Pegged to a reserve asset such as the US dollar, gold, or other fiat currency, usage of these digital coins has grown exponentially
Stable coins are uniquely positioned in the transitioning financial ecosystem to act as a bridge between the traditional fiat currencies and the incoming decentralized Cryptos. They feature the stable value that the current financial institutions and the central banks seek while featuring stronger autonomy, privacy & interoperability qualities — which are the hallmark of mainstream cryptocurrencies.
Although the mainstream cryptos have a long wall of regulatory hurdles to climb before they can truly be integrated with the legacy financial system, Stable coins emanating from public blockchains are uniquely positioned to benefit from the world’s international transactions — 55% of which is conducted in the US dollar. In addition to this, the offshore dollar market (dollar deposits held outside the US) could alone be over $57 trillion dollars, according to the Bank of International Settlements.
Running on global public infrastructure with 24/7/365 access makes these stable coins incredibly enticing in an increasingly digitized world. Their consistent growth over the past 12 months has suddenly taken an exponential trajectory as can be seen in the left chart above (Figure 1). As is the case, the current market cap of all the stable coins has just crossed over $50 billion. A handful of prominent stable coins dominate this segment of the crypto market.
Tether (USDT) is by far the biggest of the stable coins, the most widely used ‘digital dollar’ in the Cryptoverse — controlling almost 70% of the market cap in this segment and bagging almost 93% of the transactional volume. USD Coin (USDC) is the only other stable coin that comes close to Tether with almost 17% of the market cap.
Looking at the quarterly transactional volume (right chart above), Q1 2021 numbers have already crossed $616 million and are on pace to reach over $1 trillion by the end of the quarter. This is an impressive feat, considering stable coins have transacted $1.5 trillion in volume in the past 12 months.
Apart from all the enticing features of stable coins mentioned above, they also offer programmability for developers to trivially build and deploy applications with global distribution. This has given rise to algorithmic stable coins recently. They achieve price stability and balance in the circulating supply of the asset via an underlying algorithm.
Simply put, the algorithm issues more coins when the price increases, and buys them off the market when the price falls. The current longest-running algorithmic stable coin is Ampleforth (AMPL), in circulation since 2013. However, some of these innovative algorithmic stable coins have been anything but stable as they have failed to keep their value — the leaders of the hype cycle including ESD and DSD sit as low as 90% below their $1 peg (Figure 2).
This has led many skeptics to jump to the conclusion that these algorithmic stable coins were destined to fail under their current designs. Nevertheless, innovation comes with its fair share of failures and gives an opportunity to improve on the shortcomings at the same time. In this case, a still-nascent industry could eventually provide a scalable, capital-efficient & decentralized stable coin — which can be used for both a store of value and as a medium of exchange.
Otherwise, established Stablecoins have registered such impressive growth in 2020 that even the U.S. Office of the Controller of the Currency (OCC) recently announced that federally regulated banks can use stable coins to conduct payments and other activities. I guess they can see the writing on the wall.
Originally Published on Medium