEB3 world. We aim to clarify the logic behind hot topics, provide insights that penetrate the events themselves, and introduce diverse perspectives.

Alex: In this episode, we have invited our old friend, Minda. Minda has previously discussed many topics with us, including US stocks on-chain and DeFi. This time, we will talk about a recent policy hot topic, which is stablecoins, possibly one of the most widely adopted products in the blockchain field. Let's have Minda say hello to us.

Minda: Hello everyone, I am Minda. I am very happy to be here today to share some insights on stablecoins.

Differences in Stablecoin Development in This Cycle

Alex: Alright, let's get into today's main topic. We know that stablecoins have crossed many cycles, and in each cycle, core business metrics and scale have reached new highs. In your view, what are the notable differences in the development of stablecoins in this cycle compared to the previous one, aside from the regulatory policies that we will discuss later?

Minda: We know that during the DeFi summer of 2021 and 2022, there were many types of stablecoins, especially on-chain stablecoins, like TERA, and many algorithmic stablecoins completely based on the chain. However, after the collapse of TERA in 2022, we saw a significant structural differentiation in the stablecoin sector from the supply side. The dominant ones are still fiat-backed stablecoins. We saw that the minting volume of stablecoins dropped from about $180 billion in 2022 to around $130-140 billion after the Luna collapse, and then gradually stabilized and started to rebound. Recently, I saw data indicating it has reached about $250 billion. So, while the total value locked (TVL) in DeFi has not yet reached new highs, we see that the minting volume of stablecoins has already surpassed previous levels. The driving force behind this minting of stablecoins is not the native on-chain stablecoins, such as algorithmic or over-collateralized types. The only highlight in this cycle might be Ethena's USDE.

We just mentioned that USDT and USDC are fiat payment-type stablecoins, while Ethena should be considered a wealth management type, which is a yield-generating and wealth management stablecoin based on native crypto assets. Strictly speaking, it cannot be called a stablecoin because, for example, when I participate in Ethena's mining, most of the risk I bear is its price volatility risk, as it cannot achieve a one-to-one redemption. Its entire redemption mechanism is not linked to the dollar stablecoin but is based on the pricing arbitrage positions of its trading platform. Of course, recently it has undergone a transformation, and I saw that about several billion dollars have been invested in T-Bill assets. But purely from the perspective of the last cycle, we see a clear differentiation in stablecoins, with payment types being very obvious and still dominated by fiat currencies. Although DAI is considered the oldest decentralized stablecoin, its entire minting volume has basically remained at around $5-6 billion, without further breakthroughs.

I think one certain thing after the DeFi summer is that many narratives around stablecoins, at least at this stage, seem to be debunked, such as algorithmic types. With the clarity of regulations, I believe many of these types of stablecoins may gradually be eliminated. We can also see that many new stablecoins emerging in the market are driven by channels, such as PayPal's. USDT and USDC are theoretically also channel-driven stablecoins, both backed by trading platforms. USDT was previously backed by Bitfinex, and USDC is backed by Circle. However, even with the support of these two major trading platforms, it has not been easy for them to develop. Binance has also supported several stablecoins, and despite having such good resources, they have not gained traction. So, I believe each cycle has its own timing. In terms of this timing, I think in the future, we will see more channel-driven stablecoins being launched, especially from compliant channels.

The Most Impactful Regulatory Policies

Alex: Understood. You just mentioned a significant change regarding timing. In the past year, the legislation around stablecoins, especially in the US, has progressed quite rapidly. For instance, just yesterday, the US Senate further advanced a bill called Genius in a procedural vote, which will subsequently enter full chamber discussions and formal voting in the Senate. In your view, what are the legislative or regulatory policies that may have the most significant impact on the industry? How do they influence the current and future stablecoin sector?

Minda: I believe the entire regulatory landscape consists of two major markets: the EU and the US. In the EU, there is MiCA, which is relatively strict in terms of regulatory framework. On the US side, there was a lot of discussion last year about FIT21, the Financial Innovation Technology 21st Century Act. This has already passed in the House of Representatives and is expected to be reviewed in the Senate this year. The Genius bill you mentioned was further advanced in the Senate yesterday. The difference between the Genius bill and the previous FIT21 is that Genius primarily focuses on stablecoins, guiding and establishing the entire regulatory framework for stablecoins in the US, so its emphasis is more on the stablecoin side.

Recently, everyone knows that the RWA (Real World Assets) sector has become particularly hot. Stablecoins, as the vanguard of RWA, also serve as deposit certificates for US dollars and tokenized government bonds. I think this has very significant symbolic meaning. One key point is that it clarifies and confirms the identity of the issuing entities, such as financial institutions and non-financial institutions. However, it has not fully defined whether large tech companies can act as stablecoin issuers. It restricts some large tech companies, but it is unclear whether companies like Facebook or Google can issue stablecoins through their subsidiaries. However, fundamentally, the spirit of the legislation encourages compliant financial institutions, and it also includes some non-financial institutions, but not those large tech companies to enter this field.

