With seemingly one new project unveiling multi-million-dollar funding every other week, no one will blame you for questioning there being too many stablecoins out there. Much have already been written about the various approaches which projects use to maintain stability — in this regard we would like to give a special shout-out to the research team at blockchain.com for their tour de force piece titled The State of Stablecoins, as well as to the many stablecoin aficionados out there curating their research into single convenient destinations.
The purpose of this post however, isn’t to compare between the various stability mechanisms and champion a particular argument (it also assumes some level of understanding around the concept and features of stablecoins. A stablecoin is loosely defined to be a medium of exchange possessing the technological benefits of cryptocurrency_, minus the price volatility —_ click on the research links in the paragraph above to find out more). More so, this article is meant to explore the direction where the stablecoin sector as a whole is heading, including the likely motives which this latest wave of big well-funded players — notably Circle, Gemini, and Paxos — could have.
Stablecoins are already killing it
There already exists several killer applications for stablecoins. Firstly, stablecoins are actively used for trading and hedging purposes on cryptocurrency exchanges, allowing traders a more frictionless mode to temporarily alter their trading exposure positions between cryptocurrency and fiat.
Secondly, stablecoins help to facilitate an alternative “fiat-to-crypto” gateway for large over-the-counter (OTC) trades. Such gateways act as on and off-ramps for institutional investors, providing them with widely-accepted stablecoins in exchange for fiat currency. The trader will then use the stablecoins to invest in other cryptocurrencies, as there is a far larger spectrum of exchanges accepting stablecoins compared to those accepting fiat currency directly. OTC trades are typically done by big players who do not wish for their large buy or sell orders to influence the prices on smaller, regular exchanges.
Lastly, there are companies focused on crypto-related services, such as content localization or community management services, accepting payments today in stablecoins, due to it being a 24/7-settled, international, instantaneous medium of exchange.
The first two applications hint at what large institutions like Circle, Gemini and Paxos could use their respective stablecoins for. Circle — which has been steadily backed by Goldman Sachs since 2015 — offers institutional OTC fiat-crypto trading, in addition to its recently acquired cryptocurrency exchange Poloniex. Winklevoss-owned Gemini Exchange has been running successful fiat-crypto trading exchange services for both retail and institutional OTC clients since 2014. Paxos utilizes blockchain technology to provide settlements services to institutions, and also runs an OTC trading and custody services subsidiary called itBit.
A stablecoin would serve as an enabler and catalyst driving more revenues in existing core businesses for all three companies.
By being programmable in nature, stablecoins enable those large OTC trades to occur atomically — which is just a fancy scientific way for saying that “either the trade happens completely, with both sides of the trade going through, or it does not occur at all”. This thus completely removes the risk of someone handing over a large sum of USD over wire transfer, but failing to receive their BTC in return — also known as settlement risk. Naturally such atomic transactions also benefit settlements solutions tremendously in a similar way.
In addition, the statuses of both Gemini and Paxos as NYDFS-licensed trust companies that offer crypto-asset custody services could also point to their potential forays into the security token space. For example, they could offer platforms for investors to compliantly trade security tokens, and embed their stablecoins into automated dividend and interest payout use cases.
Finally, the “cherry-on-top” for these players would be having their own USD stablecoin attain the de facto status among retail users and businesses sending payments to each other — in essence replacing the controversial USD Tether (which deserves a story on its own) as the dominant stablecoin for crypto-payments today.
For something serving such a strategic overall purpose it is no wonder that each of them would choose to go their own ways.
We have so far discussed 3 existing stablecoin projects; according to the research done by blockchain.com there are more than 50 (and counting) live and in-progress stablecoin projects globally. One highly doubts that they’re all going to prosper peacefully side-by-side.
Rewinding the clock
Much like how many have drawn parallels between the formation of the Internet and that of blockchain, analyzing the history of national money could too prove insightful in understanding the direction of where we’re headed with stablecoins as well. Today, we are hard-wired to expect just one form of national currency circulating within each country — it is extremely hard to imagine there being multiple versions of your national currency in your wallet, with each being issued (and honoured) by a different bank! But that was exactly how things were at some point in the past for most nations.
Massachusetts Bay Colony and Pennsylvania Colony promissory notes. Same country, different money
The current US system of paper money as we know it only came after the a series of reiterations to the National Bank Act in the 1860’s. Before that, many different commercial banks were all issuing their own banknote, promising redeemability for gold or silver. People only dealt with banks which they trusted, depositing their gold or silver in exchange for interest. Subsequently they were only comfortable with being paid in banknotes which they knew would be accepted by others.
A lack of trust
What forced the hand of the government to enact this top-down approach and achieve standardization? Wars mostly — with the ruling elites printing more money by the day to fund spiraling expenditures.
As soon as redeemability became an issue for holders, confidence quickly dissipated making apparent that the circulating amount of money in issue exceeded the value of the gold and silver holdings collateralizing it.
Bank runs were also commonplace; it could get so bad that such contagion quickly spread to even the healthy banks too. As such, redeemability became an imperative and the best means to ensure this was to consolidate under the watchful eye of an agreed-upon trusted central authority, to standardize and regulate the industry.
With this trust in place national money blossomed. National paper money — as opposed to issuer banknotes or gold and silver — was now a medium of exchange which everyone could confidently agree upon to conduct transactions easily with, over time cementing its network effects across all areas of the economy.
The Qin Dynasty in China already had a unified system of money in place around 200 BC
Such a fate is likely to befall the stablecoin sector as well, with there ultimately being less than a handful of stablecoins per national currency. Even absent regulatory intervention, it will be inevitable for the majority of stablecoin startup projects to fail.
Most non-collateralized, algorithmic-based stablecoins have yet to be sufficiently battle-tested over a long enough period of time.
