# Cryptocurrency: Practical Uses and Structural Limitations
Cryptocurrencies have proven their practicality in areas like remittances and payments, but their influence within the broader financial system remains limited. Compared to the complex and sophisticated structure of traditional finance, there is a noticeable gap both in terms of usage scope and trust levels.
Stablecoins have contributed to increasing financial accessibility as digital money but remain confined primarily to basic functions such as asset storage and transfers. For cryptocurrencies to accommodate more advanced financial activities, on-chain credit systems and privacy protection technologies must work together.
When these three factors form an interconnected structure, cryptocurrencies can secure the potential for structural transformation beyond their current functional focus. The integration of stablecoins, credit, and privacy is expected to deliver new user experiences and operating methods in finance that the existing financial system has not yet realized.
# The Potential of the Cryptocurrency Industry: Just the Beginning
Cryptocurrencies have expanded beyond mere speculative instruments to practical areas like remittances and payments. However, their share of the overall financial market remains limited. For example, as of 2024, the traditional financial market size is projected to be about $247 trillion, while the cryptocurrency market is expected to be around $4 trillion, showing a gap of over 60 times.
This difference exists because, despite their proven practicality, cryptocurrencies still fall short of being mainstream financial instruments and remain confined to a limited scope. In other words, there is still a significant gap compared to the financial systems we have enjoyed so far.
What is needed for cryptocurrencies to move beyond limited usage into a more extensive financial ecosystem? This report aims to answer this question by analyzing the expansion strategies of cryptocurrencies within the financial ecosystem centered around three core elements: Stablecoins, Credit, and Privacy.
# How to Expand the Influence of Cryptocurrencies
## Stablecoins: Proven Potential and Structural Limits
Stablecoins are a prime example of how cryptocurrencies can be utilized as practical financial infrastructure rather than speculative instruments. Traditional cryptocurrencies, due to their high price volatility and complicated usage environments, have been challenging to use as payment methods or value storage means. Stablecoins address these limitations by providing stable value and performing basic financial functions like remittances, storage, and exchange, thus proving clear product-market fit (PMF).
In particular, in emerging markets with inadequate financial infrastructure or countries with severe inflation and capital controls, stablecoins serve as a practical alternative to fill the gaps in existing systems. Dollar-pegged stablecoins like USDT and USDC have established themselves as more reliable digital currencies than local currencies in these regions, significantly contributing to solving financial access issues.
However, the potential demonstrated by stablecoins is only a starting point. So far, their role has been limited to basic functions such as asset storage and transfer, with influence confined to specific regions and uses. Compared to the complex and sophisticated services provided by traditional finance, such as credit, investment, and asset management, stablecoins alone have structural limitations in replacing or expanding these services.
These limitations are not merely technical issues but stem from the structural characteristics of the cryptocurrency-based financial industry. Due to blockchain’s nature of making all transaction histories public, guaranteeing financial privacy for individuals and companies is challenging. The current collateral-based lending system is designed to mitigate risks only through collateral liquidation, limiting flexibility in asset management based on credit. These constraints are common challenges that the entire cryptocurrency financial sector, including stablecoins, must address.
To expand the influence of stablecoins into a broader financial ecosystem, on-chain credit systems and privacy protection technologies that can operate in the cryptocurrency industry must be combined. Stablecoins can evolve from simple digital currencies to infrastructure accommodating complex financial activities, thus substantially expanding the financial impact of the cryptocurrency industry.
## On-Chain Credit: The Axis for Vertical Expansion of Cryptocurrency Financial Structures
Stablecoins were the starting point to prove that cryptocurrencies could be applied in real life. However, stablecoins alone cannot sufficiently expand the depth of financial structures. The next step is on-chain credit. This serves as a key axis for vertically expanding the structural utilization scope of cryptocurrency finance.
Currently, cryptocurrency-based finance predominantly follows a collateral-centric structure. Without asset deposits, loans are impossible, and the collateral ratio is conservatively set at around 50 percent on average. For instance, with one Bitcoin as collateral, only about half of its value can be loaned out. This is because, given the blockchain’s lack of borrower identity information or legal enforcement, risks can only be controlled through liquidatable collateral. However, this structure offers financial opportunities only to asset holders, limiting asset management efficiency. Despite the ideal of ‘decentralized finance open to all,’ credit creation remains restricted to asset holders only.
To address these limitations, on-chain credit evaluation projects are gaining attention. A notable example is Cred Protocol, which leverages machine learning to analyze on-chain activities such as user liquidation history, position composition, and trading patterns on DeFi protocols like Aave. It predicts liquidation likelihood within approximately 90 days and provides real-time credit scores. Based on these scores, risk-based lending conditions can be set at the wallet level, potentially enabling reduced collateral requirements or even unsecured loans.
