Blockchain Study Note – Stablecoin

Key Takeaways

  • Stablecoin is becoming the critical building block of blockchain ecosystem, more and more applications are being built using stablecoin solution. They could even become a backbone for payments and financial services in the future.
  • USDC, the stablecoin jointly administered with Circle and Coinbase, has surged in popularity in the stablecoin sector.
  • Despite strong momentum, regulation and compliance could be the tail risk and strongest headwind.

What is Stablecoin?

  • Stablecoins are cryptocurrencies that attempt to peg their market value to some external reference.
  • Stablecoins may be pegged to a currency like the U.S. dollar or to a commodity’s price such as gold.
  • Stablecoins achieve their price stability via collateralization (backing) or through algorithmic mechanisms of buying and selling the reference asset or its derivatives.
  • Stability is achieved through two commitments. First, the issuer agrees to mint and buy back coins at par. Second, the issuer holds assets to back its obligation to redeem the outstanding stablecoins.

Leading Stablecoin Programs

SymbolNameDaily Volume($)
USDTTether~$100 billion (1/3 of Nasdaq daily volume)
BUSDBinanceUSD~$10 billion
USDCUSD Coin$8 billion

Typical stablecoin use cases

  1. eCommerce & marketplace account/payment (USDC/USDT, Visa/Mastercard/Circle/Paxos/…)
  2. Cross boarder payment (Stellar: Ripple vs Stellar(1), (2), Mercuryo+Binance BUSD)
  3. Other payment related use cases (Circle + Algorand/BUSD-Binance + BitPay)
  4. Earn yield on saving/provide liquidity (Algofi)
  5. Lending (Algofi)

Stablecoins reserve breakdown

  1. <3% of Tether’s reserve is held in cash!
  2. On 8/22/21, Circle announced having USDC held entirely in cash & US treasuries
Tether Breakdown (USDT)

Pie charts

USDC Reserve Breakdown (July 2021)

A gray chart showing breakdown of USDC reserves.

Key Stablecoin Players

Circle
  1. Target to become “payments & treasury infrastructure for the internet”
  2. Went public on NYSE by EoY (news)
  3. Rapidly increasing USDC minting, circulation and interoperability
  4. Holding USDC entirely in cash & US treasuries gives Circle more credibility
  5. Starts to extend their USDC based applictions further, including lending (but coinbase soon halt the launch), Yen stablecoin, circle account (Payment & Payout acocunt), defi, trading, NFT market place, treasury, and USDC swap API.
Tether
  • Tether (USDT) was one of the first cryptocurrencies to peg its market value to a fiat currency
  • The U.S. Department of Justice has also opened a criminal investigation into whether Tether executives committed bank fraud
  • The risk still remains significant while the SEC and Fed drafting the stablecoins rules.
Paxos
  • Paxos tries to position itself as a company that is deeply committed to regulation.
    • It has recently written a report highlighting the differences between USDP, USDC and USDT. According to the company, USDC and USDT shouldn’t be considered as regulated assets because of their reserves (before Circle announced the switch of their USDC reserve).
    • Paxos wants to emerge as the most legitimate player in the space so that big corporate clients choose Paxos as their preferred partner.
  • Paxos have been working with a few prestigious business partner on stablecoin, and recently moving to more retail consumer space (with Novi)
  • On regulation side,
    • Paxos pushes hard to educate the audience the difference between regulated by NYDFS vs MTL/FinCEN. See below screenshot:
    • Next year, Paxos expect more regulation clarity under the guidance of the stationcoin report from “The President’s Working Group on Financial Markets” (PWGFM)

Future Path of Stablecoin

True Stablecoins
  • Just like narrow bank, one stablecoin, one true dollar.
  • More limitation in terms of the stablecoin reserve requirement, but still potential to be a good medium of exchange, less capital cost.

Deposit (Stable)coins

  • Deposit coins combine the benefits of real time, (possibly) lower cost payments and new functionality with FDIC deposit insurance protection.
  • Challenge: May not be interoperable. Still a centralized solution, not unlock more value.

Central Bank Digital Currency

  • CBDC may compete directly with central bank’s member (commercial banks/FIs)
  • CBDCs and stablecoins could be strong complements, not substitutes. The public sector could focus on issuing digital coins and delivering on sound money, while the private sector could build rails and applications.
Company’s stablecoin strategy

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