Carter is back with another lengthy piece of the stablecoin landscape and also a change of heart:
"I used to think network effects would win out, and we’d end up with just one or two stables, but I don’t believe that anymore."
That's a pretty bold statement, considering he just told us that Tether and Circle still hold about 85% of stablecoin market by issuance. But, I guess Carter smells a change on the wind.
In a year or two, I think many intermediaries in crypto will just show your deposits as generic “dollars” or “dollar tokens” (rather than USDC or USDT) and they’ll guarantee you redeemability in a stablecoin of your choice.
I wonder if he's been playing around with lightning wallets lately. This is sort of the trend that has emerged in all the hot new offerings there, with wallets showing you one "bitcoin" balance even though it might be composed of liquid, a statechain, ecash, or in sats in a lightning channel.
Intermediaries – whether they are exchanges, fintechs, wallets, or DeFi protocols – have a very strong incentive to strip out the major stablecoins and direct user flows into their own. The reason for this is very simple. If you are a crypto exchange with $500m in USDT deposits, Tether is earning around $35m/year on that float, and you’re getting nothing.
Aha! Is this the Achilles heel that will bring down the longstanding hero of stablecoins? I feel like I've heard the story of stablecoin issuers promising yield before...I don't think it has gone well.
If you are a fintech product that serves a non-crypto native clientele, you may not even have to do an earn program or similar inducement. You could simply display user balances in generic USD and then swap them into your own stablecoin. It’s simple enough to swap into Tether or USDC at the point of withdrawal if necessary.
Of course, deposits are deposits, which is to say it's your money, not your depositors -- and you can hold lots of different ways that are more profitable than USDTs.
Other exchanges are banding together to create their own stablecoin consortia. Notably, the Global Dollar consortium consists of Paxos, Robinhood, Kraken, Anchorage, Galaxy, Bullish, and Nuvei, in addition to over a dozen notable other partners.
If the first and most compelling value of Tether is its ability to circumvent annoying regulatory burden (which is to say the value proposition is convenience) then all these competitors who are going to steal Tether's marketshare need to figure out the regulatory problem. Their users might be willing to put up with a whole lot of custodial risk, but the second the convenience goes away, they'll die bomb harder than
If you want to persuade someone to drop the highly liquid and established Tether for your stablecoin, you’re going to have to give them a damn good reason to do it. So the fact that stablecoins are generally moving towards yield provision hurts the incumbents who are less flexible.
That last bit doesn't make sense to me: there's no reason Tether couldn't work out a deals with custodians to do the same yield-for-depositing-the-stablecoin kind of deal that Carter sees benefiting all the new comers. I suspect the reality is that such deals won't be as successful in keeping around users as Carter thinks, which he acknowledges:
I used to adamantly believe that we would only need one or two major stablecoins, or maybe a half dozen at most. “Network effects and liquidity are king,” I would repeat, somewhat incuriously. But do stablecoins actually benefit from network effects? They’re not the same kind of business as Meta or X or Uber. It’s actually the blockchain that is the network, rather than the token. If you can swap in and out of the token frictionlessly, and swap between blockchains quickly and cheaply, the network effect starts to matter less. If exit costs trend to 0, you can’t force users to stick with you forever. What the majors do have – especially Tether – is tight spreads against major FX pairs on hundreds of exchanges globally. That’s harder to beat, but I’m seeing (and funding) an explosion in providers that are linking stables to local fiat both on- and off-exchange at wholesale FX rates.
The only way I see a new stablecoin challenging Tether is if they are equally chain agnostic (you can use USDT in tons of different environments) and if they have a very close relationship with a big exchange. Of course, there are now big banks that can get in on the deal and that may change the landscape quite a bit.
And the elephants in the room are the sidelined financial institutions with literal trillions of balance sheet. They are wondering if stables will cause a deposit flight, and what they should do about it if so. GENIUS and finreg shifts allow banks to compete. If they do, the roughly $300b of stable capitalization will look like child’s play.