Growing from 30 projects at the start of 2018 to over 100 by year’s end, stablecoins have emerged as the crypto market’s hottest trend. In the aftermath of a dotcom-like crypto crash, this emerging “stablecoin frenzy” is indicative of a maturing ecosystem that has grown weary of manic speculation and the hyper-volatility it portends.
Shunning the get-rich-quick exuberance of the 2017 ICO boom, investors have now pumped over $500 million into these volatility-proof tokens that promise better price stability. With bitcoin’s dollar-exchange rate registering as much movement in one day as the S&P 500 does in 23, stablecoins offer token holders a more predictable store of value than even the most mainstream crypto-assets.
Stablecoin proponents believe this digital asset class is an essential “on-ramp” that will bridge traditional financial markets and decentralized ecosystems. In theory, stablecoins enable institutions to bring off-chain assets into on-chain environments, promoting stronger liquidity and confidence in crypto markets. 2018 research from crypto-event producer Blockshow speaks to this point, identifying stablecoins as a key driver for the rise of securities token offerings (STOs).
Stablecoins can generally be classified into three types: asset-backed, crypto-collateralized, and algorithmic. In the first case, every token produced corresponds to an equal unit of fiat currency or other commodity asset held by the issuer, which entails a centralized model of governance. The second example entails pegging the value of the token to one or multiple cryptocurrencies. And in the third case, algorithmic models rely exclusively on smart contracts to regulate money supply and stablecoin value. For a more in-depth evaluation of these different models, check out our previous post here.
When evaluating stablecoin projects, however, protocol design is one piece of the broader puzzle. A stablecoin can have the most solvent off-chain capital base, brilliant exchange-rate peg or seignorage algorithm, but if its primary use is geared towards market arbitrage, the token’s utility will be strictly limited to sophisticated traders. Additionally, increasing regulatory scrutiny over manipulative crypto trading practices does not bode well for the long-term survival of arbitrage-minded projects.
Therefore, the most important question prospective stablecoin investors should ask is WHY? What real-world problems is this project trying to solve, and what is the intention behind it? Is this project a solution in search of a problem, or is it purposefully designed to meet the needs of specific people with significant problems that need to be solved?
Starting with Why
According to best-selling author Simon Sinek, the most successful organizations, innovators and movements always start with why. In his now-famous 2009 Ted Talk, “How Great Leaders Inspire Action”, Sinek analyzed the impetus behind Apple, the Wright brothers and Martin Luther King Jr., concluding that these outliers achieved greatness because they were driven by a higher purpose.
Transcending the pursuit of profit, Sinek argues that the most successful enterprises, innovators and leaders have a clear mission that inspires action and adoption. When applied to the stablecoin market, Sinek’s paradigm reveals that few operators offer a vision beyond the basic function of price balancing.
With at least 20 actively traded stable coins, and 100 more anticipated to hit the market in 2019, here at Reserve we believe that only those projects that offer a clear “why” and have the resources to solve pressing real-world problems will survive.
Real World Problems
Stablecoins can provide three key services in developing economies: protecting people’s money from hyperinflation; making cross-border remittances easy and affordable; and enabling merchant payments. Below, we will provide a high-level overview of each use-case.
Protecting People’s Money
Hyperinflation occurs when the price of goods and services increases by over 50 percent a month. Accounting firm Ernst & Young identified six hyperinflationary economies in 2018: Angola; Argentina; South Sudan; Sudan; Syria; and Venezuela. The most harrowing example of this phenomenon is Venezuela, which registered an 80,000 percent inflation rate by the end of last year.
Devalued some 95 percent by Venezuelan financial authorities, the bolivar, the country’s native currency, has become practically worthless. Meanwhile, the Venezuelan people suffer extreme poverty and lack access to the most basic human necessities.
While a stable cryptocurrency cannot magically solve things like food and medicine shortages, it could enable a secure and reliable medium of exchange that insulates peoples’ purchasing power from failed monetary policy.
Making Remittance Affordable
The annual cross-border remittance market is valued at roughly $600 billion, according to the Center for Economic Policy Research (CEPR). About three-quarters of these funds flow to low and middle-income countries, where remittance transfers account for a significant share of emerging and frontier market incomes.
Typically used by migrants who simply need to send money back home to their families, remittance services remain expensive, charging senders an average of seven percent, or $14 dollars, for every $200 payment. And that is just the average. In particularly troubled markets like Venezuela, that percentage typically ends up being much higher. In fact, the aggregate cost of remittance fees in 2017 was $30 billion, according to CEPR.
While $14 dollars may not seem like a significant amount of money in the developed world, these funds can mean the difference between starving and eating for poverty-line populations.
Offering a rapid, peer-to-peer mechanism of exchange, stablecoins can help reduce remittance fees to sustainable levels. This ensures that low and middle-income populations get to retain vital micro-funds.
Enabling Merchant Payments
According to data from crypto-forensics firm Chainalysis, the value of bitcoins handled by major payment processors nosedived by nearly 80 percent from last January through September 2018. With wild price movements that can send bitcoin’s value fluctuating by 30 percent in the span of a week, even the most widely adopted cryptocurrency remains an unappealing medium of exchange for merchants and everyday users.
However, a stablecoin project with the right economic protocol design could promote more security, confidence and transferability throughout the payments ecosystem. But to achieve merchant adoption at scale, stablecoin teams will have to form strong partnerships with payment processors, retailers and other key members of transactional supply chains.
The Golden Circle
Pivoting back to Sinek’s business gospel, he says that after an organization defines the “why” behind their business model, they can then address the “how,” and the “what,” respectively. Sinek refers to this framework as the Golden Circle.
While designing a functional exchange-rate peg and articulating core services are critical business considerations for every stablecoin team, the answer to these questions will prove irrelevant without a mission-oriented purpose and a clear go-to-market strategy for executing on that mission.
At Reserve, our why is rooted in scaling prosperity throughout the world’s most vulnerable economies by providing a stable global currency and a digital payment system designed specifically to fit the needs of people in those markets. In our next post, we will expound on our mission and explain how we are working to address each of the real-world problems highlighted above.
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