Why Non-USD Stablecoins Will Matter for the Future of Crypto
Intro
Stablecoins have been a core part of the growth story for crypto and DeFi, providing a fundamental building block for people to move money with a stable medium exchange and trade in-and-out of the volatility of other crypto assets like Bitcoin and Ether. And thus far, the protagonist in this growth story has been the USD stablecoins. USD stablecoins like USDT, USDC, DAI, and UST have taken center stage as the de facto reserve currency within crypto and DeFi, with over 99% of the overall market cap and trading volumes across different protocols, DEXes, CEXes, and beyond. However, we believe in a future where non-USD stablecoins, especially for currencies in places like Asia, will be complementary and essential building blocks as we bring in the next 1 billion people into DeFi and crypto.
This initial stage of US dollar dominance for stablecoins is only natural because a) many early adopter crypto users came from the United States, b) the position that US dollar still holds as a global reserve currency even in fiat.
Looking at the data from 2019 from Chappuis Halde & Co, North America as a region had the highest number of active crypto traders back in 2019 when there were an estimated 43 million total number of crypto traders globally.
This landscape has changed substantially by 2021, with the rise of regions outside of the United States like Asia in crypto adoption. According to a report by Triple-A (based on methodology from Chainalysis), Asia as a region now accounts for over 50% of the total globe’s crypto users, totalling 160M, surpassing the % that is coming from the United States.
The fact that we see non-US users coming into crypto in droves without a reflection in the increase in non-USD stablecoins begs the question of whether or not these alternative fiat-pegged stablecoin currencies really have a place in the crypto ecosystem. One narrative is that the world will continue to dollarize with more and more transactions and financial activities moving on-chain, and USD stablecoins will retain their hegemonic status because of the moats around liquidity, distribution, and consumer habits.
However, I would posit that this is an ephemeral state and snapshot in a certain time and place in the history of stablecoin’s growth, but not an inevitability that will persist into the future. There are two types of thinking or biases that influence the persistent belief in USD dominance in stablecoins: status quo bias, and early adopter bias.
Status quo bias
There is status quo bias at work, or with a disproportionate fixation with the current state of affairs as a lasting baseline, and with less of a thoughtful examination of the longer-term secular trends that may otherwise vastly change it. In easy terms, “This is how it’s been, therefore, this is how it always will be.”
In the context of USD vs. non-USD stablecoins, this status quo bias means:
- Believing that USD-backed stablecoins will continue to dominate well into the future because that’s just how it’s always been for the first 100M+ or so users (in the last 3 years or so), even though the types of users coming in as we reach the next 1B crypto users (in the next 5 years) could fundamentally shake that completely.
- Believing that the reasons that non-USD stablecoins have not taken off (e.g., liquidity challenges, use cases) are a matter of universal fact vs. matter of timing, circumstance, and strategic shortcomings (from previous attempts)
Early adopter bias
Based on Everett Rogers book: Diffusion of Innovations, early adopters are representing the first 5%-15% of your customers, which have different behaviors and habits that may be very different than the majority of users.
In this case, the early adopters of crypto and stablecoins did start out mostly based in the United States. For those early crypto traders outside the US, they likely have already been used to the idea of using US-denomination for their portfolio. Crypto could not have existed without the early adopters coming in, but its future in gaining more mainstream adoption cannot happen if we base all of our future product decisions on the characteristics of just the 15%.
An example of this early adopter bias for stablecoins:
- Person tries to find out whether or not people are happy with only USD stablecoins.
- Ask users who are currently avid users in crypto (e.g., the 15% early adopters) whether or not they are fine with using solely USD stablecoins. Many of these early adopters say “yes” or “yes, it’s good enough”
- Concludes that USD stablecoins solve the needs of all crypto users, represented by the feedback from just the 15% early adopters.
- Doesn’t gather feedback from the rest of the 85% that are not yet in crypto, which may include users who actually do see lack of local stablecoins as friction and hurdle to adoption
For a moment, let’s attempt to break these biases and contemplate what a different future could potentially look like. (If, after reading this article, you still disagree with me, I am happy to debate this on comments below or on Twitter — @SherryYanJiang)
We’ll start by taking a look at the history of stablecoins, and then look into the types of macro-trends for the future that build the case for why we need non-USD stablecoins.
