The State of Stablecoins Why They Matter and Five Use Cases The State of Stablecoins - Why They Matter and Five Use Cases Robert Lin & Mark Conrad Acknowledgements Stably Eyal Granit, Founder and CEO of Escapades Ventures David Segura, Chief Operations Officer of Carbon-12 Labs James Gan, Global Innovation Exchange University of Washington Masters Student Kate Mitselmakher, Founder and CEO of Bloccelerate Venture Capital Deryck Gebe, Business Analyst at Stably and studying Business Administrations at University of Washington Kory Hoang, Founder and CEO of Stably Katey Harrison, Director of Program Management at Bittrex Sheikh Mohammed Irfan , VP of Global Operations at Bloccelerate Venture Capital Anthony Waddell, Intern at Bloccelerate and studying Computer Science and Software Engineering at University of Washington Eric Moos, Editor at CryptoSlate Brian Freyburger, former CTO of Basis 2 TABLE OF CONTENTS Acknowledgements ................................................................................ 2 Abstract ......................................................................................................... 4 Introduction ................................................................................................. 5 1. History and Context for Stablecoins .......................................... 6 1.1 History of Currencies ................................................................... 6 1.2. What is the Key Opportunity for Stablecoins? ............... 7 1.3. The Meaning of Money ............................................................. 7 2. The State of Stablecoins ................................................................. 10 2.1. The Tether Project ........................................................................ 10 2.2. Three Types of Stablecoins ..................................................... 12 3. Five Use Cases of Stablecoins ................................................. 17 3.1. Use Case 1: Safe Haven for Traders ........................................... 18 3.2 Dollarization 2.0 ............................................................................. 20 3.3. Use Case 3: P2P and P2B Payments. ................................... 23 3.4. Smart Contract Integration ................................................... 25 Conclusion ................................................................................................... 31 References.................................................................................................... 33 Abstract Price-stable cryptocurrencies, commonly referred as stablecoins, have received a significant amount of attention recently. Much of this has been is in hopes that they can fix some of the issues with cryptocurrency—most notably price instability. However, little analysis has been done with respect to the drivers and investment potential of stablecoins. Stablecoins fulfill different functions of money based on their implementation. As a result, they have unique trade-offs from one another and from physical currency (fiat) itself. Stablecoins offer a similar value proposition to fiat, but the two should not be compared on a one-to-one basis as stablecoins contain unique trade-offs and benefits. These differences will drive the demand for these tokens while enabling specific use cases. The purpose of this paper is to shed light on the adoption and the potential of market share growth for stablecoins given five selected use cases: dollarization, smart contracts, peer to peer (P2P) and peer to business (P2B payments), safe haven for exchanges, and as a reserve currency. We will discuss the opportunities within each of these use cases and assess the factors which will determine the success of stablecoins. Using insights contained in this paper, technologists can think about how best to position themselves in the short, medium, and long term. Robert Lin & Mark Conrad The State of Stablecoins - Why They Matter and Five Use Cases Introduction A stable digital currency has the largest total address market (TAM) of any cryptocurrency—$90 trillion—according to Myles Snider, an advisor to the cryptocurrency venture capital firm Multicoin Capital. This estimate assumes global adoption of stablecoins as an alternative currency replacing fiat altogether. This is certainly a far-fetched possibility. However, it does convey the opportunity for stablecoins to impact billions of people in the way they transact. Potential opportunities to leverage this technology include the use of stablecoins as safe- haven assets on cryptocurrency exchanges, the expansion of dollarization in emerging economies, P2P and P2B payments, integration with smart contracts, and the use of stablecoins as a central bank reserve currency. These opportunities vary in the time frame of addressability and factors leading to success. This paper is divided into two sections. The first section consists of an overview of key concepts about the roles of money, the different types of stablecoins, and the historical circumstances surrounding stablecoins. The second section of the paper consists of use cases of each opportunity. 5 The State of Stablecoins - Why They Matter and Five Use Cases Robert Lin & Mark Conrad 1. History and Context for Stablecoins 1.1 History of Currencies Long ago, trade was done by barter and, beginning of global dominance for the US as a result, exchange rates were uncertain dollar (USD). and dependent on the goods being traded. Over time, people found it easier to use Under the Bretton Woods system established specific forms of value to simplify trade in 1944, all currencies were indirectly backed (i.e. currencies). Goods were denominated by gold because they were convertible to in shells, stones, and eventually metal USD (likewise, banknotes were convertible to coins. Banks came into existence out of the gold). In 1971, however, US President Richard need for a secure housing of currencies. Nixon suspended the ability to convert USD Eventually, in order to make transactions to gold, thus decoupling much of the global easier and after significant trust (a recurring system from gold and making the US dollar topic of importance in this paper) had an unbacked, free floating, fiat currency. been developed in banks, people began Relative stability remained despite no trading orders to transfer currency between concrete peg or exchange rate for USD. After accounts (banknotes). These banknotes the end of the Bretton Woods system, global established evidence for the negotiable currencies have been mostly fiat (unbacked settlement of debt—meaning verifiable by anything other than a government’s documents which told the banks to transfer agreement to recognize the value of a currency from one person to another. This is specific currency). how much of the developed world operated until the Bretton Woods system —the 6 Robert Lin & Mark Conrad The State of Stablecoins - Why They Matter and Five Use Cases 1.2. What is the Key Opportunity for Stablecoins? Although not broken, the global currency have invested millions into projects in market has room for improvement. Many this space. For the first time in history, we regions in the world are experiencing could see the adoption of disintermediated hyperinflation, often resulting in the value transfer systems; these systems disappearance of wealth virtually overnight. are uncensorable, not dependent on any Monetary policy tools are mostly indirect sovereign system, and act as a non-volatile and their effects on the future are often store of value. debated. Cash transactions often come at a high cost. Even governments are looking into ways they can improve their currencies. For In short, technologists have created stable, example, the Russian Association of digitally-native currencies which are built Cryptocurrency and Blockchain plans on top of the underpinnings of existing to release a “crypto-ruble” in 2019, and a blockchain technology. Stablecoins fund backed by the government of the help avoid the volatility associated with Chinese city Hangzhou is working with cryptocurrencies while retaining the a Japanese bank to create a Yen-pegged benefits of full provenance (auditability) stablecoin. The use cases for a government of transactions, programmability, and the stablecoin include seeking means to track capability to efficiently transact across transactions, maintaining capital controls, borders. Hundreds of bright minds and implementing effective monetary policy, vast amounts of capital are pushing for and avoiding sanctions. Many governments stablecoin adoption—both as a fiat currency are also wary of the risks that decentralized alternative and as a new payment system. stablecoins pose. These risks include For example, top financial institutions undermining the effectiveness of monetary and investors such as Goldman Sachs, policy (depending on implementation), loss Peter Thiel, Andreessen Horowitz, Bain of seigniorage profits, money laundering, Capital Ventures, Y Combinator, Facebook loss of government autonomy, and other (specifically developing a stablecoin for threats. remittances in India), and countless others 1.3. The Meaning of Money The qualities that make money usable are • Store of value: Its value does not often taken for granted. According to the depreciate (quickly). For example, International Monetary Fund (IMF), in order vegetables are a poor store of value in for money to be successful, it must have that they rot and become worthless these three functions: within only a few weeks. As a result,