Stablecoins & Atomic Settlement

Stablecoins operate globally on a 24x7 basis. They operate in the open and hence are publicly auditable. They revolutionize cross border transfers and democratize finance with DeFi. They make smart contracts practical in the real world. But I’ll argue the most valuable thing they offer is atomic settlement.

That sounds a little crazy. The ~$750B global remittance market is being rewritten due to stablecoins and atomic settlement is the most valuable thing?

Stablecoins end-run the global financial system. Rather than figure out a multi-hop way through the correspondent banking system, stablecoins are uniquely addressable globally. That alone is hugely impactful and the reason why international remittances are going the way of the stablecoin. Add to that the (currently nascent) on-chain FX markets, you get something that looks like a true remittance killer.

I’d be on board with that narrative except that I believe recipients really only want the dollar. The only reason you needed FX was the foreign bank would prefer to hold local currency for their users. Once you can hold a stablecoin without a bank’s permission on your phone in your pocket, I believe the remittance world will just dollarize.

That’s a pretty strong case for the importance of stablecoins.

However, there is nothing stopping the banking system from operating 24x7 or setting up a globally unique addressing system to fix the inefficiencies of correspondent bank routing. They could also hold US dollars in all cases, although this would be a far more involved project. They haven’t done these things yet, but they could.

What about the fact that stablecoin transactions are publicly visible making auditing and reconciliation simple?

I’m not so sure this is a property that will last. Knowing what is going on is easy now, for sure, but I believe financial privacy will ultimately be demanded. Stablecoins will start to flow over some less public networks including opt-in privacy systems like Circle’s Arc, zk based privacy alternatives and permissioned systems which are private by default. I think this is a trend that will result in the overwhelming majority of stablecoin transactions becoming private by default.

What about DeFi? All of Wall Street’s financial primitives are being rebuilt in the permissionless context. Stablecoins underpin this. Isn’t that an incredibly valuable contribution?

Yes it is, but I would argue these things represent an evolution of Wall Street’s primitives. It is critically important to upgrade the duct tape and mirrors way that many internal Wall Street products operate so they become far less manual and are able to withstand Byzantine faults. But there is nothing stopping Wall Street from doing this on their own without stablecoins.

You do get some “added primitives” due to the way blockchains work — flash loans, for example — but I’ll argue those support my atomic settlement claim in the end.

Smart contracts are surely critically important. Stablecoins wouldn’t exist without smart contracts — they are built using smart contracts! Isn’t programmable money revolutionary?

Yes, but much like sprinkling “blockchains” over everything in the past has shown to be ultimately ineffective, I believe doing the same with “stablecoins” has a similar fate. A smart contract’s value comes from the fact that the processer that moves the money is also the thing that executes the smart contract logic. This means the guarantees a transaction processor can supply are also available in the smart contract’s execution. The one big guarantee that matters is atomicity. Either the entire smart contract executes completely or non of it does. That’s a property of blockchains though, smart contracts just inherit it.

Programmable money is clearly a huge topic. How great would it be to be able to provide arbitrary constraints around my money? But programability doesn’t require smart contracts. Money has been programmable for decades. Bank APIs allow users to make money movements the result of programatic statements. Now of course this is at the whim of the bank and far from ubiquitous so there is significant progress to be made. If you leave out atomicity, smart contracts just present an evolutionary step forward in programmable money.

That leaves us with the one thing that traditional finance really can’t supply without a complete rearchitecture: atomicity.

Atomicity

The Greek word “atomos” (ἄτομος) means “indivisible” or “uncuttable” which is where we get the modern term, “atom”. (Let’s ignore the fact that John Dalton’s use of the word in chemestry didn’t foresee sub-atomic particles!) In our case, we’re going to use the term to refer to the “uncuttable” nature of a transaction. Either the transaction fully succeeds or it doesn’t happen at all.

Consider the task of moving $100 from account A to account B. To do this, you might subtract $100 from account A and then add $100 to account B. Simple enough. But what happens if your program were to crash just after it pulled $100 out of account A but before it added $100 to account B? You would be left in a state where some money had been forgotten about and therefore lost. It is far more preferable to have either both balance adjustments happen or neither happen. The worst case scenario is when one succeeds and the other fails. So you could say that a transaction should be the smallest atomic unit of the financial system. You should never accept a situation where a transaction partially completes. All or nothing is the goal.

In the traditional financial world, there is usually a gap in time from when a payment is initiated and when it settles. This works quite well allowing customers to initiate a debit card transaction at a point of purchase, for example, and not have to hang around potentially days later for the actual settlement.

But this feature introduces risk in to the system. If a transaction is not atomic, there is a chance that the debit card charge will not succeed and therefore you provided some goods or services to the customer without being compensated. You have to cover for this scenario — you need to purchase some kind of insurance in the form of credit or some sort of short term loan. All of this inefficiency creates cost and is ultimately unnecessary.

Risk is littered throughout every level of the traditional financial system, There are billions of dollars at any given moment in the traditional financial market at some stage of waiting to settle. This is horribly inefficient. Stablecoins, with atomicity at the heart, are poised to change this.

Atomicity is the principal feature of stablecoins that avoids these costs and makes them truly revolutionary. This is the case because atomicity is the one thing you can’t retrofit into the traditional financial system without very significant architectural rewrites. The fact that you “just get that” with stablecoins make them unquestionably revolutionary.

Conclusion

Atomicity is hiding in plain sight. It is easy to get distracted by smart contracts, 24x7 open public operation or the global nature of stablecoins. The feature traditional finance cannot copy is atomicity . That alone makes stablecoins revolutionary.