Another important point is the layered regulation. At the federal level, those with a scale of over $10 billion fall under federal regulation, while the rest are under state regulation. Therefore, I believe the implementation and clarification of regulations will play a significant role in promoting the issuance of stablecoins in the future. Additionally, we refer to the US as a legislative lighthouse country, and many other countries and regions are modeling their frameworks after the US. For example, we see that Hong Kong is currently pushing for a so-called stablecoin sandbox, including a Hong Kong dollar stablecoin. During my recent meeting in Hong Kong, I also saw many teams working on offshore RMB stablecoins in addition to the Hong Kong dollar stablecoin. So, I believe that US legislation is not just domestic but serves as a model for other places, including Hong Kong, Singapore, and Dubai.

USDT Vs. USDC

Alex: Understood. If we observe the market share of stablecoins, we find that during the last cycle, Tether, or USDT, faced significant challenges in its market share. During the last DeFi Summer, Circle's USDC saw rapid growth in its share. However, entering this cycle, we find that USDT's overall growth rate is much faster than that of its competitors, and its total scale has nearly doubled from the previous peak of around $80 billion to over $150-160 billion now. In contrast, USDC's market cap has only grown by less than 20% from its peak in early 2022. Other stablecoins, as you just mentioned, have also not seen rapid growth in this cycle. What might be the reasons for this situation?

Minda: Yes, this is a very interesting comparison. People have always compared USDC and USDT, saying that both are the biggest beneficiaries of the stablecoin market. However, Circle recently disclosed financial reports that revealed many aspects of its business model that people might not see, including the fact that USDC's profit margin is often overestimated, as a large portion of the costs are channel costs. Additionally, I think many people view USDT and USDC as equivalent or identical stablecoins, but they are actually quite different. USDT is closer to a shadow dollar, while USDC is what we traditionally refer to as a stablecoin. The difference in their minting volume growth over the past few years, I believe, primarily lies in the fact that if we view stablecoins as a river, the water storage capacity downstream depends on how many tributaries there are upstream. The tributaries of USDC, in terms of usage and use cases, include wealth management as one aspect, and another is inflow and outflow. The inflow and outflow might be USDC's biggest competitive advantage among stablecoins, as it can be exchanged one-to-one from trading platforms and issuers to dollars.

However, I believe that the market structures of USDT and USDC are completely different. For example, in terms of wealth management, there may be various trading platforms that accept it for wealth management. The usage scenarios for USDT in trading are far more numerous than those for USDC. For instance, most perpetual contracts on various trading platforms use USDT as collateral; additionally, in the OTC market, the circulation volume of USDT may be dozens or even hundreds of times that of USDC. So, if we consider it as a river, USDT has too many tributaries, and its water storage capacity is far greater than that of USDC. Therefore, I think this distinction entirely depends on their respective usage scenarios. USDT is closer to a shadow dollar or underground dollar, aligning more with our definition of money, rather than just being a stablecoin pegged one-to-one with the dollar. Because, as you can see, the price of USDT is not pegged one-to-one with the dollar most of the time; it often fluctuates in the market. For example, in some offshore markets, there may be premiums or discounts.

Of course, one advantage of the shadow dollar is that it has a very large number of counterparties, and its acceptance as a general equivalent is far greater than that of USDC, giving it a much larger moat. Another key point is that from Circle's disclosed financial reports, we can see that its channel costs for Binance and Coinbase are very high, while USDT has no such channel fee requirement; many trading platforms actively list it. Therefore, in terms of usage scenarios and utility, I believe USDT is much larger than USDC.

Alex: OK. Given that USDT occupies such a dominant position now, I believe that for USDC and many institutions looking to issue their own stablecoins in the future, they all hope to develop towards the position currently held by USDT. In your view, how likely is it for them to achieve a scale close to USDT and reach a similar channel effect? For example, taking USDC as its biggest competitor, do you think it currently has that potential?

Minda: I actually think USDC may find it quite difficult in this regard, mainly because the later entrants are essentially taking USDC's market. For instance, when banks and financial institutions want to issue stablecoins, they have a natural advantage in fiat inflow and outflow channels, which I believe USDC cannot compete with. Take PayPal, for example; its inflow and outflow channels, whether in trade or payments, are far stronger than USDC. So if stablecoins really become law this year through the House of Representatives, I think it will open the door for compliant stablecoins, and the new players entering will be particularly strong in traditional channels. USDC relies on Coinbase and Binance, which gives it a first-mover advantage, but that moat is relatively low. For instance, Facebook, although large tech companies may not be allowed to issue directly now, could they do so through partnerships or other means? I have seen that they have recently expressed an intention to possibly restart the Libra project. Twitter's X also has significant ambitions in the payment and stablecoin sectors. If they enter, I believe they would completely overshadow the channels that USDC currently collaborates with.

