Introduction to stablecoins

Stablecoins are digital currencies that are designed to maintain a stable value relative to one or more assets. While stablecoins could be structured to maintain a peg ratio with numerous financial instruments – including commodities such as gold – current leading coins, by market capitalization, are designed to maintain a peg ratio of 1:1 with the US dollar.

The desire for a stable digital currency has had significant market interest for a considerable period of time, as digital currencies have historically traded with high levels of volatility. A stable digital currency could, in theory, maintain many of the positive attributes of a digital asset while experiencing limited to no price volatility.

The benefits of stable digital currencies

A stable digital currency can be transferred between parties across countries, across different platforms, with minuscule fees, and carry an immutable transaction history recorded on a public ledger. For example, one wallet address holder sent $4,040,097 of a certain stablecoin (Gemini Dollar-GUSD) to another wallet address with a total transaction fee of 0.000255765 Ether ($0.03)–this fee is de minimis relative to fees on traditional money transfer networks.

Additionally, while traditional payment networks restrict users to only transact within one designated network (i.e. Venmo users cannot send funds to users on Zelle), stablecoins issued on permissionless blockchains, such as Ethereum, can be sent from user to user regardless of the front-end platform used (i.e. Coinbase, Circle, etc). Because these stablecoins exist on a public permissionless blockchain, funds can be sent to any person with a wallet address–which can be easily created.

While person-to-person stablecoin adoption by larger segments of the population may seem a challenging task, the benefits of stablecoins, to individuals and institutions currently trading in digital currencies, are readily observable. Stablecoins, listed on exchanges, allow for traders to exit and enter volatile digital currencies from a stable digital currency. While various exchanges provide a similar opportunity for traders by offering USD listed pairs, stablecoins can be more easily sent between exchanges in comparison to USD. Further, there still exist various exchanges which do not offer USD listed pairs, including almost all decentralized digital currency exchanges (DEXs).

Stablecoins could not only provide greater convenience and low costs to users and digital currency traders in developed countries but also allow access to a much needed stable, USD-like asset in developing countries in which the government issued fiat currency is experiencing inflation or even hyperinflation.

History of stablecoins

The idea of a stable digital currency is not necessarily new. One of the first notable stablecoins to come into existence was Tether (USDT), which printed its first tokens on October 6, 2014. Tether shares a leadership team with the popular digital currency exchange, Bitfinex. Tether has grown rapidly as digital currency adoption has increased since its inception date, helping push the asset to consistently rank among the top ten largest digital currencies by market capitalization. Over time, the number of stablecoin offerings has grown considerably.

Currently, there exist more than 110 projects building out a stable digital currency. The majority of these stablecoins are built on the Ethereum blockchain (see Figure 1 below) adhering to ERC-20 specifications. ERC-20 is a technical standard for the Ethereum network which defines a common set of rules for tokens to follow within the larger Ethereum ecosystem, allowing users and developers to accurately predict interactions with all tokens in the ecosystem.

The mechanics of stablecoin platforms

Stablecoins can either utilize a decentralized governance model or a centralized governance model. Decentralized governance systems do not rely on a small number of entities to ensure price stability, as centralized systems do, but instead require built-in, trustless incentive mechanisms to ensure that users in the open market maintain price stability for the stablecoin. In this way, no stablecoin holder or user needs to trust a certain entity or small group of entities to maintain price stability or ensure that each stable coin is in fact fully backed by collateral. Further, while centralized stablecoin issuers may require KYC and AML procedures in order for users to redeem stablecoins, decentralized systems have no such procedures in place as there is no central ‘gatekeeper.’

Centralized systems, on the other hand, rely on trusted entities to ensure price stability. While there have been concerns in the past around the trustworthiness of stablecoin issuers, many projects today have made it a focal point to publish quarterly statements providing documentation as to the existence of stated collateral reserves backing each stablecoin. These statements are often provided by highly respected third party auditing firms.

In either a decentralized or centralized stablecoin system, the platform utilizes one of three general collateral designs to maintain price stability:

Fiat Currency Collateral Backed These stablecoins are backed by reserves that are denominated in an existing government issued fiat currency, such as the US dollar These projects are often centralized relying on banks and other trusted central businesses to ensure that each coin is backed by an auditable fiat reserve At time of writing, there exist 43 projects developing in this area The most well known projects are Tether (USDT), USD Coin (USDC), True USD (TUSD), Paxos Standard Token (PAX), Gemini Dollar (GUSD), and JP Morgan Coin (JPM)



Digital Currency Collateral Backed These stablecoins are backed by reserves that are denominated in an existing digital asset, such as ether (Ethereum’s native token) These projects are often decentralized relying on incentive mechanisms to encourage a community of users to maintain a desired peg ratio At time of writing, there exist 24 projects developing in this area The most well known project is MakerDao (DAI)



