Monday, 25 May 2020

Stablecoins: A Blockchain Product With Mass Appeal

If We View Stablecoins As Novel Products, Not Cryptoassets, New Possibilities Emerge

Stablecoins have garnered an outsized quantity of mind share as of late. It seems that outside of scaling and “institutional involvement,” stablecoins have been the most widely discussed and developed sphere of the cryptoasset industry.

For those wondering what a stablecoin is, click here.

According to the Stablecoin Index by Myles Snyder there are 29 relevant stablecoin projects. In an era where so many crypto projects are on the verge of death, far more stablecoins projects are popping up, a trend that could viewed as surprising during a bear market. It should also be noted that these projects have been backed by major venture capital firms, and some have been indirectly supported by major corporations. This is not to say that venture capital firms and major corporations are the stewards of innovation and know best. It does, however, make one wonder if stablecoins have generated more attention from traditional firms because of their simple value proposition and clearly defined addressable market. Below is a list of some of the largest dollar backed stablecoin projects and the institutional backers behind them.

Gemini Dollar: Received approval form the New York State Department of Financial Services, and is regarded as one of the first fully-regulated stablecoins.

Paxos Standard: Also received approval form the New York State Department of Financial Services.

USDC: Backed by Coinbase and Circle. Circle received investment from Goldman Sachs.

Stablecoins Aren’t Cryptocurrencies

Through this lens, stablecoins are beginning to act as a bridge between the traditional, institutional world and those who are pushing for a more open financial system. At this point it should be noted that some view stablecoins as a new crypto-fiat hybrid. Some have gone so far as to state that many stablecoins are not cryptocurrencies at all, but are, in fact, digital fiat proxies. In Japan, where the government has prioritized cryptocurrency regulation, it is stated that dollar pegged stablecoins do not fit the requirements of “virtual currencies” and as such will be viewed as “pre-paid money instruments”.

This is all to say that stablecoins are not quite categorizable as cryptoassets. In many cases, they do not achieve one of the most touted use cases of cryptocurrencies: censorship resistance. However, they do enable programmable transactions and a verifiable history. Because of these projects’ in-between status, I believe stablecoins should be viewed as their own class altogether. Specifically, they are a blockchain-powered product, for the most part built on Ethereum, that may capture product-market fit beyond the crypto-obsessed. To view stablecoins on par with bitcoin or other cryptoassets is a disservice to those pouring energy into such projects and a misunderstanding of what these products could achieve in their own right.

In this light, I believe stablecoins represent the first major products to be built on Ethereum which could develop significant mainstream market share by addressing specific market needs and gaining meaningful use. This could all be done without users realizing they’re even using blockchain or stablecoins at all. Admittedly, these use cases would fall outside the desires of many early crypto evangelists. It’s also evident that, currently, stablecoins offer a tremendous benefit to crypto traders. The purpose of this remainder of this piece is to explore the use of stablecoins outside of trading.

Low Fees Are A Product Feature

While there are several noteworthy features stablecoins possess, — transparency, fast transactions speeds, and programmability — there is one key feature of Ethereum stablecoins that make them an easy sell beyond the crypto community: Low Transaction Fees.

The average Ethereum transaction fee has been roughly between 10 and 25 cents over the last month. In a world where Ethereum scaling solutions continue to progress I will assume these costs will decrease. In the event my assumption is incorrect, current fees are already cheaper than most wire transfers and cross-border remittance services like Western Union.

Imagine a hypothetical business which we’ll call Globalbux. This company believes it can disrupt the cross-border remittance market and possibly gain market share in the POS market. Globalbux (GBX) creates an app that can be easily downloaded to your phone at which point you can instantly begin loading cash onto it. On the back-end, that cash is being converted into a stablecoin. On the user-end, that cash appears as Globalbux. Private keys and wallet addresses are hidden from the user in favor of a seamless user interface that lets you send money anywhere in the world.

So to recap, why would normal users download this product?

1. Low transaction fees for moving money internationally compared to current institutions.
2. Faster remittance of payment than current institutions.
3. Seamless and easy to use UI.

Now, if GBX wanted to take their newly formed empire one step further they could create and distribute a set of POS systems that accepts Globalbux. They would most likely have an easier time gaining traction in countries where the local currency is weak or lacks trust. They could also target countries, such as Ecuador, which already widely use U.S dollars.

In order to get merchants onboard, GBX would tell merchants they can undercut existing creditcard fees, which can be as much as 2–4%, as long as they accept Globalbux. The merchants would accept, as they would be assured that they could convert globalbucks into USD (or maybe their needed local currency) at any time. On the consumer end, users would be receiving Globalbux from family and friends in other parts of the world. Now, they could spend their Globalbux with merchants who use the GBX POS system. In the United States, people need USD to pay their rent, etc., but in a developing nation with a weak national currency, this could be a major disruptive force.

Again, it’s important to remember stablecoins are not cryptoassets, so for those looking for censorship resistance and an escape from fiat it’s best to look elsewhere. However, as illustrated, the right company could use this technology to create a compelling service.

At first glance it appears GBX would likely have to offer currency conversion services to the local currency. This would likely be true in the initial stages until GBX achieves a level of market penetration commensurate with the local currency. That is to say, until almost anywhere a consumer goes, they can use Globalbux. In this scenario, merchants could stop converting Globalbux into their local currency and could eventually pay their employees and operate other aspects of their business right from the GBX platform.

In our hypothetical world, GBX is simply using the payment rails of Ethereum and the stablecoins of their choice to create a user-friendly experience and offer a cost effective service. They use a stablecoin as their base asset for transactions but both the merchants and consumers are unaware of its use. By using Ethereum and the stablecoin products built atop it, Globalbux has created a service that undercuts existing banking institutions, cross-border remittance services, and possibly POS providers.

In Conclusion

Stablecoins have potential utility and economic upside that may make them the first blockchain product to be readily embraced by those outside the sphere of early adoption, speculation, or heavy evangelism. In the case of many, Ethereum simply acts as a mechanism that allows for easier transfer of what is ultimately still a dollar. Given the antiquity of SWIFT and the lack of access to traditional institutions in many developing countries, there exists the possibility that stablecoins could just become the first blockchain product that’s actually used by a meaningful number of people. In most cases, the adopters are enterprises and most people would have no idea that stablecoins are being used on the back-end, except for of course, the blockchain obsessed.

By David Beiner
Legal disclaimer: The insight, recommendations and analysis presented here are based on corporate filings, current events, interviews, corporate press releases, and what we've learned as financial journalists. They are presented for the purposes of general information only, and all the information belongs to the original publishers. These may contain errors and we make no promises as to the accuracy or usefulness of the information we present. You should not make any investment decision based solely on what you read here.

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