Possibility of Traditional Financial Institutions Entering the Stablecoin Sector

Alex: So, do you think these traditional financial institutions, including those with their own channel advantages in the internet space, have ambitions beyond Tether's on-chain operations and their existing traditional inflow and outflow businesses? What possible pathways or methods might they have to enter this field?

Minda: Yes, for example, JD.com is preparing to issue a Hong Kong dollar stablecoin, and Alibaba is also making arrangements in this area, using their e-commerce business as a touchpoint. However, I think Tether's current positioning is quite clever. First, its network effect—I'm referring to a genuine network effect, not like USDC, which relies heavily on subsidies and high channel costs to maintain its position. Tether exemplifies a truly natural network effect. This network effect will continue to strengthen and is not easily replaced by a single channel. For example, if JP Morgan issues a stablecoin, it may facilitate inflow and outflow in the interbank market. However, in secondary trading or OTC circulation, it may not be able to compete with Tether's current network effect.

From this perspective, I believe Tether has a unique competitive advantage under the current compliance framework. It occupies a market that other compliant stablecoins cannot easily enter, or that other channels cannot fully cover. Moreover, it is not only used in trade, payments, and OTC; it can basically cover all the scenarios that compliant stablecoins can cover. Aside from the one-to-one exchange channels with banks, which cannot be directly opened in the US and Europe, it has already covered other secondary circulation and payment aspects. Therefore, I think the compliant stablecoins that follow may find it quite challenging to compete with Tether. In fact, Tether has had many challengers; when it emerged in 2015, people didn't take it seriously. Later, we saw Huobi's stablecoin HUSD, OKX's stablecoin, and Binance has already launched a third stablecoin, but none have surpassed it, nor have they even reached the scale of USDC. This shows that the network effect and the channel costs required to promote it are very high.

Alex: Understood. I saw that during the discussions on the Genius bill, one of the main opponents from the Democratic Party, Elizabeth Warren, mentioned a risk point. She believes that if this bill passes, the market size for stablecoins could grow from the current over $200 billion to several trillion dollars within a few years. Although she is not satisfied with the current bill and thinks the regulatory measures are insufficient, she has made this prediction. Do you think this prediction is credible? Is it really possible for the scale to expand tenfold to several trillion dollars within a few years? Additionally, will this new market share of ten trillion dollars likely be more occupied by established players like Tether, or will it be more taken by new entrants, including the stablecoins issued by JP Morgan or large internet companies?

Minda: Yes, Elizabeth Warren has always been anti-Crypto, and I think her perspective on this matter is somewhat skewed and unfair. Setting aside domestic political issues in the US, for instance, when this stablecoin bill was being discussed, there was another hearing where US lawmakers disclosed the so-called Trump family's involvement in the crypto industry, which I think is heavily politicized. For example, there is significant opposition to the stablecoin bill because the Trump family has also issued a stablecoin called USD1, so I think there are many political issues at play here. But putting politics aside, the entire stablecoin market is about $180 billion, primarily invested in US Treasuries, making it one of the top ten holders of US debt. If we see this market continue to grow, the amount of US Treasuries will undoubtedly increase proportionally. Of course, I think ten trillion is a very ambitious target. The general estimate is that it might reach a trillion dollars by the end of next year. I think people may still have a vague understanding of the growth of stablecoins. For example, when we were working on DeFi at the beginning of 2019, the total value locked (TVL) in DeFi was less than $100 million, around $60-70 million. By the peak of the DeFi summer in 2020, it had grown to about $250 billion, an increase of two to three thousand times. The minting volume of stablecoins has also increased significantly, from a few billion to over $200 billion today, which is several hundred times growth. Of course, I think achieving such exponential growth purely relying on the current two players will be quite difficult.

However, we have seen that BlackRock's on-chain T-bill volume has also surged to the scale of several billion dollars in just a few months. So, I believe that if compliant institutions enter, it won't be a slow growth; it could double within six months to a year. Therefore, I think Tether will certainly see significant growth in market share within the compliance framework, but perhaps even greater growth will come from the issuance of stablecoins by other new compliant institutions or tech companies. This proportion will gradually increase. A very large Web2 payment company called Stripe shared during a speech by its founder that in the past six months, it acquired a stablecoin payment platform or technology integrator called Bridge, and after the acquisition, the data showed growth rates dozens or even hundreds of times higher than traditional Web2 data.

