Written by: Nishil Jain

Translated by: Block unicorn

Introduction

In the 1960s, the credit card industry was chaotic. Banks across the United States were trying to establish their own payment networks, but each network operated independently. If you held a credit card from Bank of America, you could only use it at merchants that had a partnership with Bank of America. When banks attempted to expand their business to other banks, all credit card payments faced the challenge of interbank settlement.

If the card accepted by the merchant was issued by another bank, the transaction had to be settled through its existing check settlement system. The more banks that joined, the more settlement issues arose.

Then Visa emerged. While the technology it introduced undoubtedly played a significant role in the revolution of card payments, its most important success lay in its global universality and its ability to successfully bring banks from around the world into its network. Today, almost all banks globally are part of the Visa network.

While this seems very normal today, imagine the scale of the task of convincing the first thousand banks, both domestically and internationally, that joining a cooperative agreement rather than establishing their own network was the wise choice.

By 1980, Visa had become the dominant payment network, processing about 60% of credit card transactions in the United States. Today, Visa operates in over 200 countries.

The key was not more advanced technology or more funding, but structure: a model that could coordinate incentive mechanisms, decentralize ownership, and create compound network effects.

Today, stablecoins face the same fragmentation issues. The solution may be similar to what Visa did fifty years ago.

Experiments Before Visa

Other companies that emerged before Visa failed to develop.

American Express (AMEX) attempted to expand its credit card business as an independent bank, but its scale of expansion was limited to continuously adding new merchants to its bank network. On the other hand, BankAmericard was different; Bank of America owned its credit card network, and other banks only utilized its network effects and brand value.

American Express had to individually approach each merchant and user to get them to open their bank accounts; whereas Visa achieved scalability by accepting banks into its network, with each bank that joined the Visa cooperative network automatically gaining thousands of new customers and hundreds of new merchants.

On the other hand, BankAmericard's infrastructure had issues. They did not know how to efficiently settle credit card transactions from one consumer bank account to another merchant bank account. There was no efficient settlement system between them.

The more banks that joined, the more severe the problem became. Thus, Visa was born.

Four Pillars of Visa's Network Effect

From Visa's story, we learn about 2-3 key factors that led to the accumulation of its network effects:

Visa benefited from its identity as an independent third party. To ensure that no bank felt competitive threats, Visa was designed as a cooperative independent organization. Visa did not compete for the distribution pie; the banks competed for the pie.

This incentivized participating banks to strive for a larger share of profits. Each bank was entitled to a portion of the total profits, with the size of the share proportional to the total transaction volume it processed.

Each bank had a voice in the network's functionality. Visa's rules and changes had to be voted on by all relevant banks, and they required 80% approval to pass.

Visa had exclusivity clauses with each bank (at least initially); anyone joining the cooperative could only use Visa cards and networks and could not join other networks—thus, to interact with Visa banks, you also needed to be part of its network.

When Visa's founder Dee Hock lobbied banks across the United States to join the Visa network, he had to explain to each bank that joining the Visa network was more beneficial than establishing their own credit card network.

He had to explain that joining Visa meant more users and more merchants would connect to the same network, facilitating more digital transactions globally and bringing more benefits to all participants. He also had to clarify that if they established their own credit card network, their user base would be very limited.

Insights for Stablecoins

In a sense, Anchorage Digital and other companies that now offer stablecoin as a service are replaying the BankAmericard story in the stablecoin space. They provide the underlying infrastructure for new issuers to build stablecoins, while liquidity continues to disperse into new tokens.

Currently, there are over 300 stablecoins launched on the Defillama platform. Moreover, each newly created stablecoin is limited to its own ecosystem. Therefore, no single stablecoin can generate the network effects necessary to become mainstream.

Since the same underlying assets support these new coins, why do we need more coins with new code?

In our Visa story, these are like BankAmericards. Ethena, Anchorage Digital, M0, or Bridge, each allows a protocol to issue its own stablecoin, but this only exacerbates the industry's fragmentation.

Ethena is another similar protocol that allows yield transfer and white-label customization of its stablecoin. Just like MegaETH issued USDm—they issued USDm through tools supporting USDtb.

However, this model has failed. It only fragments the ecosystem.

In the credit card case, the brand differences among different banks were not important because they did not create any friction in payments from users to merchants. The underlying issuance and payment layer was always Visa.

However, this is not the case for stablecoins. Different token codes mean an infinite number of liquidity pools.

Merchants (or in this case, applications or protocols) will not add all stablecoins issued by M0 or Bridge to their accepted stablecoin list. They will decide whether to accept based on the liquidity of these stablecoins in the public market; the coins with the most holders and the strongest liquidity should be accepted, while the rest will not.

The Path Forward: The Visa Model for Stablecoins

We need an independent third-party organization to manage stablecoins across different asset classes. The issuers and applications supporting these assets should be able to join the cooperative and gain reserve earnings. At the same time, they should also have governance rights to vote on the development direction of the stablecoins they choose.

From the perspective of network effects, this would be an excellent model. As more issuers and protocols join the same token, it will facilitate the widespread adoption of a token that can retain earnings internally rather than flowing into others' pockets.

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