Moderator: Alex, Research Partner at Mint Ventures
Guest: Mindao, founder of dForce
Recording time: 2025.5.21
Disclaimer: The content discussed in this podcast does not represent the views of the institutions where the guests work, and the projects mentioned do not constitute any investment advice.
Hello everyone, welcome to WEB3 Mint To Be initiated by Mint Ventures. Here, we continue to ask questions and think deeply, clarify facts, explore reality, and find consensus in the WEB3 world. We clarify the logic behind hot topics, provide insights that penetrate the events themselves, and introduce multiple perspectives.
Alex: We have invited our old friend Mr. Mindao to this episode. Mr. Mindao has talked to us about many topics before, including the US stock chain and DeFi. This time we are going to talk about a recent policy hotspot, which is stablecoin, which may also be one of the most widely adopted products in the blockchain field. Lets first ask Mr. Mindao to say hello to us.
Mindao: Hello everyone, I am Mindao. I am very happy to come here again today to share some information about stablecoins.
What’s different about stablecoins in this cycle
Alex: OK, lets get to the point today. We know that stablecoins have gone through many cycles, and in each cycle, core business indicators and scale have been able to hit new highs. In your opinion, compared with the previous cycle, in addition to the regulatory policy, which we will discuss later, what are the differences that are particularly worth paying attention to in this cycle?
Mindao: We know that in the DeFi summer of 2021 and 2022, there were actually many types of stablecoins, especially on-chain stablecoins, such as TERA, and many algorithmic stablecoins that are completely based on the chain. But after TERA collapsed in 2022, we saw that the entire stablecoin track had a big differentiation change in the supply-side structure. Needless to say, the dominant type is still dominated by fiat stablecoins. We saw that the minting volume of stablecoins actually fell from 2022, I remember that the minting scale was about 180 billion US dollars, to the entire Luna collapse, and fell to about 130 billion or 140 billion, and then slowly stabilized and began to rebound. Recently, I looked at the data and it should be 250 billion US dollars. So in fact, the TVL of the entire DeFi has not risen to a new high, but we see that the minting volume of stablecoins has exceeded the previous minting volume. The driving force of the minting of stablecoins here is actually not the native stablecoins on the chain that we are talking about, that is, the algorithmic and over-collateralized type. We see that the only bright spot in this past cycle may be Ethenas USDE.
We just mentioned that USDT and USDC are fiat currency payment types. In fact, Ethena should be considered as a financial management type, which is a stable currency based on the pricing arbitrage of native Crypto assets. In fact, it cannot be called a stable currency in a strict sense, because for example, when I participate in Ethena mining, most of the risks I bear are its price volatility risks, because it cannot be exchanged one-to-one. Its entire exchange mechanism is not linked to the US dollar stable currency, but is still based on the pricing arbitrage positions of its trading platform. Of course, it has recently transformed. I have seen that about one billion US dollars have been bought for T-Bill assets recently. But if we talk purely from the perspective of the last cycle, we actually see the differentiation of stable currencies. The payment type is very obvious, and the fiat currency is still dominant. Then, although DAI is considered the oldest decentralized stable currency, its entire minting volume is basically maintained at the level of 500 million or 600 million US dollars, and there is no further breakthrough upward.
I think one thing that is certain after DeFi summer is that many stablecoin narratives have been falsified at least at this stage, such as algorithmic ones. With the clarification of supervision, I think many of these types of stablecoins may be gradually eliminated. Then we can see that many of the new stablecoins on the market are driven by channels, such as PayPal. In theory, USDT and USDC are also stablecoins driven by channels, both of which are backed by trading platforms. USDT used to be Bitfinex, and USDC was backed by Circle. But even with the support of these two major trading platforms, it is very difficult to develop. Binance also supports many stablecoins, with such good resources, but none of them have taken off. So I think each cycle has its own timing. Judging from this timing, I think that in the future, more stablecoins driven by channels will be launched, especially some compliant channels.
Regulatory policies with the greatest impact
Alex: I see. Just now you mentioned that a big change is the timing issue. In fact, the legislation of stablecoins, especially in the United States, has progressed relatively quickly in the past year. For example, just yesterday, the U.S. Senate further promoted the Genius bill in a procedural vote, and it will enter the discussion of the whole house and the formal vote of the Senate. In your opinion, what are the legislative or regulatory policies that may have the greatest impact on the industry? How does it affect the current and future stablecoin industry?
Mindao: Actually, I think the whole regulation is divided into two major markets, one is the European Union and the other is the United States. The European Unions MiCA is the Crypto Asset Market Regulation, which is relatively strict in terms of the regulatory framework. On the US side, there was actually a FIT21 that everyone discussed a lot last year, the so-called Financial Innovation, Technology and Technology 21st Century Act. This has been passed by the House of Representatives and should be reviewed in the Senate this year. The Genius Act you just mentioned was further promoted in the Senate yesterday. The difference between the Genius Act and the previous FIT21 is that Genius is mainly about stablecoins, guiding and establishing the entire regulatory framework for stablecoins in the United States, so its focus is more on the stablecoin side.