Algorithmic These stablecoins are not backed by collateral and rely on a combination of algorithms and smart contracts to maintain price stability through buying and selling of the stable token These projects can be centralized or decentralized There exist 18 projects developing in this area The most well known project is Basis Protocol, which ceased operations amid regulatory pressure in December 2018 after raising $133 million



Price stability of USD pegged stablecoins

Stablecoins are designed to maintain a peg ratio of 1:1 with USD; however, this relationship can show modest divergences in the primary and secondary markets. While various issuers, in the primary stablecoin market, are expected to issue 1 stablecoin for 1 USD and redeem 1 stablecoin for 1 USD, some issuers have offered stablecoin discounts to encourage adoption.

In the primary market, new stablecoin issuers were revealed to offer up to 1% discounts on stablecoin issuance if customers transacted with the tokens prior to redemption. Additionally, in the secondary market liquidity, exchange regulations and other factors can cause modest price divergences in various stablecoin pairs.

Across various secondary market exchanges, we found that stablecoins did not maintain an exact 1:1 ratio with USD or a 1:1 ratio between other USD pegged stablecoins. For example, at time of writing, the DAI stablecoin was trading at a 1.5% discount to the USDC stablecoin. The Tether stablecoin (USDT) traded down to an 18 month low, relative to the US dollar, in October 2018, nearly 9% lower than its pegged value amid solvency concerns that saw traders lose confidence in the asset.

Current market landscape

In Figure 1 below, we delineate a market snapshot of the current leading stablecoins sorted by market capitalization. Tether ranks by far the largest stablecoin by market capitalization at more than $2 billion, and is the only prominent stablecoin not built on the Ethereum blockchain.

Many projects building in this space have raised significant capital either through initial coin offerings (ICOs) or, in the case of centralized companies, through equity offerings. Note that several of the companies building out stablecoin projects are also building out other lines of business as well.

Among the prominent stablecoins listed below, DAI Stablecoin is the only currency that utilizes digital assets as collateral and has a decentralized governance model. While DAI currently uses just ETH (Ethereum’s native token) as collateral, this is changing soon as DAI Collateralized Debt Positions (CDPs), which are smart contracts that interact with the stablecoin to support price stability, will allow for multi digital currency collateral backing.

Figure 1: Market Snapshot of Current Leading Stablecoins

Stablecoin Ticker Blockchain Collateral Governance Market Cap ($) Funding ($) Tether USDT Bitcoin USD Centralized 2,048,096,376 – USD Coin USDC Ethereum USD Centralized 247,581,954 246,000,000 TrueUSD TUSD Ethereum USD Centralized 207,491,837 21,700,000 Paxos PAX Ethereum USD Centralized 116,347,554 93,000,000 Gemini Dollar GUSD Ethereum USD Centralized 81,953,135 – Dai Stablecoin DAI Ethereum ETH Decentralized 78,270,128 27,000,000

Data for table sourced from Crunchbase, Omniexplorer, and Etherscan

Market Adoption of Stablecoins

Stablecoins have received significant attention heralded as possible disruptors to traditional payment servicing companies, such as Venmo/PayPal. In the latter half of 2018, three new stablecoins launched to much fanfare: USD Coin (USDC), Paxos Standard Token (PAX), and Gemini Dollar (GUSD). In recent weeks, large Fortune 100 companies joined in as well when Facebook revealed a possible stablecoin for use on its WhatsApp Messenger and JP Morgan launched its own stablecoin, JPM Coin.

Given the rising interest in the sector, we analyzed stablecoin adoption for US customers and tracked stablecoin usage patterns over time. Our findings indicate that stablecoins are primarily used for on-exchange digital currency trading, rather than as a means of off-exchange medium of transaction. Further, we have found that stablecoins face resistance in taking market share from the US dollar as a trading pair with other digital currencies.

Stablecoins lose market share to the US dollar

The US dollar remains, by far, the most actively traded currency cross with digital assets at US based exchanges. Despite the growth in number of stablecoins, we have found that stablecoins have actually lost market share to the US dollar over time at US exchanges. The chart below diagrams market share across leading stablecoins and the US dollar for bitcoin (XBT) trading pairs at US based exchanges.

Figure 2: Stablecoin Share of XBT Trading Volume Year-to-Date

Data for chart sourced from the TradeBlock Professional Platform

As shown in the chart above, at the beginning of 2018, Tether (USDT) had nearly 40% of the total trading volume between bitcoin and a stable asset for the month of January 2018. This volume capture, however, steadily decreased over the course of 2018 as the US dollar gained greater share.

There are likely several major catalysts that played roles in the reduction of stablecoin market share over this period; perhaps, the largest was the exit of various market participants amidst a crash in digital currency prices.

