Number Stay Flat

Why stablecoins are the biggest use case in crypto right now

Jul 12, 2022

👋 Welcome to the 25th issue of The Syllabus from Invisible College — a weekly newsletter that helps you navigate the fast-moving world of web3. To get this newsletter delivered to your inbox, subscribe here:

Before we begin, a disclaimer — nothing in this piece should be construed as financial advice. With that, let’s dive in.

Upcoming Events

We’ve got a packed event calendar over the next two weeks. Here’s what’s coming up:

NFTuesday (Tues. 7/12 @ 3 pm PT)*
Bear Market Lessons from a Crypto OG w/ Mike Dudas (Thurs. 7/14 @ 12 pm PT)
Town Hall (Fri. 7/15 @ 9 am PT)*
Office Hours w/ Rockwell Shah (Mon. 7/18 @ 1 pm PT)*
Creating On-Chain Communities (Wed. 7/20 @ 9 am PT)*
Investing in the Metaverse (Thurs. 7/21 @ 3 pm PT)*

*To access these events, you’ll need to hold at least one Decentralien NFT.

Now onto this week’s post…

Web3 use cases have been hotly debated over the past month or two. Critics argue that the existing use cases don’t warrant the amount of speculation we saw during the bull market and that their descent back to reality in this bear market was inevitable. On the other hand, proponents rattle off lists of use cases, many of which are still quite early in their adoption cycles, which leads the critics to feel even further justified in their skepticism.

With the amount of not-so-great news plaguing crypto lately, it’s hard to blame people for having their doubts. Over-leveraged hedge funds, insider trading, tens of billions of dollars wiped out in a few days, rug pulls, and more.

But regardless of all the bear market fervor, there are still many viable use cases that exist right now. Rather than go through a laundry list of examples, I’ll focus on a simple, but powerful one: stablecoins.

Stablecoins are crypto assets that are pegged to a certain value, most commonly the US dollar (USD).

Let’s get into why stablecoins exist in the first place, the various “flavors” of stablecoins on the market, and how they’re ruffling regulatory feathers.

Digital Money

Rewind the clock back to 2009 and you’ll find a small group of people who were excited about Bitcoin and the promise of digital money. Or, as the Bitcoin whitepaper called it, a peer-to-peer electronic cash system.

Fast forward to today and Bitcoin has become one of the largest, most speculative, and volatile assets of all time. Thus far, Bitcoin’s promise of becoming digital money has fallen short. Nobody wants to use it for everyday purchases—the prices fluctuate too wildly for both consumers and merchants. And yet, in many countries, you’ll find Bitcoin ATMs and some have even adopted Bitcoin as legal tender. This is due to the expense and difficulty in moving funds across borders and/or runaway inflation of the countries’ native currency.

If you live somewhere like the US where you can send money using myriad apps like Venmo, PayPal, Cash App, etc., it might not seem like a big deal to send a few bucks to your buddy. But there are billions of people who pay outrageous fees to simply send a small amount of money to a friend or family member.

Stablecoins have emerged as a way to solve two problems at once: the price instability of Bitcoin and the hefty cost of sending fiat currencies.

As an example, the Invisible College launchpad organization Starship Guild routinely sends stablecoins to guild members across dozens of countries, saving thousands of dollars on fees each month. Those members can feel comfortable knowing their money won’t swing wildly up or down and they can easily withdraw it to pay for things like food and shelter.

Not all stablecoins are created equal

As mentioned earlier, the vast majority of stablecoins are pegged to USD. If you look up a list of stablecoins, you’ll probably wonder why there are so many—USDC, USDT, DAI, FRAX, and even brand new ones like GHO from Aave. But that doesn’t mean they all work the same under the hood.

The biggest difference between the various types of stablecoins is how they’re collateralized. USDC, for example, is fully collateralized, meaning there’s an actual dollar in a bank account somewhere backing every USDC token on the market. Whereas FRAX has a fractional reserve—it’s partially backed by collateral and partially stabilized algorithmically. UST, which completely crashed back in May, was a fully-algorithmic stablecoin.

The dollar provides a good example of how things could potentially play out in the long run for stablecoins. The US adopted the gold standard in 1879, meaning every single dollar was backed by gold. But in the midst of the Great Depression in 1933, the standard was altered because banks couldn’t keep up with the demand for cash. By 1971, Richard Nixon’s administration removed what was left of the gold standard due to high inflation, which drove up the speculative price of gold and made it untenable to redeem dollars for physical gold.

While collateralization is important in the early stages of crypto adoption we’re in now, it will hold back stablecoins from being truly break-out game-changers as more and more of our lives move online.

Regulatory Hurdles

Stablecoins have a market cap of nearly $154B right now. It’s a lot of money, but it pales in comparison to the $21.75T US dollars in the market right now. The market opportunity for stablecoins is massive, especially if they can eventually be used for IRL purchases. Despite the relatively small market cap, governments are already holding hearings to discuss the implications of stablecoins and they’re debating what legislation might look like.

This clip of US Treasury Secretary Janet Yellen was from a hearing that occurred right after the UST meltdown:

Blockworks @Blockworks_

Janet Yellen wants stablecoin legislation done by the end of the year

There are a couple of things going on here:

Regulators want to protect consumers from future catastrophic events like UST by treating stablecoin issuers like banks
They also want to protect the strength of the US dollar globally as stablecoins gain adoption

The problem is, as mentioned earlier, that crypto allows consumers to easily transact across borders. With regulation in place, stablecoin issuers will have to play by different sets of rules depending on the countries they’re operating within.

The good news is, that the US is generally a global policy leader. Right now, the regulatory landscape in crypto is murky, at best. Some clear guidelines around stablecoins will help give investors more confidence in the crypto category more broadly. Then it’s off to the races.

The Syllabus