Recently, everyone knows that the RWA track or this segment is very popular. Stablecoins, as the vanguard of RWA, are also the tokenization of US dollar deposit certificates and treasury bonds. So I think this has a very great symbolic significance. The key point is that the first is to clarify and confirm the identity of the issuer, such as financial institutions and non-financial institutions, but if there is an application for a license, of course, there is no complete definition of whether a technology company can be a stablecoin issuer. There are restrictions on some large technology companies, but for example, whether Facebook and Google count, or whether it can issue with its subsidiaries, there is no clear statement on this. But basically from the spirit of the entire legislation, it is to encourage compliant financial institutions, of course, including some non-financial institutions, but not that kind of large technology companies can enter this field.
I think another important point is the layering of supervision. First, at the federal level, the scale of more than 10 billion US dollars is subject to federal supervision, and the rest are subject to state supervision. So I think the implementation and clarification of the entire supervision will play a very big role in promoting the issuance of stablecoins in the future. Another thing is that we call the United States the so-called legislative beacon country, and many other countries and regions are following the relevant framework of the United States. For example, we have seen that Hong Kong has also been pushing the so-called stablecoin sandbox recently, including the Hong Kong dollar stablecoin. I also saw a lot of it at the meeting in Hong Kong this time. In addition to the Hong Kong dollar stablecoin we mentioned, many teams are also working on offshore RMB stablecoins. So I think this US legislation is not only a domestic legislation in the United States, but also has a demonstration effect on other places, including Hong Kong, Singapore, and Dubai.
USDT Vs. USDC
Alex: I see. If we observe the market share of stablecoins, we will find that in the last cycle, Tether, the issuer of what we call USDT, still had a big challenge in gaining market share. Including the last round of DeFi Summer, the share of USDC issued by Circle actually grew relatively fast. But after entering this cycle, we found that the overall growth rate of USDT is much faster than that of other competitors, including its total scale from the peak of the last round. I checked and it was about 80 billion. It has almost doubled to more than 150 billion or 160 billion. But if we look at the market value of USDC, it has only grown by less than 20% from the peak in early 2022. Including other stablecoins, which you just talked about, the growth rate in the past cycle was not fast. What may be the reason for this situation?
Mindao: Yes, this is a very interesting comparison. Because everyone has been comparing USDC and USDT, saying that both are the biggest beneficiaries of the rise of the stablecoin market. But in fact, the financial report disclosed by Circle some time ago disclosed many things about the business model that you may not see, including that everyone actually overestimated the profit margin of USDC, and in fact, a large amount of costs are channel costs. In addition, I think many people regard USDT and USDC as equivalent or equivalent stablecoins. In fact, these two are different things. USDT is closer to a shadow dollar, and USDC is what we traditionally call a stablecoin. I think the difference in the growth of their minting volume in the past few years is mainly that if we regard stablecoins as a river, the water storage capacity of the downstream of the river depends on how many tributaries there are in the upstream. In fact, the tributaries of USDC, in terms of use and use cases, are financial management on one side and deposits and withdrawals on the other. Deposit and withdrawal may be the biggest competitive advantage of USDC in stablecoins, that is, it can be exchanged from trading platforms and minters for USDC on a one-to-one basis.
But I think the market structure of USDT and USDC is completely different. For example, there may be financial management, and there are various trading platforms that accept financial management. Then the use scenarios of USDT on the trading side are far more than USDC. For example, the perpetual contracts of various trading platforms use USDT as margin, most of them; in addition, at the circulation level of the OTC side, the volume of USDT may be tens or hundreds of times the secondary market circulation of USDC. So we see that if it is a river, USDT has too many tributaries, and the water storage under it is much greater than that of USDC. So I think the difference in this point depends entirely on their own use scenarios. USDT is closer to the status of shadow dollar, or underground dollar, and is closer to our definition of money, rather than just a stable currency, a definition that is pegged to the US dollar at a one-to-one ratio. Because you see that the actual price of USDT is not pegged to the US dollar at a one-to-one ratio most of the time, and it is often floating in the market. For example, in some offshore markets, there may be a premium or a discount.
Of course, one advantage of the shadow dollar is that it has a lot of trading counterparties. As a general equivalent, it is accepted by a much wider range than USDC, and its moat is much larger. Another key point is that from the financial report disclosed by Circle, we can see that its channel fees for Binance and Coinbase are actually very high, but USDT has completely eliminated the saying that I have to pay you a channel fee, and many trading platforms have taken the initiative to list the currency. So in terms of usage scenarios and utility, I think USDT is much larger than USDC.
Alex: OK. Since USDT is now so dominant, I believe that USDC, including many institutions that will enter the market to issue their own stablecoins, also hope to develop towards the current position of USDT. In your opinion, is it still possible for them to achieve the scale close to USDT and the current channel effect? For example, lets take USDC as an example. As its biggest competitor, do you think it has this possibility at present?
