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Analysis of stable parts

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Cryptocurrencies can be a polarizing topic. Some believe it will change the world. They say we will live in a society with Bitcoin as the reserve currency; we will buy our chai tea lattes at Starbucks with digital tokens, then post them on web-domiciled social networks3 , all operating transparently through decentralized conduits.

Then there are those who say it’s a total waste of space, a voracious capitalist money grab awash in Ponzi schemes and shameless promotions (Kim Kardashian, if you’re reading this, I’m looking at you).

But even among those who are skeptical about cryptocurrencies, most appreciate the power of blockchain technology and the impact it could have on society.

Stable currencies are one of the most intriguing elements of blockchain technology. They are a simple fiat currency domiciled on the blockchain, which allows users to bypass the volatility of cryptocurrencies while using the blockchain. This means you avoid the downside of a yo-yo wallet all over the store, but you can take advantage of blockchain’s benefits: accessibility, speed, cheap transactions.

And since much of cryptocurrency is channeled through the dollar, all major stablecoins are iterations of the dollar. In a year in which the greenback has crushed major currencies as nations around the world struggle with runaway inflation, this offers citizens the ability to park their wealth in U.S. dollars rather than hold their own (often unstable) currency.

So what is the most popular stablecoin, and how do they grow? I’ve been diving into what is the world’s most boring cryptocurrency – in terms of price volatility – but for several other reasons, it’s incredibly exciting.

This is the stablecoin report.

Timeline – stablecoin growth.

I now see the beginning of 2020 as the “new paradigm” for cryptocurrencies. COVID burst onto the scene in Q1 and, after a collapse in March as the world sat around trying to figure out what exactly this coronavirus meant, the cryptocurrency soared.

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It took its place in the spotlight and prices, volume and liquidity skyrocketed. This year, 2022, we enter a new era of high interest rates as the money printing bonanza of the last few years caught up with us and inflation did its thing.

This led to tokens going bust. Bitcoin went from $69,000 to less than $20,000 and funds flowed out of stablecoins. However, some coins are doing better than others. Click on “play Timeline” in the chart below to get a snapshot of the movements over the past two years.

Right. Going from $20 billion to $160 billion in two years is an 8-fold increase, folks.

Of course, there is an elephant in the room when you look at the above chart. And that elephant has a name: Terra.

Decentralized vs. centralized

Perhaps blinded by the appeal of a decentralized stablecoin, many cryptocurrency enthusiasts bought TerraUSD (UST). Working on a seriously broken circular logic, the stablecoin was backed by Luna, which in turn was backed by nothing. A fancy way of saying it wasn’t backed, and the whole house of cards collapsed, taking much of the cryptocurrency ecosystem with it.

I participated in that too, to be fair. I knew the model was flawed, but I thought it would last longer than it did. I’ve written a lot about my participation in the circus, with this piece finally cutting my losses as I sold my UST, swallowing a nasty loss and a rather nasty blow to my already bruised ego.

But anyway, Terra is history. The other decentralized stablecoin play left is DAI, with a market cap of $6 billion. The only problem here is that, to me, DAI is as broken as Terra. Of course, the implications won’t be as dire and it won’t be a mindless death spiral, but if you ask me, DAI has the same probability as Terra of becoming a stablecoin of reputation and impact: zero.

That’s because the model doesn’t make economic sense. Oversizing means that in order to receive $100 of DAI, you have to commit $150 of collateral. It’s extremely inefficient and that’s all you need to know. There’s also the fact that it’s not even decentralized, with so much exposure to USDC and other centralized assets.

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To pursue this seductive quality of decentralization, IDA has made a trade-off by sacrificing capital efficiency. In a world of rising interest rates, this will never work. And… it’s not even decentralized.

A stable, decentralized currency would be fantastic, but at the moment there’s no way to do it. I hope someday it can happen, but I’m not smart enough to think about how. As for IDA, I don’t see it ever becoming relevant. Either it will die (pun intended, I promise) a slow death, or it will take drastic governance measures while it lacks relevance (apparently it is considering ceasing to be a stable play and “retiring” the peg, whatever that means).

Centralized stable plays – Circle takes Tether’s throne?

That brings us to centralized stable pieces. Not so romantic, but at least things work, right?

Tether (USDT) is the OG and is at the center of everything in the space, and is the largest liquidity pair. However, it continues to face doubts about its reserves, and after the Terra contagion, its parity is down to 95 cents.

It must be said that Tether has never failed to redeem itself and has sold large chunks of its holdings without issue, more of its reserves than most fractional reserve banks would be able to manage. However, stablecoin owners want to be able to buy and sell at $1, wherever and whenever they want.

Circle (USDC) thus becomes a more important competitor, but still drifts into second place. I have modeled the following chart to show how Tether has eroded downward with the rise of alternatives. This is largely due to the persistent narrative that not enough reserves are held.

Contagion 2022

It’s been a tough year for cryptocurrency markets, obviously. The stables are a good way to demonstrate this, as capital has been packed up and out of the system.

I’ve plotted the performance of the different stables from January to now. It’s a good way to show how Circle has made inroads on Tether’s lead. While Tether has lost $10 billion so far this year, Circle is up $2 billion.

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Binance USD and FTX?

BinanceUSD (BUSD) is another one that has come a long way. At $22 billion, it is the seventh largest cryptocurrency and the third largest stablecoin.

It is being driven hard by Binance, the world’s largest cryptocurrency exchange. Recently, the exchange delisted USDC and automatically converted all holdings into BUSD, which helped boost the market capitalization a bit.

FTX director Sam Bankman-Fried called it “the second great war of the stable currencies.” FTX itself is even planning to launch its own stablecoin.

FTX is the second largest cryptocurrency exchange, and it raises some interesting questions about the benefit of having so many stablecoins in the market. In reality, I’m not sure it matters as long as they are all managed responsibly with robust reserves and transparent reporting, something some stablecoins certainly do better than others.

Conclusion and future.

In conclusion, it has been an important two years for cryptocurrencies and, by extension, stablecoins. The latter helps people get on board with cryptocurrency. By getting on the blockchain but avoiding volatility, stablecoins have a real use case in an industry where this is not always guaranteed.

I’ve put this together now because the stablecoins market has morphed over the last couple of years, but now we seem to be entering a new phase. Binance, FTX and Circle are coming for Tether. The coins insist that we need a decentralized currency, but until a plan is worked out that makes it possible, even theoretically, it’s just talk.

Of course I would like a decentralized room. I would also like to wake up to Beyoncé’s voice in the morning. Both are equally unlikely at this point, so for now we have to talk about centralized rooms.

It will be interesting to reassess these rankings next year, when God knows what will have happened in the cryptocurrency markets. Until then, Tether rules, but the herd is chasing hard after it.

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