2021 will be the year where global stablecoin networks will become accessible to end users for general purpose payments. Be it about Central Bank Digital Currencies (CBDCs) spurred by China’s digital yuan or private initiatives such as Facebook’s Libra project (now called Diem), stablecoins have been all over the news lately.

The recent announcement of payment giant Visa collaborating with Circle, the company behind the second largest stablecoin USD Coin (USDC), Facebook’s re-branding of Libra, and the heavily debated STABLE act has wide reaching implications for the crypto-asset and blockchain industry.

The supply of stablecoins has exploded more than 1,200% this year, with COVID affecting investment behavior and the cryptocurrency market summer spike due to recent trends such as yield farming. Therefore, it’s worth looking a little bit closer into stablecoins - what they are, how they are used, how widely they are adopted, and what they (can) bring.

Stablecoins fast increase in 2020

In the ecosystem of blockchain and crypto where interconnectivity and adoption is crucial for the industry to grow, stablecoins provide a perfect bridge between the new and old financial systems, as well as acting as facilitators for users and investors to enter the market.

Stablecoins are a form of cryptocurrency that is collateralized to the value of an underlying asset. As its name indicates, stablecoins are intended to maintain a constant, stable value relative to some other asset - be it a fiat currency, real world asset, or another cryptocurrency. Stablecoins try to address a number of issues with cryptocurrencies, some of the major being:

  • Price volatility, as they allow investors to get in and out of a market more easily, reducing their exposure to volatility,
  • They also provide exchanges with liquidity, enabling faster conversion without affecting a cryptocurrency’s price drastically,
  • And they represent an opportunity for payments and transfers with very low fees between individuals and businesses.

While cryptocurrencies are trying to disrupt the financial industry, stablecoins take a significant step to decentralize the payment industry. Stablecoins, pegged to real world or digital assets, can move value faster and more efficiently than existing monetary systems.

Source: Blockdata, June 2019

There have been more than 130 stablecoin projects since 2017 - some already successfully launched and some still in development. While more than 50% of these are launched on the Ethereum blockchain, there is a growing trend of other networks enabling stablecoin projects on their protocol, as these represent a key towards widespread adoption of blockchain technology.

Source: 3rd Global Cryptoassets Benchmarking Study - Centre for Alternative Finance, September 2020

As stablecoins become increasingly available, the percentage of service providers supporting them grows, as well. Support for Tether (USDT), the largest stablecoin in the market, grew from 4% to 32% between 2018 and 2020, while support for other stablecoins increased from 11% to 55% - aligned with the rising value of transactions denominated in stablecoins. In June 2020, for the first time in its young history, more value was transacted using stablecoins than Bitcoin. The yearly transaction volume in 2019 totalled $250 billion. In 2020, over $1,000 billion had been settled on-chain using stablecoins.

Source: Coinmetrics, November 2020

The total supply of stablecoins in circulation at the beginning of 2020 stood at around $5 billion. Now, it stands at over $20 billion, reflecting the growing demand of investors as stablecoins are one of the only available option to move risk off into fiat-like assets during periods of volatility, and act as an intermediary step before putting money in riskier cryptocurrencies.

The most popular stablecoins, measured by market capitalization, are Tether (USDT), USD Coin (USDC), and Dai (DAI). USDT’s market cap has seen steady growth since 2017, with just one significant dip in October 2018. The stablecoin began 2020 with a market cap of $4.1 billion increasing rapidly to $19.8 billion in December, representing more than 80% of the total stablecoin market.

While USDT is by far the largest, USDC and DAI have clearly taken over the DeFi space as the preferred stablecoin. USDC is primarily hosted on Ethereum, which holds virtually the entirety of its supply. Demand for this stablecoin similarly exploded in the third quarter of 2020, with its market cap tripling from $928 million to more than $3 billion.

DAI’s supply grew by 623% in Q3 2020, while its market cap has expanded tenfold from $130 million in July to more than $1.1 billion in December, attributing much of this growth to the launch of liquidity mining programs in the DeFi sector.

Source: Coingecko, December 2020

The rise of stablecoins can be attributed to several factors. One is the store of wealth in a less-volatile asset, avoiding severe fluctuations in investments. Especially during the March price drop of several crypto assets, the tokens saw a surge in demand as investors sought to meet liquidity needs and avoid exposure to the highly volatile markets. Another one is decentralized finance’s (DeFi) summer explosion and with it the yield farming craze boosting stablecoins adoption, as they are employed by DeFi users to receive high yields from a variety of DeFi platforms, such as Uniswap, Curve and Aave. Furthermore, a growing number of hedge funds and over-the-counter trading desks moved funds to stablecoins for faster arbitrage and reactions to market movements. And finally, the use of stablecoins by individuals and corporations to facilitate global transactions and payments.

The entrance of big private corporations to boost adoption

Even before this vast increase in stablecoin adoption, big corporations have set their sights on them. Just to name a few, JPMorgan, Visa, and Facebook have all been trying to get in the market. JPMorgan recently launched its stablecoin for around-the-clock cross-border payments. Facebook’s Libra project has been in the news since 2019. And Visa had applied for a digital dollar already in November, 2019, and was originally announced as a member of the Libra Association until it withdrew along with a number of other companies.