Mindao: On the contrary, I think USDC may have a greater difficulty in this regard, mainly because the competitors who came later basically took over the USDC market. For example, in terms of fiat currency deposit and withdrawal channels, if banks and financial institutions want to issue stablecoins, this is their natural advantage. In this regard, I think USDC cant compete with it at all. Just like PayPal, its other deposit and withdrawal channels, trade or payment channels, are actually much stronger than USDC. So if stablecoins really pass the House of Representatives and become law this year, I think it will open the entrance to the entire compliant stablecoin, and then these new players who come in are actually very strong in traditional channels. USDC relies on Coinbase and Binance, and has a first-mover advantage, but the moat is relatively low. For example, Facebook, of course, it is said that large technology companies may not be allowed to issue directly, but what if it is through cooperation or other means? I see that they have recently expressed such an intention, and may restart the Libra project. Including Twitters X, they also have great ambitions in the payment and stablecoin fields. Therefore, if they come in, I think they will completely crush the channels that USDC is currently cooperating with.
The possibility of traditional financial institutions entering the stablecoin field
Alex: Do you think that traditional financial institutions, including those with their own channel advantages on the Internet, also have ambitions for Tethers on-chain, including scenarios beyond their existing traditional deposit and withdrawal businesses? What are the possible ways or methods for them to enter this field?
Mindao: Yes, JD.com is also preparing to issue a Hong Kong dollar stablecoin in Hong Kong, and Alibaba is also making arrangements in this regard, all of which use their e-commerce business as a tentacles. But I think Tethers overall positioning is quite clever now. The first is its current network effect. I mean the real network effect, not like USDC, which is mostly subsidized and maintained by high channel costs. I think Tether is the most typical example of a truly natural network effect. This kind of network effect will continue to strengthen and is not so easy to be replaced by a single channel. For example, if JP Morgan issues a stablecoin, it may be more convenient to deposit and withdraw funds between banks. But in terms of secondary transactions or OTC circulation, it may not be able to compare with Tethers current network effect.
So from this point of view, I think Tether has a unique competitive advantage in the current compliance situation. Because the market it has seized is not easy for other compliant stablecoins to enter, or other channels are not fully covered. And it is not only used on the trade side, payment side and OTC side, but also covers basically all the scenarios that compliant stablecoins can cover. Except for the one-to-one exchange channel of banks, it is not possible to open it directly in the European and American markets. In addition to this, other secondary circulation and payment sides have been covered. So I think it may be difficult for these later compliant stablecoins to compete with Tether. In fact, Tether has many challengers. When it came out in 2015, no one took it seriously. Later, you saw Huobis stablecoin HUSD, OKX has a stablecoin, and Binance has already launched the third stablecoin, but none of them is stronger than it, and even has not reached the scale of USDC. It can be seen that the network effect here and the channel cost required to promote it later are very high.
Alex: I see. When the two parties were discussing the Genius Act, Elizabeth Warren, a major opponent of the Democratic Party, mentioned a risk point. She believed that once the bill was passed, the market size of stablecoins might grow from the current 200 billion to trillions in a few years. Although she was not satisfied with the current bill and believed that the control was not strong enough, she had such a prediction. Do you think this prediction is reliable? Can the scale really expand tenfold to trillions in a few years? In addition, is it possible that the additional market share of 10 trillion will be more attributed to companies like Tether that are already in a leading position? Or is it possible that the additional market share will be occupied by some new players, including the stablecoins issued by JP Morgan that you just mentioned, or stablecoins issued by large Internet companies?
Mindao: Yes, Elizabeth Warren has always been against Crypto. I think she has deviated and been unfair in her view of this matter. Lets put aside the domestic political issues in the United States. For example, when the stablecoin bill was introduced, the US congressman had already held another meeting to disclose the so-called Trump familys crypto industry. I think this is a very political issue. For example, in the stablecoin bill, there is actually a lot of opposition because the Trump family also issued a stablecoin called USD 1, so I think there are many political issues in it. But lets put aside politics. Now the entire stablecoin is about 180 billion US dollars, which is all used to buy US bonds. It has become one of the top ten holders of US bonds. Then we can see that if this market continues to grow, the amount of US bonds will definitely grow in the same proportion. There is no doubt about this. Of course, I think 10 trillion may be a big goal. The general estimate is that it may be possible to break through the scale of 1 trillion US dollars by the end of next year. I think everyone may still feel vague about the growth of the entire stablecoin. For example, when we were doing DeFi in early 2019, the TVL of the entire DeFi was less than 100 million US dollars, about 60 to 70 million US dollars. By the DeFi summer peak in 2020, it was about 250 billion US dollars, an increase of 2,000 to 3,000 times. The minting volume of stablecoins is similar, from tens of billions of US dollars to more than 200 billion US dollars today, and the growth is hundreds of times. Of course, I think it is definitely difficult to increase so many times purely relying on the current two companies.
