Top Stablecoin Trends to Watch in 2024 for Fintech Innovators
2024 is the year that marks a decade from the establishment of the Ethereum Foundation in Zug Switzerland. The genesis block was created in mid-2015. Currently, 56% of stablecoins are on the Ethereum network. TRON however has been dominating trading volume as gas fees on the Ethereum network have been a major friction.
A decade ago, there were no stablecoins nor any Layer2 blockchains. Fast forward to today and Stablecoins have grown to $156 Billion and L2 blockchains account for $32+ billion (as of writing the total crypto market capitalization is $2.76 Trillion and L1 blockchains account for c. 78%).
Stablecoins are money-like but not interchangeable. From a regulatory perspective, the non-algorithmic stablecoins are categorized as e-Money Tokens or Money-like Assets.
Nic Carter was the first one who thought of Stablecoins as the next-generation Eurodollar market (the overseas USD deposits held at commercial banks). Benchmarking Stablecoins to the Eurodollar market leads to an extrapolation of significant future growth. This of course, implies that USD-backed Stablecoins will dominate the international trade of oil and other such important commodities. It does not consider the parallel growth of the Chinese and Indian CBDCs that are already real.
The Crypto exchange onramps/offramps
At first, Stablecoins served as crypto exchange onramps and offramps. Today that is not the case. Stablecoins are used in trade (across supply chains), cross-border payments, remittances, and as a store of value wherever Dollar liquidity is in shortage. According to the Fixing Finance report in the Fall of 2023, stablecoins accounted for 70% of transaction volume on blockchains. At the same time, Chainalysis reported that in 2022 and 2023 stablecoins became the “cryptocurrency of choice” among criminals.
Be on all networks
The big USD-backed stablecoins issuers — Circle and Tether — have been issuing their stablecoins on many L1 and L2 blockchains. They have aimed to make stablecoins a cross-border, frictionless medium of exchange.
Actually, Tether`s leading position is partially attributed to being on many blockchains from its early days especially ones that have had considerably lower transaction fees compared to the rising Ethereum gas fees. In Emerging markets, stablecoins have provided access to Dollars and at a low cost. In Africa, Latin America, and Asia the main criterion of stablecoin choice has been access and cost (not mitigating regulatory risk).
Even though most Stablecoins by market cap are on Ethereum, the transaction volume of Stablecoins has been happening on Solana (green) and Tron (red) over the past 6 months.
The Interest-bearing feature
As USD interest rates rose, the Stablecoin's next trend has been to design interest-bearing stablecoins. First, because 99% of fiat-backed stablecoins have been in USD, and second because the opportunity cost of parking money into USD-backed stablecoins was increasing. The BUIDL example by Blackrock, is not a stablecoin however it does aim to offer a stable value of $1 per BUIDL token and interest by investing 100% of its assets in cash, U.S. Treasury bills, and repurchase agreements[1]. As an institutional token it quickly accumulated a sizable amount of assets — $285 million — and brought the total amount of Tokenized such money-like tokens to $1.134 Trillion.
Most of the existing interest-bearing Tokenized US Treasury products can be bought only with USD stablecoins and not with fiat (the only exception is the Franklin Templeton on-chain fund — $FOBXX which has to be bought on their app with fiat).
The issuance of money-like tokens will continue and will be tied to USD stablecoins. For the next few years, the onramp and offramp to platforms that offer tokenized money-market type of assets will be USD stablecoins. Also, their cash flows will be paid in stablecoins and not in fiat.
The market will soon shift to using fiat-backed stablecoins as onramps/offramps to platforms where tokenized RWAs can be traded.
Next generation collateral
The third trend in stablecoins is the diversification of their collateral held in their reserves beyond the US Treasuries and repos. Tether has already added Bitcoin to its reserves. They aim to allocate 15% of profits to purchasing Bitcoin as reserves. Bitcoin Treasuries reports that as of April 1st, they held over 75,000 BTC.
Both Tether and MakerDAO have also been adding investment-grade corporate bonds to their stablecoin reserves. In October 2022, MakerDAO community voted in favor of a 20% allocation in investment-grade corporate bonds to overcollateralize DAI. The total amount was $ 500 million and Sygnum bank (a FINMA-regulated crypto native bank) worked with BlackRock Switzerland on this.
The new intermediaries
Increased sophistication in stablecoins means that we need new intermediaries to serve the issuers to meet regulatory and reporting requirements and to manage the risks of the increasingly complex collateral. Centrifuge is one of the new service providers positioning themselves in the broader space of `tokenizing credit funds`. Centrifuge anticipates a wave of tokenization that has started with money market funds and will broaden its scope into more sophisticated credit funds. In late March they announced their fund management platform designed to onboard credit funds to public blockchains.
The irony is that RWA tokenization seems ready to grow first for money market funds and credit funds that are already fairly liquid. The trend I foresee is that these will be tokenized to make their way into the liquidity pools of the DeFi networks. They will be held in the reserves of stablecoins which will become increasingly complex. Companies like Sygnum will become the new on-chain asset managers. Watch the entire space shift on- chain and new service providers emerge.
[1] Listen to my insights on the BUIDL token here: The Blackrock BUIDL Token | Demystifying Tokenization Myths https://youtu.be/7ZkWxXV5NRc?si=6Bba1Cn5DGMXiTuR
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