The Million Dollar Growth Hack
tl;dr: How Gemini burned cash to grow fast.
For best experience, read here: http://bit.ly/gemini-discount
There’s a new generation of fiat-backed stablecoins vying to replace & surpass Tether.
The competition is fierce.
In October 2018, three new stablecoins joined the race: Gemini (GUSD), Paxos Standard (PAX), and USD Coin (USDC).
When Gemini launched its stablecoin, GUSD, it was hoping to quickly gain traction.
But things got off to a slow start.
So according to reporting from The Block,
Gemini offered its stablecoin at a discount to bootstrap adoption.
The discount led to a surge in demand for GUSD.
Data from TRM shows a spike in GUSD issued from the smart contract starting in early November 2018.
Dollar-backed stablecoin on sale?
According to reporting from The Block, traders quickly spotted an arbitrage opportunity:
Buy GUSD at a discount, trade it 1:1 for a different stablecoin, then redeem the other stablecoin for $1 with the original issuer.
Now is the arbitrage story true?
- Did the GUSD discount create an arbitrage opportunity?
- If so, on what scale, on which exchanges, and with which stablecoins?
If GUSD was being funneled into an exchange and traded for another stablecoin, here is what we would expect:
- High net inflows of GUSD as traders move GUSD into the exchange to trade it.
- High net outflows of other stablecoins as traders bought and redeemed them.
This is exactly what we see.
In the last two months of 2018, nearly 50% of all freshly minted GUSD (79M) flowed directly into exchanges like Huobi and OKEx.
We used TRM to analyze GUSD flows through 3,125 exchange-owned addresses.
On Huobi, as GUSD flowed in, PAX flowed out.
Over the course of 8 weeks, a net total of 72M GUSD (138M inflows, 66M outflows) flowed into Huobi, while a net 32M PAX flowed out (63M inflows, 96M outflows).
On OKEx, the arbitrage was less evident.
One explanation may be that the only stablecoin trading pair on OKEx was between GUSD and Tether, which did not have significant volume.
Traders overwhelmingly chose Huobi to execute the arbitrage due to the existence of HUSD, a solution which enables traders to easily swap GUSD for another stablecoin while maintaining the 1:1 peg.
The existence of HUSD was critical in preventing the arbitrage opportunity from being quickly traded away.
Traders primarily used PAX to cash out their discounted GUSD. This is likely due to PAX’s large supply on Huobi and PAX’s no-fee, same-day redemptions.
So, was the discount effective at bootstrapping Gemini’s growth?
Gemini grew rapidly on Huobi as traders swapped GUSD for PAX, then redeemed PAX for profit.
GUSD’s market cap on Huobi increased from virtually zero to 72M, whereas PAX’s market cap decreased from 41M to 7M in the same period.
Somewhat ironically, PAX employed a similar discount strategy in October to initially gain market share on Huobi.
But outside of Huobi, Gemini has not seen rapid growth. It is currently behind other stablecoins like USDC, TUSD, and PAX.
The growth hack cost Gemini between $1–2M (approx.).
If we assume a 2% discount on a $1 stablecoin, and that 25–50% of total GUSD minted between November 4th and December29th (168M) was sold at a discount, then the experiment would have cost between 840K and $1.68M.
Takeaways
1
For Gemini, the GUSD discount was a costly, but effective, growth hack.
When Gemini offered a discounted stablecoin, it led to an increase in GUSD and a corollary decrease in other stablecoins like PAX. The arbitrage was made possible by Huobi’s HUSD solution which let traders deposit GUSD and withdraw PAX.
2
For other stablecoins, Gemini’s discount was more of an attack, putting downward pressure on their market cap and growth.
GUSD’s market cap on Huobi increased from virtually zero to 72M, whereas PAX’s market cap decreased from 41M to 7M in the same period.
3
The industry may see more “Discount Attacks” as fungible stablecoins compete for market cap.
Much in the same way that the ridesharing companies burned cash to acquire market share, we are seeing the same thing play out within stablecoins.
Thanks for reading!
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