However, we have seen that the amount of T-bills on the chain of BlackRock has increased by 200 to 300 million US dollars in recent months. So I think if the compliance institutions come in, it will not grow slowly, but may double in half a year or a year. So I think Tether will definitely have a large share growth in this compliance framework, but the greater growth may come from other new compliance institutions, or the issuance of stablecoins by technology companies. This proportion will slowly increase. There is a very large Web2 payment company called Stripe. Its founder shared in his speech that in the past 6 months, he acquired a stablecoin payment platform or technology integrator called Bridge. After the acquisition, the data has increased by dozens or hundreds of times compared with the traditional Web2 data.
So I think that in the future, stablecoins will greatly replace the existing inter-bank settlement and payment infrastructure, and the speed will be very fast, and it may be fully laid out in the next two or three years. So how much stablecoin issuance is needed to carry the replacement of the new infrastructure? This amount must be very large. I don’t think we should understand this matter purely from the past DeFi cycle or cryptocurrency cycle, because the development of stablecoins has little to do with the cryptocurrency cycle. This is why stablecoins still broke new highs after the DeFi summer crash. In fact, the entire crypto asset itself has not changed much. Because a large amount of funds have come in, it does not necessarily mean that it has to look for arbitrage opportunities in crypto. There may be many opportunities to buy US bonds on the chain. So I think its growth curve is difficult to compare with the growth of DeFi or crypto assets by following the same principle. I think this growth, if open, may be leapfrog.
Possible measures of various countries on stablecoins
Alex: I see. Lets look at it from a bigger perspective. The growth of the US dollar stablecoin is so rapid, and there are so many institutions coming in. In fact, it is very helpful for the circulation of the US dollar in the global field and covering more scenarios. On the other hand, many international markets are questioning the basic value of the US dollar and US debt. It should be Moodys two days ago, which also downgraded the rating of the US dollar or US debt. There seems to be a strong comparison between the two sides. The United States has begun to promote the laying of US dollar stablecoins in global channels. Compared with the US dollar, do other countries feel a crisis in the stablecoin issue? Or what kind of measures do they have? Please share your views based on your observations.
Mindao: I think the sense of crisis is very strong. Including the US, we are talking about MAGA now, MAGAs AI and encryption policies, in fact, I think its only imaginary enemy is China. All the promotion of the US dollar stablecoin or the promotion of the US dollar crypto market is benchmarked against China. For example, if the United States does not promote the US dollar stablecoin, Chinas Belt and Road Initiative will do this currency swap, including China is actually very active in promoting the development of the RMB digital currency. I think the United States has a very clear understanding not only of the crypto market, but also of the continuation of the hegemony of the entire US dollar. Including the current US Treasury Secretary himself has worked in the Soros Fund for many years, so he is the most knowledgeable about the currency market among all the past Treasury Secretaries. When he was at the Soros Fund, he also sniped the British pound, so he himself has a very deep understanding of the currency market. At the same time, the Secretary of Commerce is one of Tethers shareholders. I think they understand the relationship between business logic and the hegemony of the US dollar and stablecoins very well. It is not a superficial saying I know this thing, but a very deep understanding of this mechanism. I think there is a more appropriate metaphor here, that is, the US dollar stablecoin is a so-called room temperature superconductor of the US dollar. In the traditional world, there are many electronic settlements for the US dollar, such as SWIFT and various transfers, but the friction is very high, there are local regulations, and there are infrastructures of different systems. When you use a ledger to implement it through stablecoins, you will find that this thing is very efficient. So I think this metaphor is very appropriate. It is a superconductor at room temperature, with very little friction, and at the same time, the threshold is not particularly high. As long as you connect it, as a payment institution, you don’t have to touch the traditional bank’s infrastructure at all. So in this regard, I think it will greatly superconduct the speed of the US dollar’s hegemony. For example, the interest rate fluctuations in DeFi were very large in the past. As you can see, the interest rate on the chain recently cannot be said to be completely anchored to the US Treasury bonds, but the transmission of the US Treasury bonds in the entire DeFi liquidity and the entire stablecoin interest rate market is already very strong. This will only become stronger and stronger, because more and more underlying protocols integrate the assets of this T-Bill. This becomes the interest rate policy of the US dollar.
In the past, it was difficult to synchronize the interest rate policy of the US dollar globally. Each bank may have different interest rates. However, on the chain, in the stablecoin market, I think the transmission of interest rates will become very efficient. In fact, I am not particularly optimistic about the so-called stablecoins of small countries. Because it does not mean that turning a legal currency into a stablecoin will make the stablecoin stronger, more efficient, and more liquid. The underlying factor still depends on the economic strength of the country. So in the end, there may only be the United States, China, the European Union, and Japan, which are large countries that already have a relatively strong market position in the foreign exchange market and have underlying economic support. The legal currencies of these countries may enter the stablecoin market, which I think is very important. Because if you dont enter, you will gradually be dollarized. Dollarization used to happen in small countries with relatively turbulent politics or the entire economy. If the stablecoin of the US dollar continues to maintain this high monopoly, I think it may lead to the gradual dollarization of the European Union and even in regions like China. Because the biggest difference between this thing and traditional dollarization is that when the assets on the chain switch with the national currency, its friction cost is much lower than that of the traditional foreign exchange market. This will lead to the conclusion that if you want to allow the US dollar to continue to monopolize, I think the European Union will also feel that this is a big challenge to their monetary sovereignty. So I think this will intensify the competition in the stablecoin track among major countries.
