Why the next wave of stablecoins will be driven by revenue-sharing networks.
The revolution of decentralized finance (DeFi) is still just getting off the ground. While blockchain and Bitcoin continue to attract attention, the current volatility of the market may still be scaring off some users. It’s within this volatile environment that stablecoins have tried to provide a rudder to the crypto markets. But even with many regulated stablecoins emerging on the scene, there has still been a lack of mainstream adoption for DeFi products.The problem hasn’t been a lack of great options or exciting technological developments in the blockchain space. Instead, there has simply been a failure to bring users back in after many people experienced financial losses following the 2017 bullrun. As with every innovation in finance, the period of transitioning between one system to another is fraught with complications. However, stablecoins are the bridge that is making this transition possible by getting more veterans and traders from the traditional financial world to dip their toes into the blockchain pool. Let’s take a look at how stablecoins have advanced the movement of institutions and everyday people into the cryptocurrency space.
To combat the volatility of Bitcoin, Tether was one of the first to introduce price stability. The claim was a bold one: Tether offered a cryptocurrency that maintained price stability with a token that was backed by U.S. Dollars, but it’s counsel has since admitted a lack of full collateralization. Nevertheless, the high demand for a liquid stablecoin in the crypto markets has led USDT to grow its market cap to over $4 billion dollars and surpass Bitcoin in trading volume.
Tether’s success despite lack of full collateralization led to the emergence of many competitors that focus on trust and transparency in addition to stability. TrueUSD, Paxos, Gemini, and USDC all publish legal attestations by trusted third-party auditing firms, giving users the assurance their stablecoin holdings are indeed 100% backed. This generation of stablecoins are also easy to redeem for fiat currency, which enhances stability. When users know they can mint and redeem a stablecoin at any time, they have a built-in incentive to mint or redeem when the market price deviates from $1. Rationale traders will buy anytime a stablecoin’s market price falls below $1 and redeem for USD. On the flip side, users can tokenize USD into a stablecoin and sell into the market when the market price rises above $1. These natural supply/demand dynamics enhances these stablecoins’ price stability, making them a valuable trading pair for other coins in the ecosystem in need of a stable quote currency.
While these stablecoins succeeded in advancing transparency and stability in the stablecoin space, the business model of the stablecoin issuers has unfortunately remained centralized, leading them to miss out on the full benefits of the DeFi movement. Having one point of failure not only places risk on the central authority but also allows these issuers to reserve all the interest revenue, redemption fees, and any other revenue generated from these coins for themselves. The issuers that oversee the stablecoins are making money, while partners and users receive no financial benefit for parking their funds in a trust account. To date, this tradeoff has worked in bringing more regulated stablecoins to the market, but this sector is fast-moving and innovative, and competitive forces will force stablecoin issuers to build more user friendly products going forward.
We will see new enhancements in transparency, centralization, and revenue sharing with the next generation of stablecoins. Projects like Circle’s USDC is currently distributing revenue by providing rewards to holders, but requires the traders to use one exchange (Coinbase). Similarly, Libra Association announced a closed network that rewards a small group of partners for governance over its token (we’ll explore Libra more in-depth another time, but as of the writing of this post, it hasn’t yet launched and is already causing partners to abandon ship). At GCO, our approach is to work with an open network of partners to bring as many voices to the table as possible: any institution of any size can apply to participate in our network and share revenue with GCO.
We think that the next evolution of the stablecoin model should be built on an open network where revenue can be shared with partners. We envision a world with a stablecoin that is universally usable and governed by the greatest number of institutions. In turn, it is our goal to bring the many benefits of a stable cryptocurrency and the many use cases of decentralized finance to everyday users around the world. This is the promise of blockchain, and we are working hard to make this vision a reality. We think that the fastest way to achieve this goal is to open up the stablecoin model, to align incentives with the greatest number of users, and to scale quickly to deliver institutional-grade blockchain products to those who need them most.
About GCO
Global Currency Organization (GCO) utilizes blockchain technology to make institutional financial products available to all. GCO’s first product is USD Digital (USDD), a stablecoin fully backed by US dollars. GCO’s team is based in San Francisco and draws on its team members’ former experience at JPMorgan, Intel, and TrustToken to set new standards for the global decentralized finance industry. Contact us directly at media@gcodigital.com
Published at Tue, 18 Feb 2020 18:54:20 +0000
