The growth of the Dollar backed stablecoin market is a vote of confidence for on chain transactions
Stablecoins are growing at an accelerated rate and have recently crossed the $10billion mark. Several analysts monitor the issuance of stablecoins because it is often seen as a leading indicator of cryptocurrency price movements or a vote for confidence for on-chain transactions.
Stablecoins are exchanged tokens on the blockchain whose purpose is to have a relatively stable price. Stablecoins come in all sorts of flavors. Some are cryptocurrencies backed by fiat-currencies, others are backed by commodities like gold. On the other end of the spectrum, there are stablecoins backed by native cryptocurrencies like Ether and others that have no collateral but are managed by an algorithm to create a stable price trajectory. In another post, I will discuss this variety in more detail. Here I focus only on USD dollar-backed stablecoins because they have the largest capitalization for now.
In May 2020, the market capitalization of the entire stablecoin sector crossed the $10billion dollar mark with a full two years of growth. The stablecoin market capitalization was circa $2.5 billion in the beginning of 2019; it more than doubled by the end of the year — circa $5.9 billion; and year-to-date it has grown 70% to circa $10 billion.
The Stablecoin market growth has mainly been fueled by an increased demand for convenient ways to get into and out of cryptocurrency positions but remain on-chain. Amongst crypto aficionados, stablecoins are the only way they use to on-ramp and off-ramp on crypto exchanges, as these investors typically do not want to exchange their position into fiat currencies.
The largest stablecoin by market cap is Tether USDT. It is backed 1:1 by the US dollar and despite various controversies related to their lack of transparency around the management of the collateral, Tether has grown into the third largest (by market capitalization) cryptocurrency (after Bitcoin and Ether).
In May, Tether crossed the $9 billion mark and is now hovering around that level. Tether dominates the stablecoin market by over 80%. It seems to be the favorite choice of those that want to remain outside the conventional banking system and always keep their holdings on-chain. Maybe Tether benefits from the first-mover advantage.
An increase in the supply of Tether has been seen as a positive leading indicator especially for Bitcoin demand. The thinking is that increased issuance of Tether proceeds buying. Tether`s price fluctuates around $1. The issuing company, Tether, aims to manage the supply so that it does not trade at a significant premium or a discount for an extended period. USDT tokens are either ERC-20 tokens on Ethereum or are native to the Omni Layer of the Bitcoin blockchain. The collateral of the US dollars is held at various conventional banks that have partnered with Tether.
US Dollar backed stablecoins dominate the stablecoin market for now. USDC and PAX are in second and third place in terms of market capitalization (c. $700million and c. $245 million respectively).
Last year Facebook spearheaded the LIBRA association with 28 initial members and proposed launching the LIBRA coin, which was going to be backed by a basket of fiat currencies (USD, Euro, and other) and some short-term government securities. The signaling effect of the LIBRA project was significant as it was evidence that one of the BigTech companies and several other heavy wait names like Visa, Paypal, Booking.com and more; were seeing value in stablecoins backed by major fiat currencies.
By now it is clear that the cost of transacting via such stablecoins is much lower than through the conventional banking system and is especially valuable for micro-transactions that are typical in Emerging markets. In addition, the settlement of the transactions is nearly instantaneously and there is full transparency as to where the funds are as they move from sender to receiver.
LIBRA however, was confronted with severe regulatory issues. Over the past year it has changed its roadmap and is now expected to launch more than one stablecoin. Each stablecoin will be backed by one and only one fiat currency, instead of a basket. The LIBRA association members although not the original composition, constitute a strong ecosystem of diverse players that have a large audience that could become users of the expected LIBRA fiat-backed stablecoins.
As the US dollar continues to be in huge demand globally, dollar-backed stablecoins issued by various private entities could grow even faster than over the previous years. Despite the misalignment with the original decentralized network vision for finance, fiat-backed stablecoins a strong confidence vote for on-chain transactions.
Stay tuned for more about Stablecoins issued by Central Banks (CBDC) and by Decentralized Finance initiatives.
 Tether has not provided audited financial statements proving it has adequate reserves backing USDT.
 In Lack of Supervision & Transparency’: Libra Association’s Governance Falls Short I cover the LIBRA association's original members announced in late June 2019 and the governance issues that led to some of the regulatory hurdles that the association faced.
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