Alex: I understand. In the current situation, I believe that all countries should be able to see the trend of the US dollar. So it is likely that they will accelerate the practice of their own stablecoins. Can we understand it this way?
Mindao: Yes, in fact, everyone understands how to do the stablecoin business. In fact, in essence, the underlying logic of stablecoins is to help sell treasury bonds. Think about it, what do we stablecoin holders do in the end? Isnt it to become the ultimate purchasing power of US bonds? Whether it is Tether, USDC, or our chain, it will eventually be converted into the purchasing power of US bonds. In this way, you are reducing the financing cost of the US dollar. So in the end, whether it is consumers, financial institutions, or the government in the United States, they may be the biggest beneficiaries. For example, the promotion of RMB stablecoins will definitely reduce the financing cost of RMB in the end. I think everyone has understood this. This is not simply about maintaining a monopoly position in the clearing and settlement of a certain currency. In fact, it is still a pricing power, capital circulation, and capital cost. In fact, it is completely connected to the two sides of the same coin.
Centralized Stablecoins Vs. Decentralized Stablecoins
Alex: In the last round, there were quite a lot of algorithmic stablecoins that you just mentioned, including many decentralized stablecoins. However, some stablecoin projects that appeared in this round, such as Ethena and PayPals PYUSD, are actually relatively typical stablecoins associated with centralized institutions. So at present, does this mean that institutional and centralized stablecoins are actually more suitable for stablecoins? Or based on the current situation, can we basically determine that the exploration of decentralized stablecoins is difficult to succeed?
Mindao: In DeFi, stablecoins have actually been around since Bitshare in 2014 or 2015. At that time, RMB stablecoins and USD stablecoins were already proposed. In 2015, MakerDAO came out and was the first large-scale decentralized stablecoin. I have been working on the stablecoin track since 2019, mainly decentralized stablecoins. In fact, looking at the extension of the entire track, I think the positioning and narrative of decentralized stablecoins have changed a lot so far. Many of them have been falsified. For example, the previous decentralized stablecoins still regarded transaction media and payment as a very important application scenario. Without this, the logic of decentralized stablecoins itself would be difficult to establish. However, we have seen that in this cycle, the main focus of several stablecoins that have come out is basically on financial management income. For example, when the minting volume of Ethena was the fastest, the income from arbitrage basis was the main point. For example, at that time, the mining income was basically around 10%. Even if we added points and some incentives from Pendles PT, the income could reach 20 to 30%. At that time, the income of sUSDE was very high.
But we see that at the end of the last cycle, its underlying income was actually lower than that of T-bill. So, I think there may be one or two competitors in the decentralized stablecoin track. Of course, I think its appeal is very different from that of fiat stablecoins. For example, many people still hold DAI, because the biggest point of DAI is that there is no blacklist function on the chain. But DAI has solved several problems in a very clever way: one is that most of its underlying income comes from government bonds; on the other hand, it has a reserve on the chain with USDC, which can be exchanged one-to-one. Of course, this reserve is limited. When the amount is small, it will be sold from government bonds and then converted into on-chain reserves. So there was a saying at the time that in fact, all decentralized stablecoins, no matter how they are designed, are ultimately wrappers of USDC, that is, a packaged version, which is the DAI model. Although it is a token encapsulated by USDC to some extent, it has no blacklist function, is censorship-resistant, and has some features that allow for the addition of collateral, which makes it different from traditional fiat currencies in terms of economic model or monetary policy. This makes it possible and necessary for it to exist in the crypto world.
You can see that in the past few years, the total minting volume has remained at that position, without much change. In the future, I think the decentralized stablecoin track may be divided into two categories: payment-type, which I think is basically difficult to achieve, and it is difficult to achieve the volume of USDC. Now it seems that this model cannot be achieved. The other two categories will find some specific scenarios. For example, the financial management type I just mentioned can bring together various sources of income. For example, Ethena is no longer a single arbitrage strategy. There is also T-bill income at the bottom, so it is a mixed income thing. The same is true for DAI, which also connects to many Ethena strategies. So from the perspective of DAI, it is also a mixed strategy. But it is difficult to imagine a centralized stablecoin doing this. For example, the recent GENIUS Act in the United States explicitly prohibits the occurrence of interest-bearing stablecoins. So in fact, decentralized stablecoins like this kind of financial management type have opportunities, especially it can be very well combined and assembled on the strategy side. This is still much more flexible than traditional fiat stablecoins.
