The Boring Stablecoin Opportunity
My recent portfolio construction series made me ponder the different categories that exist within the crypto space. Thus far, I have explored Bitcoin, L1 smart contracting platforms, and DeFi. Stablecoins are an obvious category that ought to be discussed and yet I have always been ignoring this all important but seemingly boring category. Truth be told, I was never interested in stablecoins for the very reason they are designed for — their stability. They don’t go up, they don’t go down, so what is the point?
I use them to buy alts on Binance and sometimes to escape the volatility of the crypto market but beyond that? Not exactly a degen coin, is it?
To my surprise I fell deep in the rabbit hole. In the process of research and discovery I even discovered a possible opportunity that I will share at the end. But let’s start with a prologue. What are stablecoins? How do you define them and what are their use cases? So let’s dig into the taxonomy of stable coins.
A stablecoin, in its simplest definition, is nothing else than a digital representation of a fiat dollar. The whole idea behind a stablecoin is, if it works, it never moves from $1. Of course there are more fancy pants definitions so let’s not ignore those. Here is a good difinition that might tickle your fancy if you are more of an academic. Of course, you would not be reading this if you are an academic so the irony is not lost on me. Be that as it may, Nic Carter gets it:
[Stablecoins] combine the low volatility characteristics of sovereign currencies with the settlement assurances of public blockchains, allowing fiat currency to be transferred and settled anywhere over the internet with less interferences than the traditional banking system. Nic Carter
To be sure Nic Carter is a bit of a star in the cryptosphere, so if you are eager to learn about this space I recommend having a look at some of his content. Here is a video with Nic in regards to stablecoins that is very informative but also as exciting as watching paint dry.
There are currently three main types of stablecoins based on the different stabilization mechanism: (i) collateralized by fiat, (ii) over-collateralized by crypto-assets, and (iii) non-collateralized.
Before I go any further I want you to look at The Block Research report on stablecoins. Forget about anything else — all you need to know on stablecoins is here. Larry Cermak, Mike Rogers, and Lars Hoffmann, all experts in their own right, do a real deep dive that flashes it out at a level of detail that I haven’t seen elsewhere before.
What a little gem aye — the whole 139 pages of it! Reading is not your thing you say? No problem — I got you covered! Simply sign up to Real Vision Crypto and look up the video below.
This discussion centers around The Block’s report on stablecoins, their taxonomy, and uses. In fact, do yourself a favour — search stablecoins on Real Vision Crypto and you will find a treasure trove of related videos that might pique your interest. Print out the transcripts, watch the videos and Bob’s your uncle. I practice what I preach — below a picture of my transcripts including unpaid promotion of Skyline Luge Tongyeong — Thrilling fun for all ages!
So why are stablecoins important? Simply put, stablecoins are important because they are the bridge between traditional money and digital value.
Greg Di Prisco, head of business development at the Maker Foundation, has a more elaborate explanation. He explains that stablecoins are important because they form the bedrock of decentralized applications. Basically, everything you want to do on the blockchain requires a standardized and stable unit of account, and a medium of exchange, and store of value. And if we’re trying to replicate the existing economy or improve on it on the blockchain, you can’t really do that with an extremely volatile asset like Bitcoin or Ether.
In other words, Bitcoin can be a great investment but it is really hard to use it for everyday transactions and that’s where stablecoins come in. For example, let’s assume an employment contract is denominated in Bitcoin. It’s almost impossible to enforce that over time because if Bitcoin’s price goes up, the company goes bankrupt because it has to overpay. Then if the value falls too much, then the employee cannot make ends meet.
Also be sure to check out Jim Bianco’s discussion with Alex Saunders for an engaging discussion on the vital importance of stablecoins and the changing regulatory framework around crypto.
According to Jim, stablecoins are the best solution for the remittance dilemma that many people from the third world suffer through and how vestiges of regulation are preventing these solutions from being implemented. With stablecoins in mind, Saunders and Bianco speculate on the creation of the Fed’s CBDC and what it will mean for both DeFi and TradFi.
So a quick summary so you don’t get lost. Stablecoins ‘boring’ but ‘good’ because they are the bridge between traditional money and digital value. For all you newbies out there The Block’s report and Real Vision Crypto is all you need to learn about this topic. If you really wanna go Einstein on this take a look at the book Stablecoin Economy: Ultimate Guide to Secure Digital Finance by Alyze Sam (main), Koosha Azim, Adam Alonzi
Because who wouldn’t want to purchase a whole book on stablecoins. Ideally switch between reading this book and memorizing the dictionary.
Back to stablecoins. The most popular stablecoin is Tether (USDT), which is currently the third-largest cryptocurrency by market capitalization and has the highest daily trading volumes of any cryptocurrency, including Bitcoin. Check out Coingecko for more stats on stablecoins.
