The case of a Tether flippening

Tether has been the Stablecoin King with a solid dominance and a safe distance from the 2nd and 3rd runners.

Tether is the Hare in Aesop`s myth but will there be a Tortoise and why?

Market maturity traditionally has been measured in several ways in the markets. In equities and fixed income, we look at the variety of financial instruments or subsectors, their liquidity, new listings and several growth metrics.

Up to 2017, the emerging asset class of cryptocurrencies was dominated by Bitcoin whose market cap was around 98% more or less since birth. The proof of work consensus and mineable cryptocurrencies were also dominant in the asset class. Listings on the unregulated crypto exchanges were mostly pairs with Bitcoin denominations. Keeping Bitcoins on exchanges was the main way to trade in the cryptocurrency markets.

2017 & 2018 were major inflection points for the cryptocurrency markets. In mid-2017, the world noticed that ICO funding surpassed for the first-time early-stage Venture Capital funding. The ICO frenzy brought thousands of new coins to the market.

Despite the normal large eventual failure rate, this out-of-control experimentation added a variety of coins to the asset class. Non-mineable coins, coins with variations of new consensus mechanisms, airdrops, coin burns, and stablecoins of all sorts.

By the end of 2017, the number of coins surpassed the 1,000 mark and since then it has only gone upwards. Today Coinmarketcap reports close to 9,500 coins which means we are reaching the 10,000 mark, ten times more than just 4 yrs ago.

The new normal for Bitcoin`s market cap dominance became closer to 75%.

As 2018 started and during the spectacular market correction (after reaching an ATH of around $20k Bitcoin dropped as low as $4-k over a 15month period before recovering), Bitcoin`s market cap dominance visited for the first-time levels of 50% and below in early 2018. We are currently revisiting these dominance levels as Bitcoin rejected its recent ATH of $64k and dropped below $50k.

The other less talked about structural change in the cryptocurrency market, was the changing of the onramps to crypto exchanges. Before 2018, access to unregulated exchanges was mainly via Bitcoin and for the very few regulated ones, it was USD. Tether, the USD pegged stablecoin that was launched in 2014 along with Ethereum, accounted for only 5% of the crypto pairs on cryptocurrency exchanges. When the Chinese ban took effect, demand for Tether grew significantly as an onramp and offramp in crypto trading.

Fast forward to today, and pairs denominated in Bitcoin account for only 10% of the trading volumes down from 50% in 2017. Tether is clearly the dominant denomination, with major crypto exchanges reporting that it accounts for 60% of the trading volume on exchanges.

The year of stablecoin growth was 2020 because the stablecoin market capitalization grew rapidly and the variety of stablecoins increased dramatically.

The stablecoin market has been serving as the onramp to crypto exchanges but is also the backbone of several DeFi applications.

A few eye-catching figures, tell the story.

As we entered 2021, Tether had a market cap of $21.5B and has currently more than doubled to $52B, despite all the legal troubles and the banning from the New York Attorney General. Tether is the dominant stablecoin by market cap, currently around 85%. The other top growing stablecoins are USDC another USD pegged currency which grew from c. $4B to $11.2B in 2021; DAI the algorithmic USD stablecoin of MakerDao which grew from $1.1B to $3.5B this year; and the newcomer, the Binance USD stablecoin which started the year c. $900M and is now $6.9B.

Stablecoins are here to stay, and I can’t emphasize enough how significant the OCC`s regulatory approval of stabelcoins is. This January, the OCC in the US authorized banks to use blockchains and stablecoins for payments. VISA in partnership with Anchorage Bank (one of the regulated crypto financial providers) are building an API offering for any bank or financial institution to be able to process crypto transactions. Circle, the US-based issuer of the regulated USDC stablecoin, [1] has launched a variety of services for enabling businesses to use stablecoins for cross-border payments and remittances. GMO Internet, the Japanese Blue Chip, has just issued two stablecoins, the JPY-pegged stablecoin (GYEN) and the USD-pegged stablecoin (ZUSD) which they plan to use for payments within their global ecosystem which is around 100 businesses.

CBDCs are another emerging variety of stablecoins that will change the current landscape of stablecoins and challenge the Tether dominance.

The market cap of the current CBDCs is negligible as the only ones actually live are the Sand Dollar from the Bahamas, the Bakong from Cambodia, and DCash from the Caribbean. The Chinese DCEP is in pilot phase but there are so many others in the pipeline, that it is only a question of timing for the tipping point to happen.

While Ethereum cryptopunks have coined `the Flippening` as the event of Ethereum`s dominance by market cap surpassing that of Bitcoin`s, we should be looking at the analogous event for stablecoins when Tether loses its dominance. This will happen when the stablecoin use case broadens from just being a crypto trading enabler to penetrating the payment system. This will most probably start with the use of private stablecoins for cross border payments (like the example of what GMO Internet is planning), what Circle is building for SMEs, and what DIEM is building with its partner network. The excellent and comprehensive Block Research report on Stablecoins mentions also that PayPal maybe working with Paxos to launch a stablecoin which would be clearly a game-changer in the FX market for small size payments (average size of a transaction on Paypal is $60).

The current market dynamics place Bitcoin at 50% (historically low) dominance, Ether at 14.5% (historically high), and Tether at 85% within the stablecoin market (historically high).

Tether`s dominance is at risk as both private stablecoins built on open-source networks come to market for Payments 3.0 and as the CDBC market grows.

The PWC`s recent first report `The Global CBDC index` tracks the maturity of the top 10 retail CBDCs and the top ten wholesale CBDCs.

The Block Research report on Stablecoins presents the 11 stablecoins that have already scaled with more than $10m market cap (data as of Jan 2021). From these, only Tether and USDC have more than 10,000 daily average unique users.

The stablecoin market feels ready to explode and prove to the world the next product-market- fit, beyond crypto trading.

Admittedly in the current conditions, for any CBDC to make it all the way to crypto exchanges to become an on-ramp seems far-fetched.

However, think of stablecoin based payments outside of exchanges, the VISA crypto API facilitating banks to position themselves in this market, Paypal and Square.

As Tether does not seem a contender for this opportunity. The question is whether the current front runners (Circle and Paxos) will dominate the stablecoin payments sector?

USDC is in bed with VISA and Paxos is in bed with Paypal.

Stripe had announced an early collaboration with Circle back in 2018 but nothing has happened since. As I look at the Circle suite offering of wallets, marketplaces & business account APIs; I sense that Circle is the Stripe in the digital payments space in the Web3.0 world.

Square`s Cash App has been silent around stablecoins, but I can’t imagine that there is nothing brewing.

The race is on and the current landscape of Top 5 fiat-backed stablecoins, may change very soon and more importantly have many more private stablecoins with meaningful volume.

Bottom line is that once stablecoins go beyond just being onramps for crypto trading and make it into the payment system, then Tether`s dominance will drop precipitously.

Whether the existing stablecoins can dominate in the upcoming scalable use case of stablecoin payments, depends heavily on geopolitics around CBDCs and regulatory blocks.

The stablecoin landscape is dynamic and will be changing.

Tether remains the Hare but who is the Tortoise or the Turtle. Is it the ridiculed Libra, rebranded into DIEM? Is it a private stablecoin that is not even born yet or one of the CBDCs that is on paper at this point?

[1] USDC is operating under US money transmission laws.