I think it is a good point to start from the financial management end. Another point is that it is an accounting system within the DeFi protocol. For example, we actually have our own sUSX, which is an internal lending protocol, and serves as an accounting voucher between our different lending protocols. For example, Aave has a GHO, which is not a stablecoin in the strict sense, but it is a system for accounting between protocol liquidity. The advantage is that I can use this stablecoin to dispatch the liquidity of different chains, which is a bit like a dollarized equivalent for internal accounting between banks. I think this is necessary in the protocol setting. Of course, including Curves crvUSD, it also hopes to make it a unified liquidity allocation place in the entire Curve DEX pool, so that capital efficiency can be improved. So I think that in decentralized stablecoins, it may slowly change from the kind of I compete with legal currency to a specific scenario, which we just talked about financial management, including the equivalent between protocols. In this way, the entire positioning and market will be difficult to compare with legal currency in the future.
The impact of the Stablecoin Act on leading Defi businesses
Alex: I think there is a saying that after the stablecoin market scale gradually grows, although many stablecoins may not flow into the crypto scene as you just said, there will still be some TVL flowing into our industry, including the possibility of increasing the TVL of Pendle and Aave lending protocols. Therefore, some people believe that once the stablecoin bill is passed, it will be beneficial to the business of some leading Defi. What do you think of this view? If you agree, which projects do you think may have a greater improvement in project fundamentals?
Mindao: I think it can be viewed from two aspects. I saw that the market also reflected yesterday, and Aave also rose by 20% and 30%. But I don’t think Aave rose because it has stablecoins. I think it is because it is a Defi bank. The more stablecoins it has, the better the liquidity is, and more of these fiat stablecoins can come in. In this regard, I think it is definitely a positive for protocols like Aave, or for the lending market like us, because it means more liquidity coming in. And when stablecoins come in, don’t we have to do crypto and leverage RWA assets in the end? So I think the ones who benefit more here are the so-called protocols that are not directly related to decentralized stablecoins. For example, lending protocols, such as DEX, such as UNISWAP, stablecoins also need pools, or you also need an exchange pool between you and the euro, including assets such as RWA. But for this kind of native stablecoin protocol, such as Ethena, it may be a big shock. Because if the first Ethena only relies on basis arbitrage, the basis arbitrage business has now been largely eaten up by traditional Wall Street financial institutions. Unlike us, they do not need to go to centralized trading platforms or offshore trading platforms to do arbitrage. Now most of the hedge funds on Wall Street trade directly in ETFs, including CME, and can wash away the profits. There may be tens of billions of dollars of funds involved.
So I think that in the long run, the basis will definitely be squeezed more and more, and finally it will be equal to the yield of government bonds or even lower. Even in a big bull market, the efficiency of traditional funds entering this market is getting higher and higher, which will suppress the basis very much. So if you rely purely on arbitrage strategies to expand on a large scale, I think it is difficult to expand. It is basically unimaginable to reach the scale of USDC and USDT. So I think it will be very challenging to do it with stablecoins like financial management. This is why Ethena later transferred part of its assets, about one billion US dollars, into T-bill. Whether more will be transferred there may depend on how high the return of its basis arbitrage is. For example, DAI is not a pure financial management type. Many holders hold DAI without interest rate increase, and it exists on the chain. For stablecoins like this, I think this news should only be considered neutral and bearish, and cannot be said to be completely positive. But I think it is a particularly big positive for Bridge, lending protocols, and DEX. And with the coming of stablecoins, as we just said, stablecoins are just a vanguard, and there are RWA assets behind them. I recently took a tour of Hong Kong, and all my friends in traditional financial institutions are particularly obsessed with RWA. I don’t know why, it’s a bit like the NFT market at that time. Everyone in the traditional institution is discussing how to deal with RWA. I think this must be closely related to the clarification of the entire US regulation and the development of stablecoins.
Alex: Stablecoins are now a business category with a very strong network effect or Matthew effect. Tether has already occupied a very large market share. The regulatory policies of the market are about to be clarified, and many institutions want to get involved. Do you think that at the current market node, whether it is for centralized or decentralized stablecoins, the current status of stablecoins can be classified as a blue ocean?
Mindao: Yes, I think stablecoins are still a blue ocean, but although the poker table is still a blue ocean, the players have changed. I think it is no longer a blue ocean for native crypto teams, but it is still a blue ocean for traditional financial institutions and traditional Web2 companies. To put it bluntly, no one has come in yet. Paypal has made an attempt, but it cannot be said to be very successful. But for these native startup teams, I think they may not be able to get on the poker table. This is a big problem in my opinion. Later, we may focus on what I just said, that is, to do it from other subdivided tracks, not just to compete with legal currency for payment and transaction medium.
The chemical reaction between Defi, AI and stablecoins
Alex: OK, lets look at a cross-domain issue. As you just said, the United States is more interested in promoting innovation in two industries, one is crypto and the other is AI. For AI, there are many so-called AI projects in this round, but there are not many projects and tracks that really have product demand and market fit. Many people mentioned a point of view, or they defined a new track called Payfi, which they think has great potential. What do you think of the relationship between the definition of payfi and stablecoins? And will there be some chemical reaction between AI and stablecoins?
