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A Primer On Digital Assets, Part 2: Stablecoins

Updated: May 8, 2019

Within the digital asset ecosystem, colloquially referred to as cryptocurrency, there exists four primary asset classes: bitcoin, stablecoins, security tokens, and real estate tokens. Digital asset classes are distinguished by characteristics and market structure, as are their traditional counterparts. This four part primer explores the characteristics, market structure, and growth potential of the four primary digital asset classes. Part 1 of this primer will focus on bitcoin, part 2 will focus on stablecoins, part 3 will focus on security tokens, and part 4 will focus on real estate tokens. This installment focuses on stablecoins.


Part 2: Stablecoins

Stablecoins are the second oldest digital asset class, with recent industry traction propelling it to prominence. Stablecoins are digital tokens which are issued to represent traditional assets and meant to provide price exposure to underlying assets on a 1:1 basis. Currently the assets represented as stablecoins are traditional fiat currencies and commodities, although there have been efforts made to issue stablecoins for stocks, fixed income instruments, and derivatives. Stablecoins are issued using technology layers operating atop bitcoin, as secondary layers, utilizing the security and reliability offered by bitcoin as a technology foundation to build on, while mitigating the risk of stablecoin technology failure causing disruption to bitcoin. Similar to bitcoin, stablecoins can be sent and received with digital wallets that utilize payment systems built into their technologies. Wallet software for stablecoins often supports both bitcoin and stablecoins, and specialized solutions have been explored by enterprise wallet providers such as Bitgo and Xapo.


The most utilized technology for stablecoin issuance is Omni Layer, introduced in January of 2012, which currently supports over $2.8 billion in market value and facilitates more than $109 billion in transfers annually. Although Omni Layer’s functionality is effectively limited to digital asset issuance, issuers seeking enhanced functionality such as decentralized complex computing enjoy a long list of technologies for use, led by Liquid Network, Rootstock, Fabric L3, erctwenty, Corda, and Symbiont.


Diana Barrero Zalles and George Calle of R3 recently introduced a framework establishing three main categories of stablecoins: directly asset backed stablecoins, non-directly asset backed stablecoins, and stablecoins with prices supported by algorithms.

Directly asset backed stablecoins are issued in accordance to the value of same assets held in trust by issuers. Assets held in trust by issuers are the same assets being issued in stablecoins.


E.g. 1 bn USD traditional fiat held in trust = 1 billion USD stablecoins issued

E.g. 10 mn shares of Twitter stock held in trust = 10 mn Twitter stock stablecoins issued


These stablecoins are freely convertible to and from underlying assets by issuers themselves as well as in the secondary market by other market participants.


Non directly asset backed stablecoins are issued in accordance to the value of not same assets held in trust by issuers. Assets held in trust by issuers for these stablecoins are not the same assets being issued in stablecoins.


E.g. 1bn USD worth of Twitter stock held in trust = 1bn USD stablecoins issued


These stablecoins are freely convertible to and from underlying assets in the secondary market by other market participants with generally limited or high cost liquidity available directly from issuers.


Stablecoins with prices supported by algorithms are issued in accordance to hardcoded algorithms that respond to market demand. No assets are held in trust by issuers for these stablecoins.


E.g. 1% price increase = 1% increase in stablecoin supply


These stablecoins are freely convertible to and from underlying assets in the secondary market by other market participants.


Additionally, there is the option for issuers to include a return on capital by offering interest. This is accomplished by utilizing assets held in trust to generate a return via profitable operations or lending, and subsequently passing through a percentage of returns to holders of issued stablecoins. In time, we predict these interest rates will serve as a digital asset industry lending rate benchmark.


Value transfers utilizing stablecoins have experienced meaningful growth over the past two years. In 2016 transfer volumes totaled only $22 million, yet surged to $15 billion in 2017 and subsequently $122 billion in 2018. While still far behind bitcoin’s 2018 transfer volume of $3.3 trillion, stablecoins’ transfer volume has risen to a level comparable with traditional fund transfer systems--particularly those focused on the underbanked. Custodial stablecoin transfer service providers are regulated in most major markets as money transfer service businesses. The technology for storing, sending, and receiving stablecoins is colloquially referred to as stablecoin wallets and, while less advanced than bitcoin wallets, maintains a higher level of market-fit maturation than other digital asset classes. However, as with bitcoin, concerns are often shared among the community in regards to lack of intuitive user experiences and interfaces with stablecoin wallets. Improvements in user experiences and interfaces of stablecoin wallets as well as meaningful increases in the quantity of merchants and banks accepting stablecoins for payments will set the stage for further growth in stablecoin transfers.



Exhibit 1: Historical Transfer Volumes of Stablecoins

Sources: Satoshi Capital Research, CoinMetrics, Blockspur



Exhibit 2: Comparison of Stablecoins and Payment System Volumes

Sources: Satoshi Capital Research, CoinMetrics, Blockspur, Company Self-Reporting



The value of stablecoins traded annually was just under $1.1 trillion in 2018. Trading primarily occurs on online exchanges which enable real-time buying & selling of stablecoins using traditional currencies as well as other digital assets. All known trading also currently occurs in spot markets due to future expected prices remaining generally stable. The past two years have seen stablecoins rise from obscurity to dominance in terms of trading market growth, with stablecoins by Asian issuers, such as Tether, and North American issuers, such as Paxos, leading the way. The OTC market for stablecoins has boomed alongside their exchange trading, in which buyers and sellers deal directly with each other. Satoshi Capital Research estimates more than $25 billion in stablecoins was traded OTC in 2018. Though the stablecoin OTC market maintains some market structure similarities to the traditional currencies OTC market, it is nowhere near as liquid. To buy or sell a couple billion dollars worth of a traditional major currency, such as JPY or EUR, OTC is a frequent occurrence and fairly simple process that adheres to established procedures. In contrast, to buy or sell a couple billion dollars worth of stablecoins is currently a relatively arduous effort, prone to high transaction costs, meaningful market impact, and lack of process standardization. Custodial stablecoin trading is regulated in most markets by existing banking regulations, with a few jurisdictions launching digital asset-specific regulations. Integration of stablecoins into traditional trading and custodial processes will set the stage for further growth in stablecoin trading.



Exhibit 3: Trading Volumes of Traditional Currencies and USD Stablecoins

Sources: Satoshi Capital Research, BIS, Coinmarketcap



Stablecoins collectively maintain a market value (MV) of $3.5 billion, comparing well with traditional currency frontier markets. Satoshi Capital Research estimates this can eventually grow to $39.4 trillion. To estimate the growth potential of stablecoins collective MV, Satoshi Capital Research created a simple methodology to determine a total addressable market, which is to sum all of the M2 money supplies of traditional fiat currencies. To explain this methodology further, M2 money supply is a measure of value held in banknotes and coins as well as in instantly callable accounts at financial institutions. Assuming an eventual full transition to digital value representation in the global economy, and with it growth of the digital asset ecosystem, we expect a meaningful amount of value currently held in banknotes and coins as well as instantly callable accounts at financial institutions to be moved into stablecoins over time.



Exhibit 4: Money Supplies of Traditional Currencies and USD Stablecoins

Sources: Satoshi Capital Research, The World Fact Book, Coinmarketcap



While still a relatively nascent digital asset class, stablecoins have proven to be a major component of the digital asset industry. With trading volume already in the trillions, transfer volume in the hundreds of billions, and market value in the billions there is certainly a strong foundation to build on as the industry works towards its $39 trillion dollar stablecoin goals.

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