A Stablecoin You can Use Daily

What is a stablecoin?

A stablecoin is a money equivalent or substitute. The largest stablecoin in terms of amount in circulation is USDT, issued by a company called “Tether”. You may not even have heard of USDT (nor Tether), but more than $89 billion of it is currently in circulation. USDT is used mostly by crypto traders who need something that settles fast and yet is equivalent to USD, the most trusted central bank money in the world.

RockStable is a startup aiming to get its stablecoin ROKS in your hands so you can use it for daily expenses like buying lunch. This sounds crazy so let’s go into some details.

Why do we need stablecoins?

Very simply, the problem with USD is that it does not settle instantly. When you deposit a check in a bank, it takes at least a day to settle (or be credited in your account). This is true even when that same amount is deposited directly from another bank, say your employer’s bank account.

Now you may notice that when you use your credit or debit card to buy something, it seems that the transaction is completed instantly. In fact, the store does not receive your money until at least a day later. The store may use a payment provider that can pay them instantly, but it would cost them to use the services of this payment provider. In other words, delayed settlement costs merchants either money or time.

Contrast this with internet money, or what is called “cryptocurrency”. Cryptocurrencies like Ethereum (ETH) or Bitcoin (BTC) settle instantly — ten minutes is too long for a cryptocurrency (“crypto” in short) to settle. That’s why in the crypto world we have USD equivalents like USDT, USDC, DAI, or ROKS. These are versions of USD that settle fast, within a minute in most cases.

How do stablecoin issuers earn money?

There are three main types of stablecoins: those that are backed by a central bank money (like USD), those that are backed by other cryptos (DAI or LUSD), and those that are basically not backed by anything other than another self-referential volatile token.

Issuers of stablecoins backed directly by USD cannot spend the USD backing because each stablecoin unit releasedhas to be backed by 1 USD. However, these issuers can earn interest on safe and liquid investments like U.S. short-term bonds (T-Bills).

Stablecoins backed by other cryptos are issued programmatically (“automatically” or no humans involved) and keep USD equivalency through programmatic or computer means. In other words, the computer tracks the price of these stablecoins against USD to keep it almost constant at 1 USD. Companies behind these stablecoins earn money from the fees charged by the stablecoin program (“smart contract”).

Stablecoins with no backing (like Do Kwon’s Terra USD or “UST”) rely completely on the computer to keep its value. No stablecoin of the third kind has lasted more than two years as of this writing. Humans can outsmart and overwhelm whatever algorithm is used to stabilize this kind of stablecoin. This third kind ends up being a Ponzi scheme in which everybody loses money except the first investors and Do Kwon himself.

Our stablecoin ROKS is of the first kind, so we earn from ROKS backing interest. However, it’s backed by USDC and USDT rather than by USD directly. See why here: https://bitpinas.com/op-ed/stablecoin-liquidity/

The objective is always to gain a large network effect

Given how issuers of the first kind earn money, we can see that the issuer earns more by having more backing, which means having more stablecoins in circulation. Therefore, growth in the stablecoin issuer business means more users and more stablecoins in circulation. The more users → the more network effects → and the more stablecoins in circulation.

Stablecoin issuers have to find ways to increase the number of users. For people to start using it, these stablecoins have to be useful one way or another. The first stablecoins (USDT and USDC) were very useful in crypto exchanges and that’s where these grew slowly at first, then thrived quickly.

ROKS’ primary use case is in cross-border money transfers. We have designed a system that makes it very easy to buy it (using USD which we immediately convert to USDC) and send it to a virtual wallet running in the recipient’s smartphone, all in a single flow. In the destination country, the wallet user can easily convert ROKS to the local currency, at the touch of a button. (In the case of our pilot country the Philippines, ROKS can be instantly converted to PHP and sent to either a GCash or Maya wallet, or picked up at a Palawan station, or deposited in a bank account.)

We do not earn by charging fees when sending ROKS overseas. We will earn the normal stablecoin issuer way, by earning interest on the backing.

How can we earn interest in the cross-border money transfer use case?

In the beginning, there is almost zero USDC backing that stays in our control (“float”). The nature of a remittance business keeps the USDC backing amount low because recipients, using their virtual wallets, can cashout as soon as they receive ROKS. The average that ROKS can stay in a wallet is probably an hour. This is hardly enough float to earn interest on, in the beginning.

Increasing the network effect in the destination country by encouraging everybody to install the ROKS wallet helps keep ROKS in circulation. At first, friends and relatives can share ROKS among themselves. Later, by attracting merchants and small vendors to accept ROKS, circulation can further increase. What is the advantage to the ROKS user to do wallet-to-wallet transfers rather than cashout and do a transaction using the local currency? Converting from ROKS to fiat costs money, so passing that cost on to the payee is the advantage.

What is the advantage to the vendor? The vendor can keep ROKS in her wallet and may also pay her suppliers using it. What is the advantage of keeping ROKS in one’s wallet? Even though USD may itself inflate in the future, right now it is holding its value better than most other currencies and it is always attractive to keep and hold it in those other countries. It is in the interest of RockStable to make holding ROKS be beneficial to the user. To the extent that we can make holding ROKS beneficial to the user, we believe that users will keep USD in the form of ROKS.

RockStable has to compete with fiat (central bank money) remittance providers — large companies like Sendwave, Remitly, or even Western Union. These large companies “charge no fees” nowadays, so we have to do the same: we can because we are a stablecoin issuer. We will lose money in the first few years, but if people in the destination countries start using ROKS as money, then our USDC / USDT backing will grow in size and thereby our interest earnings.

If countries continue to allow the existence of stablecoins, then cross-border money transfers can truly be free (no fees in both source and destination countries).

Subject matter links:
To send ROKS: https://static.sendroks.com
ROKS Wallet app:
Android — https://play.google.com/store/apps/details?id=io.rockstable.rokswallet
iPhone — https://apps.apple.com/us/app/roks-wallet/id1630522873

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