The point of the matter is that stablecoins are increasingly valuable to the crypto ecosystem and it is for this reason that their restriction or their limitation could pose a significant risk to the ecosystem. In particular, there is no question that the regulators are taking an increasingly more sceptical tone toward stablecoins.
The common thread is that, without standard disclosure or reporting requirements, it is hard to know exactly what is behind a stablecoin, so it is tough to gauge how much risk it entails. Not to mention that stablecoins “may facilitate those seeking to sidestep a host of public policy goals connected to our traditional banking and financial system: anti-money-laundering, tax compliance, sanctions and the like,” Gary Gensler, who heads the Securities and Exchange Commission, told Senator Elizabeth Warren in a letter this year.
In fact, Gary has likened stablecoins to “poker chips” at the casino in the “Wild West” crypto market. Speaking to the American Bar Association on Tuesday, Gensler said some platforms are offering crypto tokens “that are priced off” securities and resemble derivatives products. In his view, any security-based products will have to comply with trade reporting rules and other laws, he said.
Jeanna Smialek wrote an excellent piece on that in the New York Times so have a look here if you want to read up on it more.
So what does that mean? Make no mistake, the SEC is coming for stablecoins. If the SEC slaps regulation on fiat backed centralized stablecoins it is not unreasonable to suggest that we will see a migration toward seigniorage supply or algorithmic stablecoins that are decetralized and use smart contracts. I speculate that a clear winner on this front could be TerraUST.
Whatch this Real Vision Crypto discussion: Terra: Progressing the First Decentralized Stablecoin featuring Jose Macedo and Do Kwon. Do Kwon explains it all rather elequently.
The foundational idea that makes cryptocurrencies the most interesting is the idea of a truely decentralized currency. Underpinning all the different applications and superior blockchain technologies that we have built is the idea that we can seperate state from money. Government regulated stablecoins wrapped in tedious disclosure requirements sound more like TradFi to me — perhaps a nifty FinTech operation at best.
In order to build a decentralized economy we need decentralized money and TerraUST might just check that box.
So what is TerraUST? Terra is a blockchain project developed by Terraform Labs that powers the startup’s cryptocurrencies and financial apps. These cryptocurrencies include the Terra U.S. Dollar, or UST, that is pegged to the U.S. dollar through an algorithm.
If you want to find out more about the Terra blockchain then I recommend listening to the in-depth Ark interview with Do Kwon, the founder and CEO of Terraform Labs and the Terra blockchain, as well as former ARK Analyst James Wang. We get to hear among other topics about the two tokens that Terra offers, the stablecoin TerraUSD (UST), and Luna, and the decision behind branching out in this way.
The key learning is that minting new UST tokens requires a percentage of another digital token and reserve asset, Luna, to be ‘burned’. If the demand for UST rises with more people using the currency, more Luna will be automatically burned and diverted to a community pool. That balancing act is supposed to help stabilize the price, to a degree.
Okay, it is time to wrap up. Here is what I have learned so far. Remember, I write to learn and not to educate per se. Stablecoins are useful because they allow people to transact more seamlessly in cryptocurrencies that function as investments, such as Bitcoin. If the SEC slaps regulation on fiat backed centralized stablecoins it is not unreasonable to suggest that we will see a migration toward seigniorage supply or algorithmic stablecoins that are decentralized and use smart contracts. I speculate that a clear winner on this front would be TerraUST.
The thesis is simple: More demand for TerraUST equals more LUNA are burned. LUNA price goes up —mazel tov! And that’s not taking into account Terras’s vibrant community and ecosystem. Well, Terra’s vibrant ecosystem is what makes the stablecoin such a gem in the first place.
Crypto Banter would support this thesis to the latter. The Crypto Banter content is definitely not for the faint hearted Bitcoin Maximalist. I f*cking love this show. Ran Neuner is a crypto wiz. Degen hard — all day everyday with a dash of DYOR — because we are in the midst of an everybody is a genius season i.e. crypto bullrun. Every damn coin seems to be pumping nowadays and everybody keeps telling me “I told you so”!
I hope I could provide some interesting context in an otherwise seemingly boring crypto category. There is so much more to learn and to be fair, I have conveniently left out some issues that a lot of naysayers would point out so be sure to DYOR. I cannot get my head wrapped around all this. I expressed this in a recent tweet:
And on this note I will leave you with a final encore, which is Laura Shin’s discussion with Do Kwon on US regulators.
Happy stablecoining ya’ll.
Frei Bier / Twitter: @FreiBIER13
DISCLAIMER: My writings are merely a reflection of my learning journey and my attempt to compartmentalize the cryptoverse. I am learning out loud so feel free to correct me or disagree with me. This is not investment advice but my hope is that you find value in some of my links and ideas. As a former academic, I also recognize that I will need to sharpen my paraphrasing and referenceing skills.