5x
Six months ago we wrote about stablecoins and their importance for crypto. Since then, their market size grew 5x.
The abundance of issuers is impressive across different underlying blockchain protocols, business models and stability enforcement mechanisms. This is now a market which requires detailed analysis of each asset and their place in the ecosystem.
Some are supposed to be backed up with real world collateral (an even allow for real-time tracking of their reserves):
While some follow complex game theory / economic incentivisation mechanisms to protect their USD peg:
Some, such as Tether (the largest stablecoin in the market), have somewhat controversial reputation given lack of transparency into their collateral.
Maturing ecosystem
‘Bank run’ risks are real and just because an asset is issued on a blockchain, instead of a traditional payment network, doesn’t make it safe. Markets are reasonably efficient, however, and if there is demand for a risky asset, there will be supply of hedging mechanisms.
Concerned about a bank run on Tether? Use DeFi to hedge the 1:1 peg breakage risk:
This works as a put option, covering losses beyond a 5% peg deviation.
Concerned about the smart contract security of an algorithmic stablecoin provider? Insurance is easily available:
Utility
What can these coins be used for apart from payment / non-volatile savings?
Borrowing and lending is an obvious use case - there is a sufficient number of crypto-native market participants who are comfortable holding volatile crypto as collateral and borrowing USD-linked coins against it. Again, DeFi is here to serve and accommodate multi-billion demand for borrowing:
The second use case is less straightforward, but very relevant for DeFi - given the variety of different coins and a much higher currency velocity in the space, providing liquidity for market making purposes is a valid use case. There will always be those who need to swap from Stablecoin A into Stablecoin B - facilitating such transactions and collecting transaction fees is another use case adding utility to this asset class.
The Stablecoins business has grown dramatically in both size and width of issuers (some regulator friendly and some not) and use cases. The trend shows no signs of slowing down - a whole new ecosystem has emerged over the last 12 months together with the demand for those who navigate it.