May 9, 2020

5 min read

10 Things I Learned From “Stablecoins Are Killing It ” Episode #2 on 5/6/20

The first half of Episode #2 featured our esteemed guests presenting their macro views on stablecoins. The 2nd half was Q&A. View the entire episode:

Or read my 10 highlights:

#1 U.S. Dollars Are Being Ported On To Public Blockchains

For the past year, stablecoins have been gaining share of the total value transferred over Ethereum and Bitcoin. If nothing else, the porting of dollars on to public blockchains is a stunning truth that very few people appreciate.

#2 COVID-19 Has Greatly Accelerated The Growth Of Stablecoins

Due, in large part, to COVID-19, stablecoins added almost as much market cap in Q1 2020 as it did in all of 2019:

#3 The Biggest Stablecoins Winners In Q1 Were Tether, BUSD (Binance), & DAI

Binance’s BUSD saw the fastest growth in Q1, all-be-it, off a small base, as they extended a promotion for BUSD trading pairs on the Binance exchange.

Maker’s DAI benefited from the introduction of Multi-Collateral DAI in January.

But the big news was Tether continuing to grow it’s dominant share as market participants continued to gravitate to the stablecoin with the most liquidity.

#4 Circle’s Market Research Prior To Launching USDC, In Late 2018, Indicated That Counterparty Risk Was The Markets Biggest Concern

Prior to launching USDC, Circle leveraged it’s trading network to conduct market research with traders, investors, and liquidity providers. The biggest concern by potential users of USDC was counterparty risk. What happens if Circle or the bank where the reserves are held go under?

To address those concerns, Circle partnered with Coinbase and established the Centre consortium to oversee USDC as membership-based framework and governance scheme. Centre expects to add other members in 2020.

#5 The Big Story of 2019 was The Migration of Tether to Ethereum

For its first five years, since launching in 2014, Tether used the Omni protocol, a second layer protocol on the Bitcoin blockchain. In mid-2019, a day after Binance said it would stop supporting the Omni protocol, Tether announced it would start issuing ERC-20 compliant Tether.

Less than a year after Tether created a stablecoin option for transferring value on Ethereum, value transferred over Ethereum reached parity with Bitcoin.

And stablecoins are now the significant majority of the value transferred over Ethereum:

# 6 Research Indicates That Arbitragers Acquire Stablecoins From The Tether Treasury When The Price Exceeds $1

Not surprisingly, Ganesh’s research showed a strong correlation between the price of Tether and flows between the Tether treasury and the secondary market, as arbitragers take advantage of deviations from the peg. When Tether trades at a premium, there is a positive flow from the treasury to the secondary market. And when it trades at a discount, there is a negative flow.

#7 Tether’s Migration To The Ethereum Blockchain Resulted In Less Deviation From The Peg & Quicker Reversion To The Peg

Before April 2019, Bitfinex was the only one address transacting with the Tether treasury on the Omni layer. Since April 2019, there has been a big increase in the number of addresses interacting with the Tether treasury,

As a result of that increase in access, deviations from the peg are much smaller and they revert to zero (get arbed away) much quicker.

#8 Stablecoins Tend To Trade At a Premium During Times of Crises, And At A Discount If There’s A Loss Of Confidence

During times of crises, and/or great volatility, resulting in a flight to safety, stablecoins tend to trade at a premium. When the reserves of a stablecoin are called in to question, or there are other events leading to a loss of confidence, stablecoins tend to trade at a discount. This is similar to how currencies like the Peso, when they’re pegged to the dollar, trade at a discount if people believe the dollar reserves are running low. To drive this point home, Ganesh showed that all six major stablecoins traded at a premium when Bitcoins price fell by almost 50% on March 12, 2020.

Ganesh pointed out that the addition of a forward market enabling arbitragers to arb without transacting with the Tether treasury, would result in even greater efficiency of the stablecoin market.

#9 Ganesh’s Research Refuted Earlier Research Which Showed That Stablecoin Issuance Causes Crypto Market Bubbles

Ganesh found there was no correlation between Bitcoin’s price and the issuance of Tether. That finding differed from the much publicized research done by Griffin & Shams. Ganesh attributes the different findings to different methodologies of looking at the flows.

#10 Regulators Remain An Important Part Of The Stablecoin Ecosystem

Joao stated that Centre has always been focused on working in collaboration with regulators, which has gotten easier as Facebook/Libra forced greater focus and thought on stablecoins by regulators around the world.

Ganesh believes that regulators continue to look warily at stablecoins, focusing on reserves and issues associated with a “run on the bank”. The other issue Ganesh highlighted was financial stability in smaller countries if stablecoins get wide scale adoption. The central bank could lose power over monetary policy and banks could lose power to make deposits.

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