3Jane takes this a step further by analyzing predictable income flows based on both on-chain scores and off-chain activities like recurring bank deposits, DeFi activities, and exchange earnings. By evaluating credit based on cash flow rather than asset holdings, this model presents new possibilities even for ‘thin filers’ who lack credit history in traditional financial systems. Future possibilities include using income flows from various on-chain activities, such as airdrop participation or running nodes, as credit evaluation elements. Although still in the early stages, this approach aligns with the growing trend of turning on-chain behavioral data into practical financial data, representing a significant future development direction.
On-chain credit can also extend to project-level applications beyond individuals. For instance, if a specific project consistently records treasury management history or protocol revenue flows, it can secure funding on the chain without external investment. This indicates that cryptocurrencies can evolve beyond personal finance into corporate finance areas.
Ultimately, on-chain credit lowers the high barrier of ‘collateral,’ enabling users to build credit histories based on their on-chain activities. This transition forms a core foundation for cryptocurrency finance to shift from a restricted structure for select asset holders to a more inclusive financial system open to a broader user base. This development is expected to significantly strengthen the role of cryptocurrencies as financial infrastructure.
## Privacy: The Axis for Expanding the Scope of the Cryptocurrency Industry
While the transparency of blockchain is essential for system reliability, the resulting exposure of all transaction details poses practical limitations due to information disclosure. The structure that records and makes public sensitive financial information of individuals and companies acts as a structural limitation to the extensive use of cryptocurrencies.
For individuals, salary reception or spending records are exposed to outsiders. In traditional finance, basic financial privacy is protected, but in the blockchain environment, this privacy principle is essentially forfeited, limiting real-life scalability. The problem becomes even more pronounced for companies, as exposure of internal transaction records can reveal cost structures and internal strategies to competitors. For asset managers or investment firms, disclosing investment timing and scale to the public could lead to strategic risks like frontrunning or copy trading.
Technological approaches to overcoming these limitations focus on ensuring confidentiality for privacy protection. For example, cERC20 (Confidential ERC-20), jointly developed by Inco and Circle Research, utilizes Fully Homomorphic Encryption (FHE) technology to maintain encrypted transaction amounts and balances while allowing on-chain verification of transaction validity.
The core feature of cERC20 is its provision of a selective disclosure structure, which allows information to be selectively disclosed to approved parties only when necessary, contrasting with complete anonymity that conceals all information. This approach satisfies compliance requirements from regulatory and audit bodies while balancing the seemingly conflicting demands for transparency and confidentiality.
Such confidentiality assurance technologies are prerequisite conditions for extending cryptocurrencies from simple peer-to-peer remittance tools to practical environments for businesses and institutions. As a privacy infrastructure, cERC20 is expected to play a key role in establishing a trust-based extended structure where more diverse economic entities can participate.
# From Limited Influence to Structural Impact
Cryptocurrencies still possess limited influence compared to traditional finance. While they have proven product-market fit in certain areas, there remains a gap in both usage scope and trust levels compared to the multi-layered and complex systems traditional finance has built over decades.
Stablecoins were the first step towards narrowing this gap by enhancing financial accessibility and efficiency, particularly in regions with inadequate financial infrastructure. However, they remain confined to basic functions like value storage and remittance. For broader expansion into the financial ecosystem, integrating on-chain credit and privacy protection technologies is essential.
When these three elements are combined, cryptocurrencies can expand beyond simple functions to provide continuous and holistic financial activities. For instance, a freelancer in South Korea could receive overseas payments in stablecoins, obtain loans based on their transaction history on the chain, and actively engage in investment activities. Throughout this process, financial information remains protected but can be selectively disclosed when necessary, such as for tax filing.
The key point is that the complex processes of fund flow and regulatory compliance in traditional finance can be automated within a single environment, enabling borderless financial participation by various global users and companies without the infrastructure constraints of the past.
There are still many financial areas unimplemented in the on-chain environment. However, as on-chain credit and privacy technologies are added onto the stablecoin foundation, cryptocurrencies are increasingly showing potential for creating structural impacts comparable to traditional finance. The speed and effectiveness of integrating these three pillars will determine whether the cryptocurrency industry can bring substantial changes to the traditional finance sector, which is sixty times larger.
The above content is from the report “When Stablecoin Meets On-Chain Credit and Privacy” by Tiger Research, a global Web3 specialist research organization, and a partner of Block Media. The full report is available on the official Tiger Research website.