So, I believe that in the future, stablecoins will rapidly replace the existing interbank settlement and payment infrastructure, and this could be fully established within the next two to three years. When considering how many stablecoins will be needed to support the replacement of this new infrastructure, the volume will certainly be substantial. I think we shouldn't interpret this purely based on past DeFi cycles or cryptocurrency cycles because the development of stablecoins is no longer closely related to the crypto cycle. This is also why, after the collapse of the DeFi summer, stablecoins still reached new highs; the changes in the entire crypto asset landscape have not been significant. A large amount of capital is entering, and it doesn't necessarily mean that it will seek arbitrage opportunities within crypto; there are many opportunities for buying US Treasuries on-chain. Therefore, I think its growth curve is difficult to compare with the growth of DeFi or crypto assets using a rigid framework. If opened up, this growth could be leapfrogging.

Possible Measures by Various Countries Regarding Stablecoins

Alex: Understood. Now, looking at the rapid growth scale of US dollar stablecoins and the influx of so many institutions, it is indeed very helpful for the circulation of the dollar globally and for covering more scenarios. On the other hand, many international markets are questioning the fundamental value of the dollar and US Treasuries. A couple of days ago, I believe it was Moody's that downgraded the rating of the dollar or US Treasuries. There seems to be a strong comparison between these two sides. The US has already begun to promote the global deployment of dollar stablecoins. In contrast to the dollar, do you think other countries feel a sense of crisis regarding stablecoins? Or what measures are they taking? Please share your observations on this.

Minda: I feel that there is a very strong sense of crisis. Including the current situation in the US, we talk about MAGA, and the AI and crypto policies under MAGA, I believe the only hypothetical enemy is China. All discussions about promoting US dollar stablecoins or the US crypto market are benchmarked against China. For example, if the US does not promote US dollar stablecoins, China's Belt and Road Initiative will facilitate currency swaps, and China is also very actively pushing for the development of the digital yuan. I believe the US has a very clear understanding of not only the crypto market but also the continuation of the dollar's hegemony. The current US Treasury Secretary has worked at the Soros Fund for many years, making him one of the most knowledgeable Treasury Secretaries regarding the currency market. When he was at the Soros Fund, he also speculated against the British pound, so his understanding of the currency market is very deep. At the same time, the Secretary of Commerce is also one of the shareholders of Tether. I believe they have a very good understanding of the relationship between commercial logic, dollar hegemony, and stablecoins. It’s not a superficial understanding of "I know this," but a deep understanding of the mechanism. I think a fitting metaphor here is that US dollar stablecoins act as a so-called room-temperature superconductor for the dollar. In the traditional world, the dollar has many electronic settlements, SWIFT, and various transfers, but there is a lot of friction due to regulations in different places and various underlying infrastructures. When you use stablecoins to achieve this with a ledger, you find that the efficiency is very high. So I think this metaphor is very apt; it is a room-temperature superconductor with very little friction, and it’s not that the threshold is particularly high. Now, as long as you connect, payment institutions do not need to engage with the traditional banking infrastructure at all. From this perspective, I believe it will greatly accelerate the hegemony of the dollar. For example, in the past, interest rate fluctuations in DeFi were very large. Recently, we have seen that on-chain interest rates cannot be said to be completely anchored to US Treasuries, but the liquidity of US Treasuries has already had a very strong influence on the entire DeFi liquidity and the interest rate market of stablecoins. This will only get stronger as more underlying protocols integrate T-Bill assets. This effectively becomes the interest rate policy of the dollar.

In the past, it was very difficult for US dollar interest rate policies to synchronize globally; each bank might have different rates. However, on-chain and in the stablecoin market, I believe the transmission of interest rates will become very efficient. I am not particularly optimistic about the so-called stablecoins from small countries. It’s not that turning a fiat currency into a stablecoin makes that stablecoin stronger, more efficient, or more liquid; the underlying still depends on the economic strength of the country. So in the end, it may just be the currencies of the US, China, the EU, and Japan—these large countries that already have a market position in the foreign exchange market and have underlying economic support—that will enter what I think will be a very important competitive market for stablecoins. If you do not enter, you will gradually be dollarized. Dollarization used to occur in politically unstable or economically turbulent small countries. If the stablecoin of the dollar continues to maintain this high monopoly, I believe it could lead to dollarization in regions like the EU and even in China. The significant difference between this and traditional dollarization is that the friction costs of switching these on-chain assets with the local currency are far lower than those in traditional foreign exchange markets. This will lead to the situation where, if you want to maintain the dollar's monopoly, I believe the EU will also see this as a significant challenge to their monetary sovereignty. Therefore, I think this will intensify the competition in the stablecoin arena among major powers.

Alex: Understood. Given the current situation, I believe all countries should see the trend of the dollar. So, accelerating the practice of their own national currency stablecoins should also be a high-probability event, right? Can we understand it this way?

