The world of crypto has been promising tantalizing innovations in the financial space for almost a decade now. The hype has been incredible, often utterly unjustified. And yet, among many hyped verticals, one has stood out for having shown Product Market Fit and has now gained enough traction to become seriously captivating for incumbents: stablecoins.
The goal of this post is to present the existing stablecoin space, understand why the segment is so critical and analyze the most exciting projects pushing the boundaries of monetary innovation forward.
Current Status
At the time of this writing, the so-called stablecoins market has achieved the impressive size of around $180b, the vast majority being crypto-dollars.
The growth in adoption of tokenized money is tangible also when we look at user behavior statistics: around 190m wallets interacted with stablecoins over the last 12 months, of which 28m were active in the last month.
The amount of transactions in stablecoins is now consistently around 100m per month and the value transferred monthly is in the hundreds of billions USD.
Just to put things in perspective, SWIFT FIN – the swift messaging protocol – processes around 20m payment messages per day, still 5 times more than the average stablecoins volume (which stands at 4m/day).
In another comparison, the SEPA payment system (excluding monetary financial institutions) processed approximately 20b transactions in the second semester 2023, for a grossly-calculated average of 55m/day ( more than 10x the current stablecoin volume).
Stablecoin duopoly
As briefly mentioned before, a duopoly clearly emerged over the last few years in the stablecoin market, led by Tether USDT and Circle USDC.
USDT has conquered around 66% of the market share, and USDC follows by a certain distance with around 20% of the market. Behind them, there is a group of some established alternative stablecoins – mainly DeFi centric – and a few newly founded projects.
It is not the goal of this post to produce the n-th analysis of USDT or USDC, both already dissected in great detail by many analysts. What I will rather do, is to point out the fundamental features of the projects that I consider key to determining where the stablecoin industry will go next.
Core products mechanics
USDT and USDC are centralised, fiat-pegged and permissioned issuers of crypto-dollars. Both USDC and USDT do not distribute any yield, they deposit the fiat received to mint their tokens mainly in the commercial banking system or in low risk fixed-income securities.
Hierarchy of money
Both USDT and USDC don’t really innovate the fabric of money creation. From a monetary standpoint they simply represent an additional tech layer sitting on top of the existing monetary stack: they don’t disrupt the commercial banking system which they use to deposit their funds, nor the Central banking system at the top of the hierarchy of money.
Jurisdiction
There is one big difference between the two commercial propositions. USDC’s main jurisdiction of operation is the US – Circle keeps its deposits within the American banking system and is deeply integrated to it – as the SVB incident demonstrated. This makes USDC a token equivalent of the US Dollar.
Conversely, USDT mainly operates offshore, so outside of the US banking system, and it can simplistically be depicted as a tokenized equivalent to the Eurodollar.
Breaking the duopoly
“Your margin is my opportunity”
Jeff Bezos
Tether printed more than $5b of profits in the first half of 2024 and this margin is the opportunity that all the new entrants in the stablecoin industry are chasing. Out of many of these entrant stablecoin startups, a few are standing out as particularly interesting.
Flatcoin or Yield bearing stablecoins
Epitomized by Mountain USDM and Ondo USDY, flatcoins are stablecoins backed by sovereign bonds (or equivalent instruments) that provide a yield to their holders.
The play of yield-bearing stablecoins is based on the assumption that users will switch to them because they offer a yield, something that USDC and USDT don’t.
While stablecoins’ total adoption in 2024 grew at a fast pace, yield-bearing stablecoins have been flat or have shown limited absolute growth.
Even though theoretically compelling, the adoption of yield-bearing tokens on-chain didn’t explode: the assumption that a 1-digit yield is enough to make holders abandon USDT and USDC is proving wrong.
On top of that, these tokens have an unclear regulatory status: in many jurisdictions they can be considered securities and this doesn’t help with reassuring holders.
Overall, the impression is that stablecoin holders value the trust and the ubiquitous acceptance of USDC and USDT much more than the yield provided – and are not willing to give it up that easily.
Paypal PYUSD
Under new leadership, Paypal has decided to enter the stablecoin arena, launching – in partnership with Paxos – their PYUSD token.
The token is not substantially different from USDT or USDC. It simply adds a tokenisation layer to commercial deposits and uses the Paypal network to distribute them.
