Stablecoins in the wild

We’re two-thirds of the way through the Year of the Stablecoin. Rather than taking yet another look at the many projects still cooking and the theory behind how stablecoins work (here is a good recent overview), I want to take a glance at the projects that are currently live already.

Surveying the current landscape

The first thing we notice is… there’s not much out there yet. The vast majority of stablecoin projects are still in the development or closed testing phase. The big live release this year has been TrueUSD by TrustToken (TUSD) — effectively a better designed and more transparent version of the dominant player: Tether (USDT). TrueUSD is currently running at a market cap of about $60 million and an average daily volume around $10 million (both from coinmarketcap). This compares to Tether’s market cap and daily volume both over $2 billion. A good list of the currently active stablecoins can be found at the Stable Coin Index. Besides Tether and TrueUSD, it’s worth examining Maker’s Dai and BitShares “smartcoins” (bitUSD and bitCNY).

Update: A more comprehensive list of active and inactive stablecoin project can be found at https://stable.report/

Figures of merit

From the perspective of the current users of stablecoins, two factors are critical: stability and liquidity.

  • Stability is the degree to which, well, the coin is stable — by how much and how often does it deviate from its target price ($1).
  • Liquidity is the measure of how much of the coin you can buy/sell without significant market impact — slippage cost.

Stability can be approximated by various measures of volatility, although with something like a stablecoin we may be more concerned about price outliers than the standard deviation. Liquidity can usually be approximated by trading volume. The more volume being traded, the cheaper it will tend to be to get your trades done. A more accurate measure is looking at the visible order book and seeing how much size you could trade immediately within some given price range of slippage (say, 1%).

In practice, these two factors are correlated. The more liquid a stablecoin gets, the less susceptible it will be to short-lived price outliers. On these two factors — stability and liquidity — no one comes close to Tether (yet!).

(numbers approximate USD$, from coinmarketcap.com)

I’ve included market capitalization in the table as well because it’s a variable many people are watching. As you can see, it can be misleading. For example, while Dai’s market cap is about equal to TrueUSD’s at the moment, it is far less liquid. You can see the TUSD/USDT Binance market (below) is incredibly liquid with several millions of dollars of posted liquidity available within 1% market impact. I’m not counting these numbers directly for TUSD liquidity since most people are interested in trading stablecoins against BTC or ETH rather than between each other.

TUSD/USDT Liquidity (decimals collapsed, from Binance)

As a given coin is accepted as Store of Value (SoV), we would expect higher market cap — more dollars being kept in the coin. As it comes into use as a Medium of Exchange (MoE), this shows up more in terms of volume — more trading of the coin. I’ve included a measure of the velocity of money — the Daily Velocity calculated as Avg. Daily Volume / Market Cap. The incredibly high velocity of Tether (this is an annualized velocity of over 300, as compared to USD M1 velocity of around 6) is indicative of it being used primarily as a Medium of Exchange, and also may indicate that people are actively avoiding keeping wealth stored in Tether.

Factors impacting liquidity

It’s interesting to speculate on what factors are contributing to TUSD liquidity over Dai’s. One major factor is probably market access. TUSD is available for trade on the world’s most popular crypto exchange, Binance, whereas Dai is mostly only traded on its own DEX (which comes with all the UX problems that are currently common with DEXs). In addition, given the direct benefits TrustToken will accrue from TUSD adoption, it’s likely that they’re sufficiently incentivized to promote dedicated liquidity provision efforts for TUSD. It seems relatively unlikely that the decentralized, and therefore relatively uncoordinated, Maker team would be able to coordinate to do this. This also likely explains part of why TUSD has been able to get listed on major exchanges whereas Dai hasn’t, even though it’s been around for longer. This is an important point to consider when estimating the expected effectiveness of decentralized vs centralized projects.

ETH/DAI Liquidity (from OasisDex)

One relevant dynamic to look at is the TUSD/USDT market — the premium or discount of TrueUSD (TUSD) to Tether (USDT) — on Binance. USDT’s superior liquidity will contribute to it trading at a liquidity premium — that liquidity is valuable to holders of Tether. On the other hand, the market’s skepticism over USDT’s accounting — to what extent Tether is actually fully backed by fiat — likely makes it appear riskier than TUSD from a legal perspective. The price of TUSD in USDT terms is therefore a good way to gauge the market’s perception of how the legal risk compares to the benefits of more liquidity when comparing these two stablecoins. As you can see, in general they trade very close to parity, albeit with periods of time at a small but steady premium or discount.

Source: TUSD/USDT Binance

The distribution of ownership is another interesting variable to explore. At least for TrueUSD, we can see that about 60% of outstanding tokens are held by three wallets which seem to correspond to exchanges: Binance and Bittrex. This is likely being used for trading purposes, like providing liquidity. Dai’s concentration is also quite high, with the top 10 wallets holding over 50% of outstanding supply. Specifically with Dai, if you dig into some of these addresses and their transfer patterns, it looks like many of are related to large MKR holders. This seems to indicate that Dai is primarily being used by people (founders? investors?) within the Maker ecosystem rather than capturing broader adoption. BitShares bitUSD, on the other hand, has the least concentrated ownership as measured by the top 10 holders with only about 30% held by them.

How stable is your stablecoin

When looking at measures of stability, we find it highly correlated with liquidity. However, while Dai and bitUSD have similar volumes and relatively low liquidity, we see bitUSD seems to be significantly less stable. Not only does it have much wider trading ranges (more outliers) but also does not even trade at an average price of $1.00 — the target for a USD stablecoin. This is possibly a result of the unconventional design of the stablecoin — relying on a derivative-like mechanism with an oracle rather than simply having it backed by fiat. Admittedly, Dai also uses a model that is not backed by fiat, although bitUSD’s mechanism is designed in a way where we would expect it to trade at a variable premium to $1.

Interestingly, BitShares bitCNY (not shown above) has the most volume out of any other stablecoin except for Tether at the moment. Much of this is coming from use as a base pair on the exchange CoinTiger. This traction is especially interesting since the design of the BitShares stablecoin seems less effective than the other forms, as well as the likelihood that the BitShares stablecoins don’t seem to have a concerted liquidity provision effort behind them in the same way that TUSD might. This seems to suggest pent up market demand for a stablecoin targeting Chinese Yuan.

Wrapping up

We’ve taken a quick survey of the traction, liquidity, and stability dynamics of the currently active stablecoin projects: Tether (USDT), TrueUSD (TUSD), Dai, and bitUSD. Tether continues to maintain a commendable lead along all metrics, although TUSD has made substantial progress given the short amount of time it has been trading.

Currently, the primary use case of stablecoins is to trade in and out of other cryptos. As a result, minimizing slippage and risk of losses from holding the coin are extremely important. To the extent projects want to compete with Tether for this use case, they will need to figure out how to incentivize extremely liquid secondary markets around a stable price — $1 USD.