Forward the Original Title ‘A First Principles Breakdown of the Crypto Payments Stack’

The stablecoin supercycle is here.

Not just because of the $230+ billion in supply, Circle’s IPO filing, or my regular statements that it is here. It’s because stablecoins are fundamentally disrupting payments, and they will continue to do so at an exponential pace.

My thesis is simple: stablecoins will overtake traditional payments because they are better, faster, and cheaper.

Yet, “payments” is a broad term. Today’s system is dominated by legacy payment rails, banks, and fintechs, each playing distinct roles within the web2 payments stack. Though stablecoins present a more efficient and usable alternative to legacy systems, the payment stack is mirroring the complexity of its web2 counterpart, and therefore is worth unpacking

Hundreds of companies are building on or alongside stablecoin rails. @Dberenzon has curated an excellent page that breaks down the onchain payments landscape into nine distinct segments, which you can find below.

While Dmitriy offers an in-depth, technical perspective, others, such as Pantera in “The Trillion Dollar Opportunity”, present a higher-level categorisation of the payments stack into four layers.

In this article, I offer an alternative, crypto-native, first principles approach to dissecting the payments stack. Nevertheless, the layers identified by Dmitriy, Pantera, and others remain valuable for categorisation from another perspective.

And for some key context, in my opinion, the payments stack operates along a vertical line, with one category of user at the top, and another at the bottom. Additionally, I see the highest achievement for the payment stack is to onboard billions of users, therefore, this analysis is geared towards an actual retail user that may not even know they are interacting with crypto.

The Crypto Payments Stack

To begin from first principles, stablecoins are tokens on the blockchain representing a unit of fiat currency - most commonly the US dollar. There are different types of stablecoins, including:

• Fiat-backed (e.g. USDT)
• Crypto-backed (e.g. DAI)
• Synthetic (e.g. USDe)

The largest type of stablecoins is fiat-backed. These are backed 1:1 by highly liquid assets, including US Treasury bills, cash, and other cash equivalents, held in reserve with a custodian. As a result, at the base user of the payments stack is the legacy banking and payments system.

As noted, stablecoins are disrupting traditional payments because they are simply better, faster, and cheaper. This advantage not only boosts margins for fintech and payments companies but also delivers a superior experience to end users. With that in mind, consumers occupy the top user category of the payments stack.

At this point, the payment stack looks like this.

Now, let’s consider the most dominant application in the payments stack. We have seen that one of the highest retention use cases of crypto is actually off-ramping. On-ramping is also popular, but the ability to spend crypto, specifically stablecoins, with ease, will always remain dominant. In our stack, on/off-providers sit dead in the middle.

Everything above these providers is geared toward consumer-facing applications or tools that enable them; I refer to this as the consumer serving layers. Conversely, everything below, from the on/off-ramps down to traditional banks, works to integrate stablecoins into the existing financial system, forming what I call the financial integration layers.

Notably, there are significantly more consumer serving layers than financial integration layers. This occurs because building a financial integration layer demands licenses, structured operations, and regulatory compliance, while consumer layers can leverage the services and relationships established beneath them. Although additional layers likely exist in the consumer category, I am highlighting those which I believe to play the most critical roles based on their functions and dependencies within the payments stack.

Consumer Serving Layers

From a consumer’s perspective, the journey into the crypto payments stack begins with the wallet. The consumer wallet is not just a storage solution, it’s the gateway to saving, spending, and earning crypto. With functionalities that include debit card payments, virtual banking, and peer-to-peer transfers, wallets are designed to meet diverse user needs. There are countless options available, some with a global reach, others built for different regional markets.

Building a wallet is a complex undertaking. It requires integrating multiple services while mitigating the risk of hacking, which is why many companies turn to wallet-as-a-service (WaaS) providers. These providers deliver audited, battle-tested solutions that come pre-integrated with essential services such as on/off-ramps and card issuers.

For consumer wallets to have a real impact, they must rely on various business-to-business stablecoin payment providers. Key components include:

• Invoice services: These platforms enable individuals to invoice their employers in fiat or crypto. They handle the issuance of invoices, receive funds, and convert them as necessary before depositing the appropriate currency into the wallet.
• Payment streaming platforms: As companies increasingly operate on a global scale, these platforms facilitate seamless, regular payments in stablecoins. This is particularly useful for employees in countries without local banking options.
• Card issuers: With spending shifting away from cash, crypto cards have become essential. By partnering with networks like Visa or Mastercard, card issuers empower wallet providers to offer branded debit or credit cards, enhancing everyday usability.