2018 saw record price declines across nearly all digital currencies – as bitcoin fell more than 70%, and various alt-coins fell more than 90% – after rising to all time highs in 2017. In response, as investor appetite for digital currencies waned and as funds faced redemptions, trading volumes declined more than 80% at US based exchanges. It is reasonable to assume that as these assets declined and interest waned some investors were selling digital currencies for US dollars, rather than a stablecoin. These transactions likely occurred at exchanges to withdraw US dollars into their bank accounts to: pay taxes, cover expenses, or even to exit the market.

Stablecoin notional trading volume rises before resuming its decline

Year-over-year (YoY), stablecoin notional trading volume has fallen at US exchanges as digital currency volumes, as a whole, declined significantly. In Figure 3 below, we diagram notional stablecoin trading volume YoY using a 7-day moving average.

Figure 3: Notional Stablecoin Trading Volume Year-over-Year

Data for chart sourced from the TradeBlock Professional Platform

After trading activity bottomed in early November 2018 amidst declining digital currency prices and various media reports concerning Tether solvency, stablecoins recently saw an uptick in notional trading volume in late November and December before beginning a downward slide again in 2019. Not only did Tether trading volumes begin to rise, as concerns around solvency subsided, but also several new stablecoins were launched in Q3 2018 which saw quick market adoption.

This trend reversed recently as the beginning of 2019 has seen reduced stablecoin trading volumes. This is not specific to stablecoins, as digital currency trading as a whole – including bitcoin futures volumes – continues to decline amidst a slump in asset prices.This relationship suggests that stablecoin trading is primarily facilitating speculative, fiat-equivalent liquidity vs other sustained economic use cases.

Figure 4: Notional Stablecoin Trading Volume Over Past 3 Months

Data for chart sourced from the TradeBlock Professional Platform

Stablecoin trading volume has mirrored the broader digital currency trading market, including bitcoin. Since January 2018, XBT/USD trading volume has fallen considerably, declining by 85% year-over-year, with a modest pick-up in November during heightened volatility. In Figure 5 below, we diagram bitcoin notional trading volume across some of the largest US based exchanges. January 2019 recorded the lowest monthly bitcoin spot trading volume over the past year.

Figure 5: Bitcoin Spot Trading Volume

Data for chart sourced from the TradeBlock Professional Platform

USD Coin gains largest trading market share among new stablecoins

Since its launch in October, USD Coin (USDC) has taken the largest market share from Tether (USDT) among newly launched stablecoins. On US based exchanges, USDC is the second most traded stablecoin after Tether as shown in Figure 6 below. In the figure, we diagram stablecoin market share at US based exchanges year-to-date. As shown, Tether remains the dominant stablecoin with the largest market share; however, USDC has rapidly gained market share.

Figure 6: Stablecoin Market Share Year-to-date

Data for chart sourced from the TradeBlock Professional Platform

The assent of USDC is likely in part driven by direct support from two of the largest US based exchanges: Coinbase and Poloniex. USDC is a product of Circle and supported by the Centre Stablecoin Consortium, which includes both Circle and Coinbase as member institutions (we first wrote about Centre back in October here). Circle owns Poloniex, the popular US based exchange.

Among the different stablecoins, Tether (USDT) is listed on a majority of the largest US exchanges at three, followed by USD Coin (USDC) which is listed on two, and finally both Paxos Standard Token (PAX) and TrueUSD (TUSD) are listed on one exchange each.

Stablecoin off-exchange adoption presents mixed results

We tracked the number of on-chain transactions for the leading stablecoins using TradeBlock’s Ethereum Blockchain Explorer. On-chain transactions are those in which assets are moved between different exchanges, off-exchanges into private wallets, or from private wallet to private wallet.

By analyzing this information, we can determine if users are primarily using stablecoins as a means of trading on exchanges (and thus not moving these tokens to different wallet addresses), or moving them between wallets, which could suggest individuals and entities are using stablecoins as a form of monetary transfer, as one would use Venmo. However, it is important to note that those transactions occurring on decentralized exchanges (DEXs) would also occur on-chain. Further, if users are simply transferring stablecoins between different centralized exchanges, this also would register as an on-chain transaction.

In Figure 7 below, we compared the number of on-chain transactions over a recent five day period across the leading stablecoins.

Figure 7: Number of On-Chain Transactions Over Recent Five Day Period

Digital Currency Ticker On-Chain Transactions Market Cap ($) Dai Stablecoin DAI 10,079 78,270,128 USD Coin USDC 5,031 247,581,954 Paxos PAX 2,200 116,347,554 Gemini Dollar GUSD 1,170 81,953,135

Data for chart sourced from TradeBlock’s Ethereum Blockchain Explorer Tool

As shown in the figure above, stablecoins are seeing off-exchange adoption as evidenced by the number of on-chain transactions. The transactional count, however, is considerably lower than that of traditional payment networks. Zelle, for instance, recorded more than 876,000 transactions a day as of June 12, 2018.