Mindao: I think Payfi is a concept created by public chains and project owners to tell stories, a bit like SocialFi or GameFi. Whether this thing can be established or implemented logically, I think there are still doubts. Now the typical payfi projects in the market actually focus on two narratives: one is how to combine financial management and payment? How can you get better returns while making payments? But isn’t this angle actually a stable currency business? If stable currencies penetrate into various channels, such as USDT or USDC in various payment systems, they can also be deposited in various Defi protocols to increase interest rates. For Payfi companies, how many opportunities can they seize? There may be some particularly subdivided asset categories here, such as accounts receivable, which may have some specific scenarios in solving capital turnover. I think it may be possible to promote it. But this concept itself, I think it is difficult to become an independent large category. Of course, I think the combination of AI and Crypto is another matter. It may overlap with payfi a little, but not completely. Because we know that one of the great conveniences of using AI agents in Defi is that AI agents still require the intervention of the payment system.
In terms of integration, traditional payment is not as seamless as stablecoins or native DeFi protocols. So I think in this regard, I am optimistic about the future development of AI automated fund collection and investment decision-making. We are also working on the combination of AI and DeFi. I think a big obstacle to the development of traditional DeFi is that all previous DeFi logic must be written into the contract, which makes it very difficult to expand. This is why the basic protocol of the entire DeFi has not changed much from 2019 to now. It is still the same AMM, DEX, lending protocol, and stablecoin. Although contracts have been released recently, no player has really achieved such a large market share as Uniswap in AMM or DEX. The evolution of DeFi has been very slow in the past few cycles. One of the biggest reasons is that its contracts are only 100% written on the chain, and the costs of various aspects such as audit fees are very high. With the combination of AI agent and DeFi, I think a big change will be the change in the entire development model. Maybe in the future, the on-chain logic will only account for 10% to 20%, and the other 80% of the logic will be implemented by AI agent.
We have also seen some early use cases slowly emerging in the market. And as AIs reasoning ability becomes stronger and stronger, in fact, many of the things we introduced in traditional transactions at that time are very different from the flexibility and scalability of the current LLM. So recently we are looking at it, I think in the combination of DeFi, stablecoins are definitely the most core use case. For example, when AI agents pay for various services, whether they use traditional payment media or stablecoins to pay, stablecoins are definitely a more self-consistent way. Another interesting point is that the AI agent that everyone is talking about now finally forms a point-to-point closed loop. Your income and costs are all on the chain, and they can be completely closed at the agent level without any human intervention. Under this premise, as the agent becomes more and more automated, you must integrate a framework that can complete the collection and payment of your income on the chain. For stablecoins and DeFi, combining with agents is the most natural thing.
Alex: I see. Just now you mentioned the combination of DeFi and AI, which is actually a topic that I am quite interested in recently. You mentioned that the development speed of DeFi based on smart contracts was relatively slow because most of its logic needs to be executed in smart contracts and on the chain. You also mentioned a point that 80% of the subsequent logic may be implemented by AI, and 20% is in the smart contract on the chain. What does this 80% correspond to?
Mindao: Let me give you an example. For example, we are currently working on a cross-chain revenue aggregation product. Traditionally, this cannot be done in DeFi. First, different chains involve information synchronization, and atomic transactions are definitely not possible. You can use some cross-chain protocols, such as LayerZero, to do some docking, but the sources of funds on different chains and the configurations in different chains and different protocols require logic that is so complex that no contract can be written down and deployed on different chains to solve it. Traditional DeFi cannot do this. However, through AI Agent, traditional DeFi only does user-side deposits and withdrawals, and the other is the on-chain strategy, and from cross-chain to depositing different protocols, it only does this. In fact, it goes back to what we said, Crypto settlement is to be implemented by on-chain logic, to ensure that it is at least verifiable and transparent on the ledger. But all the logic in the middle, for example, I withdraw money from Ethereums Aave, and then I have to cross to Base and store it in Morpho, and then I leverage and loop in Morpho, and there are many changes in the logic. I think a big problem with traditional DeFi is the business logic. The iteration of products like Binance or Cefi is measured in days and weeks. When something new comes out, it can be launched immediately. This is the centralized service logic of centralized trading platforms such as Binance. But all the logic of DeFi must be completely written on the chain. Lets look at Uniswap, Aave, and MakerDAO. These are the basic DeFi protocols we are talking about. The iteration cycle is measured in two to three years. The reason why it takes so long is that all DeFi is static logic, but business changes are dynamic. Today we have to reveal this strategy, and tomorrow we have to reveal another strategy. This is dynamic.