Regulatory compliance also plays a critical role at this layer. To safeguard consumer wallets, many platforms integrate robust know-your-customer (KYC) and anti-money laundering (AML) measures, along with onchain fraud detection services. Providers of these services play a critical role in the consumer category of the payments stack, enabling both security and regulatory adherence.

Additionally, the consumer layer encompasses peer-to-peer (P2P) payment networks. Operating somewhat independently of the payment stack, these networks directly connect individuals and businesses for crypto-to-fiat trades. P2P solutions offer a potential alternative to traditional channels and have seen significant adoption in developing regions. That being said, P2P payment networks are less efficient and settle substantially less flow than the overall payment stack.

Lastly, on/off-ramp aggregators sit at the base of the consumer layer. They consolidate multiple on/off-ramp providers into a single, easily integrable API, allowing wallet providers to automatically choose the best combination of speed, cost, and regional service for their users.

Financial Integration Layers

Transitioning into the financial integration layers, we arrive at the backbone of the crypto payments stack.

In many other payment stacks, what I will write about next is referred to as the aggregation and orchestration layer. However, in order to aggregate and orchestrate, there must be something underneath this layer. Therefore, my viewpoint is that the aggregation and orchestration layer comes at the very top of this category of the payment stack.

Underneath this layer comes the companies and services which help in moving stablecoins and fiat around as seamlessly as possible. There are 3 critical layers that are commonly aggregated and orchestrated:

• Banking-as-a-service (BaaS) providers: These platforms offer modular financial infrastructure, enabling companies to integrate virtual bank accounts, cards, and payment services into their products. By managing regulatory compliance and backend operations, BaaS providers allow businesses to offer bank-like features without needing their own licenses.
• Over-the-counter (OTC) desks: Handling large transactions, OTC desks bridge the liquidity gap for companies lacking direct relationships with major exchanges or liquidity providers. They efficiently convert stablecoins to cash, and vice versa, making high-value transactions far more practical to settle.
• Liquidity providers: Working closely with OTC desks, liquidity providers ensure that sufficient funds are available to settle trades globally. They remove much of the complexity associated with switching between fiat and crypto by abstracting the liquidity sourcing process.

In many cases, no company wants to own or manage the wallets which may hold millions of dollars in stablecoins (or other crypto assets). Therefore, they rely on custodians to store their liquidity in a trusted, insured manner. Custodians sit towards the bottom of the payments stack as almost every application and service is built upon them to store stablecoins as securely as possible.

Centralised exchanges (CEXs) also play a pivotal role in the financial inclusion category of the payment stack. They settle large-scale crypto and cash trades by directly partnering with liquidity providers and mint/redeem services. Holding reserves in both stablecoins and cash, CEXs effectively facilitate transactions on both sides of the trade.

Finally, at the bottom of the crypto payments stack are the mint and redeem services or companies. Tether operates through a whitelisted network that is able to mint and redeem USDT, directly receiving cash in a bank account or stablecoins with a custodian. On the other hand, Circle’s Circle Mint allows eligible companies that pass know-your-business (KYB) checks to mint and redeem USDC.

A Complete Picture

The payments stack is dynamic and incredibly interwoven. Each layer relies on the tools, services and providers that come beneath them. Holistically, the crypto payment stack is this:

Closing Thoughts

Stablecoin-enabled payments represent one of the most impactful, adoptable use cases for crypto beyond BTC as a store of value.

@PlasmaFDN is well positioned as a blockchain purpose-built for stablecoin payments, but I expect nearly every blockchain will eventually pivot toward stablecoins and payments. To do so, they must rethink their payments stack, as mere compatibility with the EVM is no longer enough.

To conclude, stablecoins are truly a trillion dollar opportunity and those who play a critical role in the payments stack stand to gain the most.

Disclaimer:

1. This article is reprinted from [Nathan]. Forward the Original Title ‘A First Principles Breakdown of the Crypto Payments Stack’. All copyrights belong to the original author [Nathan]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
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