Minda: Yes, in fact, everyone has realized how to do business with stablecoins. Essentially, the underlying logic of stablecoins is still to help sell government bonds. Think about it; what we stablecoin holders ultimately do is become the purchasing power for US Treasuries. Whether it’s Tether or USDC, or buying on our chain, it will ultimately convert into the purchasing power of US Treasuries. In this way, you are effectively lowering the financing costs of the dollar. Therefore, ultimately, whether it’s consumers, financial institutions, or the government in the US, they may be the biggest beneficiaries. For example, the promotion of the renminbi stablecoin will definitely lower the financing costs of the renminbi. I think everyone has understood this. It’s not simply about maintaining a monopoly position in the clearing and settlement of a certain currency; it’s actually about pricing power, capital circulation, and funding costs, which are completely interconnected.

Centralized Stablecoins vs. Decentralized Stablecoins

Alex: In the last round, there were quite a few algorithmic stablecoins you just mentioned, including many decentralized stablecoins. However, the stablecoin projects emerging in this round, like Ethena and PayPal's PYUSD, are actually more closely associated with centralized institutions. Does this mean that institutionalized, centralized stablecoins are actually more suitable for the stablecoin product? Or, given the current situation, can we basically conclude that the exploration of decentralized stablecoins is very difficult to succeed?

Minda: In DeFi, stablecoins have been around since around 2014-2015, starting with Bitshares, where proposals for renminbi and US dollar stablecoins were already made. By 2015, MakerDAO emerged as the first large-scale decentralized stablecoin. I have been involved in the stablecoin space since 2019, mainly focusing on decentralized stablecoins. Looking at the entire landscape, I believe the positioning and narrative of decentralized stablecoins have changed significantly. Many of these have been disproven. For example, earlier decentralized stablecoins emphasized trading mediums and payments as very important application scenarios. Without this, the logic of decentralized stablecoins becomes difficult to establish. However, we see that in this cycle, the stablecoins that have emerged primarily focus on investment returns. For instance, Ethena had the fastest minting volume when it was primarily based on arbitrage returns. At that time, we saw mining returns of over ten percent, and with additional incentives like points and Pendle's PT, returns could reach twenty to thirty percent, making sUSDE's returns very high.

However, we observed that towards the end of the last cycle, its underlying returns had already fallen below T-bill returns. Therefore, I believe that in the decentralized stablecoin space, there may ultimately be one or two competitive players, but their appeal points are quite different from fiat stablecoins. For example, DAI still has many holders because its biggest advantage is that it has no blacklist function on-chain. However, DAI cleverly solves several issues: one is that most of its underlying returns come from government bonds; the other is that it has a reserve on-chain that can be exchanged one-to-one with USDC. Of course, this reserve has a volume, and when that volume is low, it will sell government bonds and convert them into on-chain reserves. There was a saying that all decentralized stablecoins, regardless of how they are designed, ultimately become a wrapper for USDC, referring to DAI's model. Although it is, in a sense, a token wrapped around USDC, it has characteristics such as no blacklist function and resistance to censorship, along with some collateralization features that differ from traditional fiat currencies, which gives it a certain possibility and necessity for existence in the crypto world.

You can see that over the past few years, its entire minting volume has remained relatively stable without much change. In the future, I believe the decentralized stablecoin space may split into two categories: payment-related, which I think will be very difficult to achieve, as it seems unlikely to replicate the scale of USDC. The other category will find specific scenarios. For example, as I mentioned earlier, investment-related stablecoins can aggregate various sources of returns. Ethena, for instance, is no longer solely based on arbitrage strategies; it also has T-bill returns, making it a mixed-return product. DAI is similar; it also incorporates many of Ethena's strategies. Therefore, from DAI's perspective, it is also a mixed strategy. However, it is hard to imagine a centralized stablecoin doing this. For example, the recent GENIUS Act in the US explicitly prohibits interest-bearing stablecoins. Therefore, investment-related decentralized stablecoins have opportunities, especially as they can effectively combine and assemble strategies. This is much more flexible than traditional fiat stablecoins.

Starting from the investment side is a good point. Another aspect is as an internal accounting system for DeFi protocols. For example, we have an sUSX, which is our internal lending protocol, serving as a voucher between different lending protocols. For instance, Aave has a token called GHO, which is not strictly a stablecoin, but it serves as an accounting system for liquidity between protocols. The benefit is that I can use this stablecoin to manage liquidity across different chains, somewhat like a dollar-equivalent for internal accounting between banks. I believe this aspect has a necessary existence in protocol design. This includes Curve's crvUSD, which also aims to become a unified liquidity allocation point within the entire Curve DEX pool, thereby improving capital efficiency. Therefore, I believe that decentralized stablecoins may gradually shift from "competing with fiat currencies" to being specific scenario-based equivalents, such as investment-related and inter-protocol equivalents. In this way, the entire positioning and market will be difficult to compare with fiat currencies in the future.