For these companies, there are many reasons to enter the stablecoin market. Using distributed ledger technology to make payments faster, cheaper, and more transparent is definitely one of the main ones. Attracting and retaining new clients is another. The latest announcement of Visa  teaming up with Circle to allow businesses to accept payments in USDC can have major implications for the blockchain & crypto industry. When it comes to adoption, having a credit card giant connecting crypto to its global payments network of 60 million merchants is a major step. Businesses will eventually be able to send international USDC payments to any business supported by Visa, and after those funds are converted to the national currency, spend them anywhere that accepts Visa. This will not only significantly increase the utility that USDC can provide but also is a testimony to the whole blockchain and crypto industry for the usage this ecosystem is bringing to the world. It recognizes technology as a crucial part of the future of money. And it’s a great example of how networks can work together - Visa’s network & the blockchain network - building a bridge between traditional and new financial services.

Hurdles on the way to widespread acceptance

While the innovation behind stablecoins has many advantages, it is still a young concept which needs to be accepted on a global scale. To achieve this, not only private but especially public institutions need to recognize it.

Private stablecoin initiatives have seen a number of challenges to gain trust. Facebook’s Libra is one of the most famous examples. With the announcement that the social media giant wanted to create its own stablecoin, Libra, in 2019, public institutions were quickly acting against it. They saw that Facebook’s user base was far larger than the population of any country, and Libra would be able to challenge every monetary authority on earth. Therefore, countries representing the world’s largest economies opposed the launch of Facebook’s Libra project, and maintained that no global stablecoin project should begin operation until it adequately addresses relevant legal, regulatory, and oversight requirements through appropriate design and by adhering to applicable standards. To adhere to that Facebook now rebranded Libra to Diem in an effort to gain regulatory approval by stressing the project’s independence and emphasise a simpler, revamped structure by initially launching a single dollar-backed digital coin.

However, more recent events show that the war between public and private institutions is far from over. The Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act introduced by congresswoman Rashida Tlaib before the US House of Representatives is trying to make fiat-pegged stablecoin operators abide by the same rules and registration requirements expected of banks. This does not only affect stablecoins but the whole DeFi industry, as it would potentially make much of DeFi trading and even running an Ethereum node illegal.

Although none of the regulations have been officially passed yet, neither in the US nor Europe (e.g. MiCA), it highlights the risk of operating in an industry that’s developing in a regulatory gray area, with officials who do not always understand the very technologies they are trying to regulate. Most of the regulations claim to protect low-income consumers while it’s precisely those people that stablecoins and DeFi applications help the most.

Stablecoins are here to stay

The stablecoin market has seen immense growth the past months as there is clearly a big appetite for stablecoin projects, with more and more big companies joining the party. Visa, Facebook, and JPMorgan are all positive signs that stablecoins are here to stay - if they can withstand scrutiny from regulators and lawmakers.

While stablecoins are coming under fire, their advocates are growing. The US government itself was revealed to be working directly with Circle to distribute relief payments to Venezuelans in need. And Germany’s Bankhaus von der Heydt, or BVDH, has just launched a Euro stablecoin on a blockchain network. It might not be easy and there will be many more challenges to overcome but stablecoins as part of the whole crypto & blockchain industry, can lead the way and show how the future of payments and FinTech can look like.


Sources:

3rd Global Cryptoassets Benchmarking Study - Centre for Alternative Finance ; September, 2020 [1]

What Are the Top Stablecoins Used For? - Flipside Crypto ; Dec 8, 2020 [2]

Visa Applies For Digital Dollar Blockchain Patent - Forbes ; May 14, 2020 [3]

It’s not just Project Libra and JPM Coin: 134 stablecoin projects are in development - Blockdata ; Jun 26, 2019 [4]

Stablecoins Hit $20B Milestone, a Nearly 300% Year-to-Date Surge - Coindesk ; Sep 25, 2020 [5]

G7 will oppose Libra launch until regulations in place - Cointelegraph ; Oct 12, 2020 [6]

FSB releases recommendations to regulate 'global stablecoins' such as Libra - Cointelegraph ; Oct 14, 2020 [7]

Tether's market cap could overtake Ethereum’s next year - Cointelegraph ; Oct 14, 2020 [8]

Tether volume hits $600B as it attempts to take on Bitcoin as crypto’s benchmark - Cointelegraph ;  Oct 16, 2020 [9]

USDC set to land on Stellar in 2021 - Cointelegraph ; Oct 15, 2020 [10]

Chasing the hottest trends in crypto, the EU works to rein in stablecoins and DeFi -  Cointelegraph ; Oct 18, 2020 [11]

Yield farming fuels 623% growth in DAI supply to nearly $1B - Cointelegraph ; Oct 22, 2020 [12]

JPMorgan's stablecoin finally sees commercial light of day - Cointelegraph ; Oct 27, 2020 [13]

Tether market cap surpasses $17 billion, fueling Bitcoin price rally - Cointelegraph ; Nov 6, 2020 [14]

Congresspeople speak out against Tlaib's anti-stablecoin bill -  Cointelegraph ;  Dec 5, 2020 [15]

Ethereum community explodes over proposed stablecoin act from U.S. representatives -  Cryptoslate ; Dec 5, 2020 [16]

Euro stablecoin launched on Stellar by one of Europe’s oldest banks - Cointelegraph ; Dec 10, 2020 [17]

Visa Partners With Ethereum Digital-Dollar Startup That Raised $271 Million -  Forbes ; Dec 2, 2020 [18]

Facebook-backed digital coin Libra renamed Diem in quest for approval - Reuters ;  Dec 1, 2020 [19]