From Stablecoins to On-Chain Credit: The Formation of Interest Rates and Lending Structures

I. Comparison Premise: Functional Consistency of Two Systems

The emergence of on-chain finance has not changed the fundamental functions of financial activities. Whether in traditional or on-chain systems, financial structures revolve around several core issues: value storage, fund transfer, credit expansion, risk management, and profit distribution. The differences are not in function but in institutional organization and credit bearing structures.

The traditional financial system is centered around banks, clearing institutions, and central banks, operating through a layered structure. On-chain finance uses blockchain networks, smart contracts, and stablecoins as core components, executing automatically via protocol rules. Both address highly similar issues but follow different paths.

Therefore, this lesson does not discuss “substitution,” but focuses on structural differences and boundary changes.

II. Account Systems: Bank Accounts and Wallet Addresses

Traditional finance is based on bank accounts as the basic unit. The account system features identity binding, compliance checks, and tiered management. Account records are maintained by banks, with settlement conducted via internal systems or interbank clearing networks.

On-chain finance uses wallet addresses as the basic unit. Addresses themselves are not directly linked to identities; asset records are maintained on the blockchain ledger, and transfers are completed through network consensus mechanisms.

Key differences include:

• Different account opening thresholds
• Different transaction review mechanisms
• Different methods for fund freezing and recourse
  Traditional systems emphasize compliance and identity verification, while on-chain systems focus on openness, transparency, and verifiability. The accessibility of wallet addresses lowers entry barriers but also introduces regulatory and compliance challenges.

III. Settlement Mechanisms: Layered Settlement vs. On-Chain Settlement

Traditional finance uses a layered settlement structure. Transfers between commercial banks rely on clearing networks, with final settlement provided by the central bank. Cross-border transfers usually involve multiple intermediary institutions, leading to relatively high settlement times and costs.

In on-chain systems, the blockchain ledger assumes a unified settlement role. Stablecoins serve as pricing and settlement assets, enabling direct value transfer on-chain. Once network confirmation is complete, final settlement is achieved.

Core differences between the two mechanisms include:

• Traditional systems rely on layered credit endorsement
• On-chain systems rely on network consensus and cryptographic verification
• Traditional settlement has operating hours and regional limitations
• On-chain settlement typically runs continuously
  It should be noted that on-chain settlement does not mean complete separation from real-world systems. Fiat-backed stablecoins still depend on bank custody and legal structures; their on-chain settlement capability is linked to off-chain asset security.

IV. Credit Creation: Balance Sheets and Overcollateralization

The traditional banking system creates credit through balance sheet expansion. Banks accept deposits and issue loans, forming a credit multiplier effect within a regulatory framework. Central banks adjust credit volume through interest rates and reserve requirements.

On-chain lending protocols mainly use overcollateralization models. Borrowers must provide collateral assets exceeding the loan amount, with credit expansion limited by the quantity and price volatility of collateral assets.

A comparison of both structures:

• Traditional systems rely on credit assessment and regulatory constraints
• On-chain systems rely on collateral ratios and automatic liquidation
• Traditional systems use fractional reserve requirements
• On-chain systems typically lack a credit multiplier mechanism
  This means that while on-chain credit expansion is less efficient, risk transparency is higher. Systemic risk comes more from collateral asset volatility than hidden risks in balance sheets.

V. Interest Rate Systems: Policy Adjustment vs. Algorithmic Pricing

In traditional finance, interest rates are determined by a multi-layered structure, including policy rates, interbank lending rates, and market risk premiums. Central banks play a key role in regulation. Interest rates serve both as macroeconomic policy tools and risk pricing benchmarks.

In on-chain systems, interest rates are often generated algorithmically based on supply and demand dynamics. When pool utilization rises, borrowing rates increase; when utilization outflows, rates decrease.

This mechanism features:

• Transparent interest rate formation processes
• Automatic adjustment mechanisms
• No reliance on mid-level policy tools
  However, its stability is more affected by market sentiment and liquidity fluctuations, lacking the ability of central institutions to provide liquidity support in extreme situations.

VI. Capital Entry: Institutional Participation and Structural Integration

As the scale of on-chain finance grows, traditional financial institutions are exploring on-chain issuance and custody structures. For example, some asset management institutions are experimenting with putting fund shares or bond products on-chain, while banks are exploring stablecoin and deposit tokenization pathways.

Institutions like BlackRock and JPMorgan Chase are making strategic moves into blockchain infrastructure, indicating a trend toward relayering structures.

This trend shows that:

• On-chain finance is not an isolated system
• Traditional institutions have not entirely rejected on-chain technology
• Some functions are gradually migrating or being superimposed
  Integration directions may include on-chain settlement, tokenized asset issuance, and digital custody. On-chain systems offer efficiency and transparency advantages; traditional systems provide legal backing and credit support.

VII. Boundary Redefinition: Substitution or Supplementation

The relationship between on-chain finance and traditional finance is not simply substitutional. Stablecoins remain anchored to USD assets; lending volumes are still constrained by collateral assets; on-chain systems do not yet possess full macro adjustment capabilities.

A more reasonable understanding is functional supplementation:

• On-chain systems improve settlement efficiency
• Traditional systems provide legal and credit backing
• The two intersect in specific scenarios
  Boundary changes mainly occur in settlement paths and asset representation forms rather than fundamental changes to monetary sovereignty or financial governance structures.

VIII. Lesson Summary

This lesson compared on-chain finance and traditional finance across four dimensions: account systems, settlement structures, credit creation, and interest rate formation. While their functions are consistent, they differ significantly in institutional organization and risk-bearing structures.

The innovation of on-chain finance lies in using technical rules to replace certain intermediary functions, building new operational paths with stablecoins and smart contracts. Its development is more likely to integrate with traditional systems than to fully separate from them.

The next lesson will discuss how future infrastructure might evolve atop stablecoins and on-chain credit structures, as well as how tokenized assets and compliant stable structures may impact the financial system.