Impact of the Stablecoin Bill on Leading DeFi Businesses

Alex: I see that there is also a saying that as the market size of stablecoins gradually increases, even though, as you mentioned, many stablecoins may not flow into the crypto scene, there will still be some TVL flowing into our industry, which may enhance the TVL of projects like Pendle and Aave. Therefore, some voices believe that if the stablecoin bill is passed, it will be beneficial for some leading DeFi businesses. What do you think of this view? If you agree, which projects do you think are most likely to see significant improvements in their fundamentals?

Minda: I think it can be viewed from two aspects. I saw that the market reflected this yesterday, with Aave rising by 20% to 30%. However, I believe Aave's increase is not because it has stablecoins. I think it is because, as a DeFi bank, the more stablecoins there are, the better the liquidity, and more fiat stablecoins can come in. In this regard, protocols like Aave, or those of us in the lending market, are definitely benefiting, as it means more liquidity is coming in. Moreover, when stablecoins come in, they ultimately have to leverage crypto and RWA assets. So I think the ones that benefit more are those protocols that are more inclined towards decentralized stablecoins, which are not directly related. For example, lending protocols, DEXs, and Uniswap need pools for stablecoins, or there needs to be a swap pool with euros, including RWA assets. However, for native stablecoin protocols, like Ethena, it may face a significant impact. The first issue is that if Ethena relies solely on basis arbitrage, that business has already been largely consumed by traditional Wall Street financial institutions. They no longer need to engage in arbitrage through centralized trading platforms or offshore trading platforms; now, most hedge funds on Wall Street trade directly in ETFs and CME, which allows them to wash away those profits. There may be hundreds of billions of dollars involved in this.

Therefore, I believe that in terms of basis, it will definitely be increasingly squeezed in the long run, ultimately aligning with or possibly being lower than government bond yields. Even if a major bull market comes, the efficiency of traditional funds entering this market is increasing, which will significantly compress the basis. So if you purely rely on arbitrage strategies to scale up, I think it will be very difficult to grow, and it is basically unimaginable to reach the scale of USDC or USDT. Therefore, I think that managing investment-type stablecoins will face significant challenges. This is also why Ethena has transferred a portion of its assets, about several billion dollars, into T-bills. Whether more will be transferred there may depend on how high the returns from basis arbitrage are. For something like DAI, which is not purely investment-oriented, many holders keep DAI without interest, existing on-chain. I think this type of stablecoin can only be considered a neutral to slightly bearish news; it cannot be said to be entirely positive. However, I believe it is a significant benefit for bridges, lending protocols, and DEXs. Moreover, as stablecoins come in, we just mentioned that stablecoins are just the vanguard, and there are also RWA assets behind them. Recently, I traveled around Hong Kong, and all my friends from traditional financial institutions are particularly enthusiastic about RWA. I don’t know why, but it’s somewhat like when the NFT market broke out. Every traditional institution person is discussing how to engage with RWA. I believe this is definitely related to the overall clarity of regulation in the US and the development of stablecoins.

Alex: Currently, stablecoins are a business category with very strong network effects or Matthew effects, with Tether already occupying a very large market share. Now that the regulatory policies in the market are becoming clearer, many institutions want to enter the field. Do you think that, at this market juncture, the status of stablecoins can be classified as a blue ocean for both centralized and decentralized stablecoins?

Minda: Yes, I think stablecoins are still a blue ocean, but although this table is still a blue ocean, the players have changed. I believe it is no longer a blue ocean for native crypto teams, but it is still a blue ocean for traditional financial institutions and large Web2 companies. To put it bluntly, no one has really entered yet; PayPal has made an attempt, but it cannot be said to be very successful. However, for these native entrepreneurial teams, I think they may not even be able to get to the table. This is a significant issue, and in the future, it may focus on what I just mentioned, moving from other niche tracks, rather than purely competing with fiat currencies for payment and trading mediums.

The Chemical Reaction Between DeFi, AI, and Stablecoins

Alex: Okay, let’s look at a cross-domain issue. As you just mentioned, the US is quite eager to innovate and promote two industries: one is crypto, and the other is AI. In this round, we have seen many so-called AI projects emerge, but there are actually not many projects and tracks that have real product demand and market fit. Many people mention a viewpoint or define a new track called Payfi, which they believe has great potential. What do you think about the relationship between this Payfi definition and stablecoins? Will there be some chemical reactions between AI and stablecoins?