PAX and DAI see the greatest off-exchange adoption among new stablecoins

Strictly comparing stablecoins, we found that the DAI stablecoin recorded the largest number of on-chain transactions. This is somewhat surprising given that DAI has the smallest market capitalization among the stablecoins we analyzed.

It is likely that the large number of on-chain transactions for DAI is due to limited listing on centralized exchanges (Coinbase recently listed DAI – the first centralized exchange in the US to do so). DAI tokens are primarily traded on decentralized exchanges (DEXs). DEXs are different from centralized exchanges in that each transaction or trade executed on a DEX occurs on-chain (for more information on DEXs read our DEX report here).

As such, a significant portion of DAI on-chain transactions are likely occurring in a trading capacity on-exchange, rather than used for monetary transfer purposes off-exchange. Since inception, we found that on average ~350 on-chain DAI transactions a day are conducted through a DEX. Further, the MakerDao team behind the DAI token estimates that 50% of the total daily DAI value transferred is occurring on DEXs.

In order to further determine whether each stablecoin was primarily used for trading or for off-exchange transfer of value, we compared notional value traded on exchange to notional value transferred in on-chain (off-exchange) transactions over a set time period.

Among the largest centralized stablecoins (DAI is a decentralized stablecoin), USD Coin had the greatest number of on-chain transactions, as shown in Figure 6 above. However, if we look at the notional volume transferred, PAX recorded the largest value transfer over our five day period. Interestingly, the PAX notional volume transferred is notably disproportionate relative to the other stablecoins analyzed. The PAX notional on-chain volume is significantly higher than its own on-exchange trading volume, and the average on chain volume per transaction is more than 3x that of other stablecoins (see Figure 8 below).

To construct the ratios below, we compared on-chain notional volume transferred to on-exchange notional trading volume at US exchanges for a recent 5 day period prior to the time of writing.

Figure 8: On-chain Volume vs Exchange Trading Volume Over 5-Day Period

Digital Currency Ticker Avg Volume1 Total Volume2 Trading Volume ($) Ratio3 USD Coin USDC 30,327 152,577,252 15,171,140.91 10.06 TrueUSD TUSD 14,985 58,784,605 2,544,146.64 23.11 Paxos Standard Token PAX 105,017 231,036,954 151,253.04 1,527.49 1. Average On-Chain Volume per Transaction 2. Total On-Chain Volume 3. Ratio of USD denominated Trading Volume to Total On-Chain volume

Data for table sourced TradeBlock’s Ethereum blockchain explorer and Etherscan

Stablecoin off-exchange adoption relative to traditional payment processors

The notional volume transferred on-chain across the stablecoin platforms was surprisingly quite high. Among the four largest new stablecoins (USDC, GUSD, PAX, and TUSD), the average daily volume transferred using these stablecoins was nearly 75% of the daily total payment volume (TPV) transferred across the Venmo network in 2018, indicating stablecoins may be gaining significant off-exchange adoption relative to traditional payment networks. However, the number of transactions per day across Venmo is still magnitudes larger than the number of transactions across stablecoin platforms.

If we analyze these numbers further, we find that the average on chain dollar value per transaction across the listed stablecoins is quite high. As shown in Figure 8 above, the average volume per transaction across several different stablecoins was more than $20,000 per transaction. Transaction sizes at traditional payment processors, especially those platforms catering to person-to-person interactions, are substantially lower. For example, during 2015 the average USD value transferred per transaction on Venmo was $58. Similarly, for Q3 2018, the average USD value transferred per transaction on Zelle was $280. Stablecoin transactions, conversely, were several magnitudes larger than these transaction sizes.

The large average transaction value transferred across stablecoins is likely driven by trading parties transferring assets between addresses for various purposes rather than individuals transfering stablecoins for everyday purchases or payment between individuals as is common on Venmo and Zelle. This suggests that much of the stablecoin transactional on-chain activity, while not occurring on exchange, is still, at least partially, in support of digital currency trading activity.

Our findings indicate that stable coins still have significant room to make inroads on traditional payment processors as a payment option. The accessibility and user experience on traditional payment applications remains significantly further developed than applications and platforms that are used to transfer stablecoins. While stablecoins have shown promise as a way for users to transfer monetary stable value quickly and cheaply, such transactions have not seen explosive adoption, as evidenced by the relatively low number of on-chain transactions. Further, while stable coins initially saw traction as a digital currency trading pair on exchanges, this appears to have lost some momentum as trading volumes fall and as the US dollar maintains its dominance as the top trading pair in bitcoin and altcoin transactions.