History of USD stablecoins adoption
The first stablecoins launched were BitUSD and NuBits back in 2014, but it wasn’t until Tether in 2015 where the collateralized off-chain stablecoins, or fiat-backed model, really took off. Stablecoins were originally used primarily as a way for traders to be able to trade in and out of the volatility of crypto assets, without needing to pay the fees to off-ramp back to fiat. Therefore, you could keep all of your assets still on the exchanges.
Stablecoins really took off and grew nearly 400% in 2021 after DeFi summer, where retail crypto users would leave stablecoins on protocol as a way to tap into yields. Stablecoins essentially chugged along growly slightly year-over-year until there was a rising tide that lifted all boats in DeFi.
Dai: Data from Messari attributes most of Dai’s growth to the launch of four specific liquidity mining programs within DeFi: change in Compound yield distribution that increased Dai rewards, launch of YFI farming, CRV launch, and launch of yield farming for UNI token.
Nearly 65% of Dai’s supply in 2020 was being supplied for DeFi protocols for yield farming.
UST: UST has recently surpassed Dai market cap at $12B. Where has most of this growth come from? The vast majority of the demand for UST has largely come from Anchor Protocol, where you could deposit UST and earn APYs of 19.5%. And how do these yields get propped up? Because borrowers are subsidized to borrow by rewarding them with ANC or Anchor tokens, and many will use the borrowed UST to buy Luna with leverage.
I think many of us will look at the current $180B market cap for stablecoins, which is over 99% USD-based, and find it hard to imagine a market that is not dollar-dominated, due to this status quo bias. However, we have to remind ourselves that this market really gained its foothold 1–2 years ago, it is far from over to see how things will shake-up with the next wave of crypto use cases coming in.
AND…we’re starting to see some of the larger non-USD stablecoins pick up a bit of steam in 2021, starting with Euro and SGD stablecoins.
Euro
According to a report from “The Block,” Euro stablecoins will “likely gain adoption in the coming years.” There are a few liquid Euro-pegged stablecoins right now — STASIS Euro (~$130M market cap) and AgEUR ($140M market cap).
The xSGD became the largest non-USD fiat-backed stablecoin recently, with a market cap of ~$180M. It actually grew 10x in 2021, since the starting market cap was $20M only.
Why is there a future for non-USD stablecoins?
We are at a pivotal moment right now in crypto where we are just starting to move from early adopters to early majority users. If DeFi was the catalyst that drove in more early adopters and tinkerers to build and trade in the space, then verticals like NFTs and GameFi that speak to a more mainstream customer base will bring in the early majority. And many of these early majority users are coming from regions like Asia, where we’ve seen an explosion in blockchain gaming over the last year.
However, we’re still in early days, and need non-USD stablecoins to solve a critical but simple part for unlocking the TAM for the next wave of early majority users: USER FRICTION.
Despite all the growth last year, the different experiences and processes in crypto are still far from optimized (e.g., cashing out from SLP to fiat PHP is still inconvenient). The impact that non-USD stablecoins will have for mainstream crypto users will be similar to the thinking around creating more intuitive and inclusive interfaces and designs in crypto. Let me explain why.
The crypto space still has a steep learning curve. It is still very complicated for the average person to navigate and requires active engagement on the part of the users to bridge across chains, enter in correct wallet addresses with long sets of characters, learn how to use Metamask (not always 100% intuitive IMO), study different complex DeFi protocols and yield-earning opportunities, and more.
Generally speaking, no one will generally disagree with the statement that “improving interfaces in crypto will help propel more mainstream adoption.” Good UX will pay off in creating more delightful experiences, increasing loyalty, and therefore, mass market appeal of crypto.
However, most people are thinking about one layer of the definition of friction — “interaction friction” — and not the others like cognitive or emotional friction (The Hierarchy of User Friction)
Some definitions…
- Interaction friction refers to friction a user experiences when interacting with your product’s interface. It covers all aspects of the UI that may be hindering your users from accomplishing their goal.