Minda: I think Payfi is a concept created by public chains and project parties to tell a story, somewhat like SocialFi or GameFi. Whether this thing can logically hold up or be implemented is still questionable. Currently, the typical Payfi projects in the market mainly focus on two narratives: one is how to combine investment and payment; how can we achieve better returns while making payments? But isn’t this perspective essentially the business of stablecoins? If stablecoins penetrate various channels, for example, USDT or USDC in various payment systems, they can also be deposited into various DeFi protocols to earn interest. How many of these opportunities can Payfi enterprises capture? There may be some particularly niche asset categories, such as accounts receivable, which might have specific scenarios for solving capital turnover, but I think it may be pushable. However, I find it difficult for this concept to become an independent large category. Of course, the combination of AI and crypto is another matter; it may overlap with Payfi but is not entirely the same. Because we know that AI agents in DeFi have a significant convenience in that they still require the intervention of payment systems.

In terms of traditional payments, the integration is not as seamless as stablecoins or native DeFi protocols. Therefore, I am quite optimistic about the future development of AI in automating capital aggregation and investment decision-making. We ourselves are also working on combining AI and DeFi, and I believe a significant barrier to the development of traditional DeFi is that all previous DeFi logic had to be written into the contracts, making scalability particularly difficult. This is also why, from 2019 to now, the entire foundational protocols of DeFi have not changed much; they are still those few AMMs, DEXs, and lending protocols, along with stablecoins. Although some contract-based projects have emerged recently, none of the players have truly captured market share to the extent that Uniswap has in AMM or DEX. The evolution of DeFi has been quite slow over the past few cycles, and one of the biggest reasons is that all DeFi logic must be fully written on-chain, and the costs of auditing and other aspects are very high. In the future, the combination of AI agents and DeFi will bring about a significant change in the entire development model; perhaps the on-chain logic will only account for 10% to 20%, while the remaining 80% of the logic will be implemented by AI agents.

We are also seeing some early use cases slowly emerging in the market. Moreover, as AI's reasoning capabilities become stronger, the differences between what we introduced in traditional trading and the flexibility and scalability of the current LLM are very significant. Therefore, recently, we have been observing that the combination of DeFi and stablecoins is definitely the most core use case, for example, whether AI agents use traditional payment media or stablecoins to pay for various services; stablecoins are certainly a more coherent way. Another interesting point is that everyone is now talking about how AI agents ultimately form a peer-to-peer closed loop. Your income and costs are all on-chain, and at the agent level, everything can be completed in a fully closed loop without any human intervention. Under this premise, as agents become increasingly automated, you must integrate a framework that can complete your income aggregation and payment on-chain, which makes the combination of stablecoins and DeFi with agents a very natural thing.

Alex: Understood. You just mentioned the combination of DeFi and AI, which is also a topic I have been quite interested in recently. You mentioned that the development speed of smart contract-based DeFi has been relatively slow because most of its logic needs to be executed in smart contracts on-chain. You also pointed out that perhaps 80% of the logic will be implemented by AI, while 20% will be in on-chain smart contracts. What does this 80% correspond to?

Minda: Let me give you an example. For instance, we are currently working on a cross-chain yield aggregation product. Traditionally, this is not feasible in DeFi. First, different chains involve information synchronization, making atomic transactions impossible. You can use some cross-chain protocols, like LayerZero, to make some connections, but the logic required for different funding sources and configurations across different chains and protocols is so complex that no single contract can be written and deployed across different chains to solve it; traditional DeFi cannot achieve this. However, with AI agents, traditional DeFi can focus solely on the user-end aspects of depositing and withdrawing money, as well as on-chain strategies, and from cross-chain to depositing into different protocols, it only handles this part. Essentially, it goes back to what we said: the settlement of crypto must be implemented in on-chain logic to ensure that it is at least verifiable and transparent on the ledger. However, all the logic in between, such as withdrawing from Aave on Ethereum to deposit into Morpho on Base, and then leveraging and looping in Morpho, involves a lot of logical changes. I think a significant issue with traditional DeFi is its business logic. The iteration of products like Binance or CeFi is measured in days or weeks. When something new comes out, it can be launched immediately; this is the centralized service logic of centralized trading platforms like Binance. However, all the logic in DeFi must be fully written on-chain. We see that Uniswap, Aave, and MakerDAO, which are the foundational DeFi protocols, have iteration cycles measured in two to three years. The reason it takes so long is that all DeFi is static logic, while business changes are dynamic. Today, a strategy needs to be revealed, and tomorrow another strategy needs to be disclosed; this is dynamic.

