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Stablecoin Primer Section 5— Stablecoins’ future

What needs to be true for stablecoins to reach mainstream adoption?

“Stablecoins are one of the three trillion dollar narratives in crypto” Sam Kazemian, founder of the algorithmic stablecoin issuer Frax Finance

The chain of adoption

The chain of adoption

  • Utility: As the founder of the Terra stablecoin (rip) Do Kwon tweeted, great stablecoin mechanisms need to be supported by even greater economies around them. In the fiat economy, we use money for so many purposes (e.g., transact, save, donate, invest, burn). Stablecoins need this type of utility too. Users need simple on/off ramp solutions to move their fiat into stablecoins and be able to use their stablecoins both in the fiat economy and in the blockchain economy. At the end of the day, stablecoin is a money business and what good does money have if it can’t be used?
  • Regulation: Haseeb Qureshi of Dragonfly Capital states that “all the other avenues have to be exhausted before decentralized stablecoins have a chance of winning.” Along his lines, right now, most stablecoin usage is in terms of fiat-backed stablescoins (e.g., USDC). While this is thanks to their simple mechanism design, strong stability, and early market entry, fiat-backed stablecoins are fully permissioned and non-scalable. This means that if a regulator wants to censor the usage of a stablecoin (e.g., thinking that it poses a threat to other fiat monies), they can easily do so. Additionally, their scaling is dependent on how much fiat collateral is available to them. Decentralized stablecoins however, provide so much more flexibility to their users given they are fully blockchain based, permissionless, and non-custody taking. What this means is that, increased regulation on fiat-backed stablecoins may actually lead to the increased adoption of decentralized stablecoins as people will shy away from regulation.
  • Inflation of the US dollar: Even throughout the writing of the Primer, inflation in the US continued to increase. At 8.5%, inflation eats into people’s savings in fiat money, making the US dollar a questionable store of value. But as the World’s reserve currency, wasn’t the US dollar supposed to be super stable? Maybe not. Stablecoin projects like Volt and Frax’s FPI aim to solve this problem by pegging their stable tokens’ value not to the US dollar but to the consumer price index (i.e., the real price of goods & services in the economy.) The point is, stablecoins have flexible designs and they will always follow the more stable alternative. Increased and continued inflation of the US dollar may lead to the adoption of such stablecoins, expediting stablecoins’ mainstream adoption.
  • Infrastructure: While blockchains like Avalanche and Terra boast about their TPS limits (i.e., 50,000 and 10,000 respectively), these limits have not been battle tested at scale. If stablecoins will be used by billions of people, we need a robust infrastructure in place.

Closing thoughts

STABLECOIN PRIMER article series

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Osman Sarman

Engineer and ex-consultant exploring stablecoins, twitter: @_namsso_