Stablecoin Use Cases

Now that we’ve covered the different design structures, it’s important to focus on how stablecoins can and should add value to different ecosystems we commonly encounter. Please note that while we understand there are plenty of niche uses for stablecoins beyond what we’re presenting, we’ve decided to condense our thoughts into concepts that are most feasible in the short-term.

Utility Rewards

The vast majority of ICOs we encountered last year heavily relied on the fact that the primary utility of their token was to reward users for participating in their network. It became readily apparent that this is a weak utility use case as these reward models add a perpetual amount of sell pressure as the dApp or protocol scales. While utility staking mechanisms were a nice bandaid to *theoretically* help incentivize holding and mitigate the amount of dumping on secondary exchanges, the lack of adoption and tangible usage of the staking mechanisms quickly made most of the existing utility models obsolete.



These insights lead us to the idea that rather than creating an obscure utility token to fulfill the promise of a new dApp, stablecoins provide an easy reward solution to any new token-startup. Assuming the stablecoin can maintain the stability it promises, rewarding consumers in dollar equivalents becomes much easier to digest for the average individual. Additionally, as the larger stablecoins continue to gain adoption from traditional retailers, this increased liquidity would serve as an added benefit when users accumulate rewards from the usage of a specific network.

It’s important to note while accumulating stablecoins seems easy enough for a high level, there are still some risks and barriers that need to be explored. First and foremost, most stablecoins require users to pass KYC/AML in order to redeem the underlying asset. With this being said, the amount of anonymity any project rewarding users in stablecoins can promise its users looking to liquidate to fiat becomes slim to none. It’s entirely possible for an anonymous user to transfer their stablecoins to secondary exchanges, but without providing their identity to the issuing entity, it’s unlikely that they will be able to redeem USD.

Secondly, many ICOs loved the idea of rewarding users in their currency because it was, more or less, free. Similar to “unpaid internship credit”, it’s very obvious why many projects would prefer to pay consumers in the form of a self-created currency rather than one with tangible monetary value. For this reason, a potential threat associated with this model is the need for a project to allocate capital for the purchase or issuance of the stablecoins they plan to distribute as rewards.

Finally, seeing as many of these stablecoins are being built on Ethereum, it’s safe to assume that any dApp planning on using stablecoins as rewards (for the time being) will need to utilize an Ethereum compatible wallet. This could become problematic if a project wishes to build on other networks such as Stellar or NEO but wishes to utilize a stablecoin-based reward system. From our perspective, interoperability will mitigate this risk in the long-term but it is an important consideration to bring to mind as the industry adapts.

Security Dividends

Similar to the reward model described above, many of the security tokens we’re currently working with are leveraging the promise of being able to grant token holders with future dividends. In this model, we believe that the issuance of stablecoins would be a strong alternative to having to collect each holders banking information for the issuance of cash dividends.

As token-startups *hopefully* begin accruing value in the form of tangible revenue, a more traditional evaluation model will be considered when investing in security tokens. Assuming security tokens will ultimately represent the amount of outstanding stock in a tokenized company, choosing to issue cash dividends in the form of stablecoins will allow a traditional investor to utilize the same formulas when calculating expected dividends per share.

Combined with the fact that most of the security tokens we’re currently working with are utilizing an ERC standard, it’s safe to assume that the token owners will be storing their security tokens in Ethereum-compatible wallets. Supplemented by the fact that security tokens require the issuing entity to keep an active cap table of its existing owners, the dividend distribution process should theoretically be expedited by the issuance of stablecoins to the same wallet an owner is holding his security tokens in.

As stated above, the biggest risk with this model is ensuring that each and every individual holding a security token has been whitelisted by passing KYC/AML requirements prior to the issuance of any security tokens or stablecoin dividends.

Payroll Expenses

As one of my blockchain colleagues once said: “magic internet beans don’t pay for developers”. While many projects have wanted to leverage their currency as a means of compensation post-fundraise, this also adds sell-pressure in the long-term. The ability to effectively onboard strong talent is immediately diminished when token-startups attempt to build out their team on the promise of utility token compensation with limited liquidity and long vesting.

We believe that offering a hybrid solution to compensate employees is the most practical way for a new team to onboard strong talent. There’s certainly nothing wrong with compensating employees in the form of outstanding shares of the company they work for, but it becomes tricky when a developer needs to keep the lights on and the “outstanding shares” of a company are illiquid with no opportunity to cash-out within the first year.

By offering stablecoins as payment(s) on a monthly or even weekly basis, new team members can be confident that the project is strategically utilizing the capital from its fundraise by providing immediately liquid, fiat-backed currency to compensate its employees.

With stablecoin payments, employees have the freedom to diversify their cryptocurrency holdings however they see fit. If the employee has a more risk-averse appetite for the ever-changing volatility of currencies such as Bitcoin or Ethereum, they can easily set up an account on the issuing entities exchange to redeem their stablecoin for USD. On the flipside, riskier players can now leverage their payment(s) on secondary markets while the parent company executives can sleep well at night knowing that the compensation rates will be the same now as they will be three, six, or even eighteen months down the line.

Hedge Against Volatility / Shorting Digital Assets

One of the most common use cases for stablecoins is the ability to hedge the high volatility in cryptocurrency markets by allocating a portion of a portfolio into a stablecoin. Since the value of the stable coin is pegged and has little fluctuation in price, stable coins offer an attractive opportunity for investors to mitigate their losses during a bear market without having to re-enter the slow and costly process of transferring back to the traditional banking system.

In addition to hedging, actively investing in stablecoins can, in effect, act as an abstracted mechanism for shorting. If an investor has an inclination that the digital asset market is overvalued and believes that the market will go down, the investor can exchange a large portion of their existing holdings for stablecoins and ultimately buy back the digital asset at a lower price (thus allowing them to buy more of it and increase their original position). Since the digital asset market is in its nascence and there are few opportunities to short other assets outside of Bitcoin, Ethereum and a select few others offered on BitMex, stablecoins offer the next best opportunity for investors.