So I think AI agents are particularly suitable for expanding many dynamic logics. In the past, when we developed AI, we had to exhaustively enumerate every rule. But now, many reasoning models do not require exhaustive rules and situations. For example, when we talk about cross-chain cost issues, it can understand how gas fees are spread over several days and how that affects APY, without us needing to redefine a very detailed rule. Therefore, I believe that in the future, aside from the on-chain aspects I just mentioned regarding the inflow and outflow of funds, most of the logic can be implemented through agents. The biggest difference between this and traditional CeFi, like Binance, is whether human intervention is needed. For example, if Binance did not have a team to optimize and intervene, the business would definitely not run smoothly. So I think there may be some relatively simple business logics in DeFi that can be fully optimized and implemented by agents without team intervention. The next step may expand from yield aggregation to lending to swaps; I believe that in the future, agents will gradually implement all of this. In fact, we have seen this cycle with projects like Ethena, which is hard to classify as a DeFi project since all the funds are within trading platforms and are controlled by the team to run arbitrage strategies. However, I believe that in the future, all underlying DeFi protocols will be transformed using AI, gradually replaced by agents. This trend is very obvious. If a so-called DeFi product appears in the next cycle, it will not be a DeFi product based entirely on on-chain contract logic in the traditional sense.

Alex: Understood. For these next-generation DeFi products that incorporate AI modules, if AI accounts for 80% of the execution logic, how should the verifiability of this AI module or the certainty of its output results be ensured?

Minda: Yes, I think this is currently the biggest issue. The hallucinations in AI models are still quite evident. For example, with the same request, if I provide you with funds, data, and APIs, you give me a strategy. Currently, with most AI models, if you ask the same question 10 times, the strategies they provide will be different. There are definitely some issues that need to be resolved here. However, I feel that compared to three months ago when I tested these models, there has been tremendous progress, and the reduction in hallucinations is significant. You will find that its strategies still align with our cross-validation, although its consistency is still problematic; it is hard to ensure that 100 requests yield the same result. But at least I think it is close enough, and it can accurately solve arithmetic problems. One way to address this issue is to refine the workflow of the agent for each task, reducing the frequency of hallucinations. I believe that as reasoning models improve, this issue does not need to be overly concerning. Perhaps in another year, including Grok's recent version 3.5, if it truly bases its reasoning on first principles or physical principles, many hallucination issues may gradually be resolved. In the future, a large prompt could be input, resulting in very high-quality outputs. So the benefit of this issue lies in the enhancement of foundational models.

We see that many projects in DeFi are also slowly developing MCPs. Once MCPs are established, they essentially segment the workflow. I believe that more specialized MCPs will emerge in the future. For example, if you ask me for a strategy, this MCP is specifically designed to run lending arbitrage strategies, and I can provide you with an executable strategy that has been validated through various means. So I think an interesting point moving forward is that previously, we talked about modularity or composability in DeFi; you could use AAVE's code or Uniswap's code to create another AMM. From the perspective of AI and DeFi development, many specialized MCPs may emerge. The MCP itself is a module, and when combining different MCPs, many new functionalities can be realized. I think modularity is developing very rapidly at the MCP level. Of course, this will raise new security issues, such as whether the AI environment has been poisoned, leading to various risks. However, I think compared to scaling, these are minor issues. The security of DeFi has also evolved over the years.

Therefore, I believe that AI may actually make many DeFi security issues easier to resolve. For example, a significant reason why many traditional financial institutions are reluctant to enter DeFi is that we spend millions of dollars on audits, but I cannot ensure that there are no risks; I can never guarantee that. However, traditional financial institutions do not face such issues; they cannot say that all the money in their bank has been stolen. The hacking incidents in DeFi protocols involve the penetration of all assets within the protocol; when issues arise, the entire pool is often drained. However, if many of the future DeFi logics are controlled by AI, there are many ways to incorporate traditional Web2 risk control methods at the agent level, such as withdrawal limits, which can be written into the logic through agents. Therefore, it may be easier to refine the security gray areas; traditional DeFi cannot be too detailed due to gas fee issues and other new bugs and security problems.

Alex: Understood. One last small question, also extending from what you discussed. You mentioned that many codes used to require auditing institutions. Based on your observations, with the advancement of AI, is the security expenditure for a DeFi project increasing or decreasing? Has there been a noticeable decline in its security costs over the past year or two?

Minda: I think we need to look at several factors to determine if costs are decreasing. One major issue in DeFi is that all audits struggle to cover all possibilities; it’s not just about code audits but also formal verification, which is also difficult to exhaustively cover all security boundary logics. This is why in traditional DeFi, people are reluctant to create overly complex products; when complexity increases, logical vulnerabilities or various edge cases emerge. I believe that the security audit costs and security boundaries of a DeFi product with AI added are much more controllable than those of a traditional DeFi product. I don’t have specific numbers because this is still very early, but my feeling is that DeFi AI products can implement more logic without needing to spend as much on audits. The capabilities and logics of the two are quite different.

Alex: Understood. Today we discussed a lot, starting from stablecoins, extending to the relationship between stablecoins and DeFi, as well as the intersections of DeFi and AI, including AI and stablecoins. Thank you very much, Minda, for joining our program today and sharing so many insights and perspectives. Thank you.

Minda: Alright, thank you.

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