Cryptocurrency can be a polarizing subject. Some believe it will change the world. It is said that we will live in a society that has Bitcoin as its reserve currency; that we will buy our iced coffees from Starbucks with digital tokens and then post them to social media domiciled at Web3, with everything working seamlessly through decentralized pipelines. But there are also those who say it’s a complete waste of space, a voraciously capitalist greed awash in pyramid schemes and shameless advertising (Kim Kardashian, if you’re reading this, I’m talking to you). But even among those who are skeptical of cryptocurrencies, most appreciate the power of blockchain technology and the impact it can have on society. One of the most intriguing elements of blockchain technology is stablecoins. It is simply a fiat currency domiciled on the blockchain, which allows users to circumvent crypto volatility while still using the blockchain. This means that the downside of a network-wide yo-yo portfolio is avoided, but the benefits of blockchain – accessibility, speed, cheap transactions – can be utilized. And given that much of the cryptocurrency is channeled through the USD, all major stablecoins are iterations of the USD. In a year when the dollar has crushed all major currencies as nations around the world struggle with rampant inflation, this gives citizens the opportunity to park their wealth in dollars rather than holding their own (often unstable) currency. So which stablecoin is the most popular? And how are they growing? I dove into what is the most boring cryptocurrency in the world – in terms of price volatility – but for a variety of other reasons it is incredibly exciting. This is a stablecoin report.
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Timeline – growth of stablecoins
I look to early 2020 as the “new paradigm” of cryptocurrency. COVID burst onto the scene in Q1, and after a meltdown in March as the world sat down to try to figure out what exactly this coronavirus meant, cryptocurrency surged. It took its place at center stage and prices, volume and liquidity soared. So this year, in 2022, we transitioned into a new era of high interest rates as the money printing bonanza of the past few years caught up with us and inflation flexed its muscles. This caused the tokens to crash. Bitcoin has dropped from $69,000 to under $20,000, and funds have flown out of stablecoins. Some stablecoins fared better than others, however. Click on “play Timeline” on the chart below to get a picture of movements over the past two years. In fact. A run from $20 billion to $160 billion in two years – that’s an 8X increase, folks. Of course, there’s the white elephant when looking at the chart above. And that elephant has a name – Earth.
Decentralized x Centralized
Perhaps blinded by the allure of a decentralized stablecoin, many crypto enthusiasts bought TerraUSD (UST). Working with some seriously broken circular logic, the stablecoin was supported by Luna, which itself was not supported by anything. A fancy way of saying it wasn’t guaranteed, and the whole house of cards came crashing down, dragging much of the cryptocurrency ecosystem with it. I was involved in it too, to be fair. I knew the model was flawed, but I thought it would last longer than it did. I’ve written quite a bit about my involvement in the circus, with this article detailing that I had finally cut my losses and sold my UST, swallowing a terrible loss and a rather nasty blow to my already bruised ego. But anyway. Earth is past. The other decentralized stablecoin left is DAI, with a market cap of $6 billion. The only problem here is that, for me, DAI is as broken as Terra. Of course, the implications won’t be that severe and this won’t be an insane death spiral, but if you ask me, is DAI as likely as Terra to become a respectable, impactful stablecoin – zero. This is because the model makes no economic sense. Overcollateralization means that to receive $100 DAI, you must pledge $150 in collateral. This is grossly inefficient and that’s all you need to know. Then there’s also the fact that it’s not even decentralized, with so much exposure to USDC and other centralized assets. To pursue this seductive quality of decentralization, DAI has committed itself to sacrificing capital efficiency. In a world of rising interest rates, this will never work. And yes… it’s not even decentralized. A decentralized stable would be fantastic, but there’s no way to make that happen right now. I hope one day it can happen, but I’m not smart enough to think about how. As for the DAI, I can’t see it becoming relevant. It will either die (pun intended, I promise) a slow death, or take some drastic governance action while losing relevance (apparently, it’s considering not being a stablecoin anymore and instead “removing” the peg, whatever that means).
stablecoins centralized – circle is taking the throne of Tether?
So that brings us to centralized stablecoins. Not so romantic, but at least things work out, right? Tether (USDT) is the OG and hub for everything in space, and is the biggest liquidity pair. However, it continues to face doubts about its reserves and, after the Terra contagion, its price dropped to 95 cents. It must be said that Tether never failed to redeem and sold large parts of its holdings without any problems – a larger portion of its reserves than most fractional reserve banks would be able to handle. But still, people who hold stablecoins want to be able to buy and sell at that $1 mark — no matter where and when they want to. Circle (USDC) is becoming a bigger competitor but remains adrift in second place. I modeled the chart below to show how Tether was sucked down, with alternatives emerging. Much of this is due to the ongoing narrative that sufficient reserves are not maintained.
The contagion of 2022
The year has been a difficult one for the cryptocurrency markets, obviously. Stablecoins are a good way to show this as capital has packed its bags and left the system. I’ve charted how different stables fared from January to now. It’s a good way to show how Circle has made inroads into Tether’s lead. With Tether losing $10 billion since the start of the year, Circle has increased by $2 billion.
Binance USD and FTX?
BinanceUSD (BUSD) is another one that has gained ground. With up to $22 billion, it is the seventh largest cryptocurrency and the third largest stablecoin. It is being pushed by Binance, the world’s largest cryptocurrency exchange. Recently, the exchange withdrew USDC and automatically converted all holdings to BUSD, which helped to boost the market cap a little. FTX boss Sam Bankman-Fried referred to it as the “Second Great Stablecoin War”. FTX itself is planning to launch a stablecoin of its own. FTX is the second largest cryptocurrency exchange and raises some interesting questions about the benefit of having so many stablecoins on the market. In reality, I’m not sure it matters, as long as they’re all managed responsibly, with solid reserves and transparent reporting – something certain stablecoins certainly do better than others.
Conclusion and future
In closing, it’s been a huge two years for cryptocurrencies and, by extension, stablecoins. The latter helps to integrate people into cryptography. Diving on-chain but avoiding volatility, stablecoins have a real use case in an industry where this is not always guaranteed. I put these two words together as the stablecoin market has transformed over the last couple of years, but now it looks like we are embarking on a new phase. Binance, FTX and Circle are coming to Tether. Some insist that we need a decentralized stable, but until a plan is devised that makes this theoretically possible, it’s just bullshit. Of course, I would love a decentralized stable. And I would also love to wake up to Beyoncé’s voice tomorrow morning. Both things are equally unlikely now, so for now, we need to talk about centralized stablecoins. It will be interesting to re-evaluate these rankings next year, when God knows what will have happened in the cryptocurrency markets. Until then, Tether dominates the race – but the pack is close behind.