So far the growth of PYUSD has been massively subsidized by the issuer, especially on Solana, and as soon as the incentives winded down, the TVL decreased.
The key competitive advantage of PYUSD is the Paypal network and its massive existing user base, and this is where they will try to conquer market shares: converting Paypal users into PYUSD users to achieve a critical mass, big enough to make PYUSD a credible and ubiquitous tokenized dollar.
Will they make it? It probably depends on how strongly the market will grow outside of existing crypto rails, because it has already been proved that they can’t break the USDT/USDC duopoly in the crypto-native target.
Agora
Agora Dollar was launched a few months ago with the aim to become a stablecoin for businesses. Their core strategy is to attract and nicely reward the distribution channels if they make significant use of AUSD.
The main targets of their strategy are exchanges, market makers, payment companies, financial service companies, web3 applications and banks.
Agora allows them to earn the yield generated by the FIAT collateral used to mint AUSD, if certain activities are performed: listing tokens, providing liquidity, marketing activities and using AUSD as a payment method.
Each distributor can then decide whether to pay out the incentives to the end users or to keep them.
This strategy is probably more structured and with higher probability of success than simply relying on end users to switch to another stablecoin because it provides a yield: businesses, especially in the financial space, have a better understanding of the opportunity; they drive bigger volumes and they are easier to convert than individual holders.
On the other hand, Agora shares the same challenges of ecosystem creation and establishment that every new stablecoin issuer has to face, and they are not trivial to solve.
M^0
M^0 is the most intriguing stablecoin project in circulation today. Their goal is to re-architect the monetary stack, disintermediating not only existing stablecoin issuers, but also commercial banks and e-money providers.
In simple terms, their vision is to create a new layer for minting standardized and interoperable stablecoins. Today stablecoins are not standardised: a user has to swap USDT with USDC, but they are not the same thing like a US$ in a JP Morgan account and a US$ in a Wells Fargo account are.
M^0 wants to be the coordination / standardization layer that allows everyone to create its own stablecoin and make each stablecoin on their platform interoperable.
But why should businesses be willing to do it? Why does a business need a stablecoin?
The idea is that when a business accepts a payment instrument, it is basically accepting to give up the yield produced by the collateral backing the stablecoin to the stablecoin issuer.
For example, when a Centralised Exchange is keeping USDT in custody, it is giving up to Tether the yield produced by its entire USDT deposit base.
The perfect example of what M^0 wants to enable at scale is BUSD: a stablecoin internal to Binance, not really relevant outside of Binance, in which all the stables arriving at Binance were immediately auto-converted and, on which Binance collected the yield that they generated.
The vision of M^0 is to make this the new standard for private issuance of money and to use M (their token) as the underlying layer for all these private stablecoins.
Their play is not simple, because they want to make private issuance of money much more ubiquitous and decentralised. On the other side, their market is potentially huge and no one else is approaching the stablecoin distribution problem from this angle.
Conclusions
Stablecoins have seen a significant growth in adoption and received much attention over the last few months. As I write, the news is out that Stripe will be buying Bridge – an interesting stablecoin API provider – for ~ $1.1b. This is yet another validation for a product that has clearly demonstrated to have found product market fit.
Right now, the market is dominated by USDT and USDC, but my gut feeling is that for stablecoins we are where Search Engines were pre-Google or where social networks were pre-Facebook: there are some market dominators, but their model is not the one that will conclusively win the market.
I really think this comes down, in the end, to seeing blockchain either as a disruptive or an incremental technology: USDT and USDC are incremental technologies that expanded money to another technological platform (the blockchain); but I believe blockchain’s true potential lies in disruption, and I expect that the future of money will demonstrate that.
Resources
- Stablecoins adoption
- https://www.theblock.co/data/stablecoins/usd-pegged
- https://visaonchainanalytics.com/
- https://www.theblock.co/post/316048/survey-visa-brevan-howard-castle-island-ventures-stablecoins-real-world-application
- https://www.swift.com/about-us/discover-swift/fin-traffic-figures
- https://www.coindesk.com/policy/2024/05/06/less-than-10-of-stablecoin-transaction-volume-coming-from-real-users-report/
- Monetary innovations