So I think AI Agent is particularly suitable for many dynamic logic expansions. In the past, we had to exhaust every rule when developing AI. But now, basically many reasoning models do not need to exhaust rules and situations. For example, when we talk about the cost of cross-chain, it can understand how to spread the gas fee over how many days and how much impact it has on APY, without us having to re-establish a very detailed rule. So I think in the future, in addition to the on-chain settlement of funds involved in the inflow and outflow of funds that I just mentioned, most of the logic can be implemented by Agent. The biggest difference between this and traditional Cefi and Binance is whether human intervention is required. For example, if Binance does not have a team to optimize and intervene, the business will definitely not run. So I think there may be some relatively simple logic businesses in DeFi that can be optimized and implemented by Agent without the need for team intervention. The next step may be to expand to different, from income aggregation to lending, to SWAP, I think they will gradually be implemented by Agent in the future. In fact, in this cycle, we have also seen projects like Ethena. It is hard to say that it is a DeFi project. All funds are in the trading platform, and they are all controlled by the team to run arbitrage strategies. But in the future, I think all the underlying DeFi protocols may be transformed with AI, and all will be gradually replaced by Agents. I think this trend is very obvious. If the so-called DeFi products appear in the next cycle, they will not be DeFi products in the traditional sense that are completely based on on-chain contract logic.
Alex: I see. If AI accounts for 80% of the execution logic of next-generation DeFi products with AI modules, how can we ensure the verifiability of this AI module or the certainty of its output results?
Mindao: Yes, I think this is the biggest problem now. The current AI model still has obvious hallucinations. For example, for the same request, I give you all the funds, data, and APIs, and you give me a strategy. Most AI models now, if you ask it the same question 10 times, it will give you different strategies. There are definitely some problems that need to be solved. But I think compared with the three months ago when I tested these models, the progress is very, very fast now, and the reduction of hallucinations is very large. You will find that its strategy is still in line with our cross-validation. Although its consistency is still problematic, it is difficult to ensure that 100 requests will have the same results, but at least I think it is roughly the same, and it can figure out arithmetic problems. One way to solve this problem is to further refine the agents workflow for each task to reduce the frequency of hallucinations. I think as the reasoning model gets better and better, this problem does not need to be overly worried. Maybe in another year, including Groks latest version 3.5, if it really makes reasoning based on first principles or the so-called principles of physics, many hallucination problems may be gradually solved. Maybe there will be a big prompt at the end, and very high-quality results can be output. So the benefit of this problem lies in the improvement of the basic model.
We have seen that many projects in DeFi are also slowly developing MCP. After MCP is available, it actually subdivides the workflow in essence. I think there may be more professional MCPs in the future. For example, if you ask me a strategy, my MCP specializes in running lending arbitrage strategies, and I can give you an executable strategy, and this strategy has also been verified in various ways. So I think the interesting point in the future is that we used to talk about modularity or combination in DeFi. You can use AAVE code or Uniswap code to combine another AMM. From the perspective of AI and DeFi development in the future, there may be many such professional MCPs. MCP itself is a module, and then when combining different MCPs, many new functions can be realized. I think modularity is developing very fast at the MCP level. Of course, this will cause new security issues, such as whether there is poisoning in the AI environment, there will be various risks. But I think compared with scale, these are all minor issues. Because the security of DeFi has actually come out after so many years of development.
So I think AI may make it easier to solve many security problems in DeFi. Let me give you an example. Many traditional financial institutions are reluctant to enter DeFi now. One of the biggest reasons is that we spend millions of dollars on audits, but I cannot ensure that there is no risk. We can never guarantee it. But traditional financial institutions do not have such a situation. We cannot say that all the money in my bank has been stolen. The hacking incident of the DeFi protocol is that all the assets of the protocol itself are penetrated. Most of the time, when there is a problem, the entire pool is emptied. However, if a lot of the DeFi logic behind is controlled by AI, it actually has a lot of traditional Web2 risk control methods that can be added at the agent level, such as the withdrawal amount, and this logic can be written into it through the agent. So it may be easier to make the grayscale of security more detailed. Traditional DeFi cannot be made too detailed. If it is too detailed, there will be problems with gas fees, as well as some new bugs and security issues.
Alex: I see. The last question is also based on what you have talked about. Just now, it was mentioned that a lot of codes need to be audited by auditing agencies. According to your observation, with the progress of AI, is the security cost of a DeFi project getting higher or lower? Has its security cost dropped significantly in the past one or two years?
Mindao: I think we need to look at several things to reduce costs. One is that DeFi has a big problem, that is, it is difficult for all audits to cover all possibilities. Not only code audits, but also formal verification is required. Formal verification is also difficult to exhaust all the logic of the security boundary. This is why people in traditional DeFi are reluctant to make too complicated products. Once it is complicated, logical loopholes or various edge-cases will emerge. Compared with a DeFi product and a DeFi product with AI, I think the security audit cost and security boundary of the latter are much more controllable. I don’t have specific numbers because it is still very early, but my own feeling is that DeFi AI products can implement more logic and do not need to spend so much money on audits. The capabilities of the two and the logic of what they can do are not quite the same.
Alex: I see. We talked a lot today, starting with stablecoins, and then extended to the intersections of stablecoins and DeFi, DeFi and AI, and AI and stablecoins. Thank you very much to Mr. Mindao for being our guest today and sharing so many insights and opinions with us. Thank you.
Mindao: Okay, thank you.