- Cognitive friction refers to the total amount of mental effort being used in working memory.
- Emotional friction refers to emotions your users feel that prevent them from accomplishing their goal.
For people who are sitting in markets outside of the US who are more early majority (than early adopter), there is COGNITIVE and EMOTIONAL FRICTION that comes from having to rely on USD stablecoins as a workaround solution because they have no other better choice. Let me give you two examples:
Cognitive Friction: Lack of familiar unit of account
If you are someone who grew up in the Philippines, you are used to thinking and operating in the Philippines Pesos, as your unit of account. And this habit is going to be very strong because of the sheer frequency of thinking in terms of Philippines Pesos for money decisions.
Assuming you make around 10 decisions and actions around money a day (e.g., lunch, utility bills, gas, cab fare), that’s 3,650 decisions a year. Assuming an average age of 26 in PH and the start of money-decision-making at age 10, that’s 58K money decisions and actions over the course of a lifetime, made in Philippines Pesos as the unit of account.
If you live in the Philippines, you buy your bag of rice, pay for education fees, buy a house, thinking in terms of Philippines Pesos. After making 58K money decisions in Philippines Pesos, suddenly going into USD denominated is unnatural. They would need to go through the cognitive load of constantly converting from USD to PHP currency any number of thoughts and decisions from:
- How much yield am I actually earning on my USDC farm in PHP terms?
- What is the current value of SLP in PHP, given the SLP to USDT exchange rate AND the USDT to PHP exchange rate?
- I want to take a loan in DAI for my business, but how much is the interest rate payment going to be in the future in PHP terms, because my earnings are in terms of PHP for my business?
Granted, there are Axie Infinity and other P2E players in the Philippines that use USD stablecoins like USDT, but you have to remember that these represent the early adopter users and not the rest of the early majority. And even if you ask the existing P2E players, they would be happier using a PHP stablecoin if there was a liquid option available.
Some user quotes to share:
- “People understand the PH currency, they could study it”
- “If you launch a stablecoin in PH, it should be PHP. It’s what people are used to”
Emotional Friction: Foreign exchange risks & uncertainty
Uncertainty can be a big emotional friction for users, because they lose a sense of understanding and control for the future. In the context of USD stablecoins, it’s the foreign exchange uncertainties and risk between the USD and local currency that creates hurdles for users.
Historically, the PHP has moved around 5–10% against the USD, and while it is not as volatile as what you would see in markets like Myanmar or Venezuela, it’s enough to create a sense of discomfort around the foreign exchange risk.
Imagine you are a PH business owner considering taking a loan in DeFi based on USDC in order to finance a small business, and the interest rate on that loan is 10% to be paid back in 3 months. The source of income for your business is going to be denominated in PHP because your customer base is local Philippinos. You might face some hesitation for taking that loan because the interest rate to you is essentially a floating interest rate, which could potentially be 11% if PHP decreases 10% against the dollar, which eats into the profitability of your business.
Some user quotes to share:
- “USD stablecoins are not really considered stablecoins for us, because they change in value against PHP”
- “USD stablecoins feel to me just as volatile as SLP because they also change in value”
Therefore, creating local stablecoins is a KEY part of an overall more inclusively designed crypto ecosystem, alongside improvements in interfaces and flows. And will be a critical piece in onboarding the next billion users coming into the space.
Conclusion & What’s Next?
It is easy to forget that the history of stablecoins is quite short. We are far from a verdict that non-USD stablecoins do not have a place in this ecosystem just because there haven’t been highly successful and scalable models so far. And in fact, because there hasn’t been one player to rise to the top means that there is a bluesky opportunity to come in and chart the course for stablecoins in the years to come.
So, what exactly will it take to get non-USD stablecoins off the ground?
We will discuss this in a future article, where we talk about the challenges of adoption around two-side marketplaces (e.g., suppliers of liquidity, demanders of stablecoins), and the fundamental (e.g., new high-potential verticals for stablecoins like GameFi) and technical (e.g., DeFi growth hacks) catalysts for growth.
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