Collateralized projects face their own challenges as well. A large black swan event (Mt Gox 2.0 perhaps?) could strenuously put the underwriting models of most crypto-collateralized projects to the test.
Fiat-collateralized stablecoin projects suffer from evolving regulatory uncertainty. Their centralized nature also theoretically allows for them to pull a disappearing act with their fiat collateral too.
Finally, any given project under any one of these three models may simply fail to gain enough popularity and drift into the sunset.
But you’ve got to be in it to win it
Going back to the US banking system as an example again, the foundings of JP Morgan (1799), State Street (1792) and Bank of New York Mellon (1784) all significantly predated the National Banking Act. All have gone on to fortify their hugely influential roles in the American financial system of today. As the old saying goes — you’ve got to be in it to win it.
Money has a long history of being revolutionized fundamentally by private sector innovations.
The first ATM machine was opened by Barclays in 1967. The first wire transfer was initiated by Western Union in 1872. Nostro accounts — the backbone of the correspondent banking system we know today — found its roots in the 15th century as a product of the Medici family, who were required to open banks at foreign locations in order to exchange currencies to act on behalf of textile merchants. Money changers have been known to be in operation since Biblical times 4,000 years ago, while interest payments were commonplace in Middle Eastern civilizations as early as 5000 BC. None of these hallmark innovations in money were implemented in a top-down manner by a central government — they all sprang about in a distributed, organic fashion before gaining popularity. The innovations in the money of tomorrow are due to be led by the private sector once again.
What will the use cases be?
On an immediate, near-term basis, cross-border payments and micropayments, two categories of payments plagued by high fees today, stand to benefit immensely from the speed and low cost of transferring stablecoins. Imagine a use case of paying an international news agency on a per-story-read micropayment basis rather than a subscription model. Or Netflix being able to offer billing on a per-hour-watched basis to cater to casual users worldwide. Such payment models aren’t readily viable with today’s payments infrastructure.
Cryptocurrency-savvy disruptors such as Abra have already begun making early strides here in the form of on-lease micropayments. The idea is essentially a new model of consumer asset financing, whereby after paying a small deposit for a SIM-connected product (e.g. fridge), the consumer will then need to continue making recurring daily micropayments, failing which the product will not carry on functioning. Abra CEO Bill Barhydt credited solar energy product startup M-Kopa Solar for providing the inspiration.
Globally, the total addressable market for payments stands upwards of hundreds of billions of dollars today. Think about the amount of future potential that could be unlocked through the efficiencies of cheap, fast, 24/7-settled payments across varying payment use cases.
Another obvious avenue for early adoption would likely be the crypto-sector itself, through payments made within DApps (Decentralized Apps — think decentralized versions of Uber, Fiverr or Airbnb_)._ Some have already coined this as in-DApp payments, similar to how the term in-app payments emerged during the “mobile revolution”.
Event-driven payment models are where things begin to get interesting.
An event-driven payment is akin to someone receiving payment on condition of something else happening. For example, Alibaba operates an escrow service that only wire transfers out payment made to a seller on its marketplace after the buyer acknowledges that the goods ordered have been well-received, or if a stipulated amount of time had passed. An application using stablecoins to handle such a transaction could be programmed to have the above logic built-in and conducted automatically, bypassing the need for an intermediary to monitor events and initiate bank wire transfers manually.
There is a whole host of use cases which would benefit from event-driven payments, including stock dividend payouts, flight insurance disbursements, invoice discount refunds, e-commerce taxation, government tax revenue allocation and crowdfunding — to name a few.
Just like how one was unlikely to foresee the emergence of Netflix and Uber during the ADSL dial-up modem days, the best use cases for stablecoins have probably yet to even be conceptualized till date, with programmable money enabling a whole new design space for products to innovate around (autonomous IoT machine-to-machine micropayments anyone?).
Everyone loves guinea pigs
While there are ongoing explorations at differing stages by multiple governments — including those of Canada, Singapore, China and Russia, into central bank digital currencies (CBDC’s), these are some years away from being implemented into their respective financial systems due to many difficult problems.
What impact would the full-collateralization of the billions of dollars involved in trade financing, for instance, have on an economy’s fractional banking system and money supply?
Exhibit A: Meet Startup #13153
Upon the conclusion of its Phase 1 exploration into CBDCs by Singapore in March 2017, the team noted that they have “plans to validate policy questions around the vision of SGD as a CBDC and its impact on monetary policy,” which eloquently understates the sheer ramifications any miscalculations with their strategy could have on the country’s monetary system.
This is where startups in the private sector can step in with their “move fast, break things (on a small scale), reiterate and try again” mantras. The observable real-world lessons garnered from their ventures into this new frontier will prove invaluable to the dozens of backroom policy analysts, alleviating them of the need to hack together policy recommendations for this new paradigm from old frameworks.
Make American stablecoins great again
Stablecoins are already out there in the wild. They are led by those denominated in the United States dollar, with those of other national currencies significantly lagging behind.
It places the U.S. in a position of leadership in being a breeding ground for the next wave of innovations leveraging programmable money.
As history has shown, it is only natural to expect a wave of consolidation to follow this early sprint, with determinant factors including ecosystem trust and network effects deciding who gets to stay. Just like the early U.S. financial juggernauts of yesteryear, the pioneering protocols and technologies powering the successful stablecoin projects of tomorrow will likely also play an instrumental role in the financial system long into the horizon. They will do so well past the introduction of a government-backed stablecoin, offering other value-added services as demanded by the smart economies of the future.
Now back to the question — are there too many stablecoins out there? With the potential of the sector now being framed in this light, we would like to make the case of there being too few, especially with regards to the non-USD variants.