For years, many have asked what will be the killer DApp for cryptocurrency. In other words, what will be its version of email.
The answer resides in stablecoins. This is shaping up to be the one thing that completely reshapes transactions. It also affects, as we will see, how the money supply is expanded. Here we see a shift in who controls this process and pushes it further out.
We are still in the early stages. The amount of activity is relatively low compared to what the traditional system does. However, this could be something that goes on an exponential curve.
There is also the fact we are dealing with the proverbial drop in the bucket at the moment. In this article, we will go through the stablecoin market along with why it will explode over the next few years.
The screenshot above comes from Coingecko. It shows how the total market cap of the stable coin market is $231 billion. This means there are roughly that many coins/tokens in circulation since it is approximately $1 each. Of course, this will not be exact but it is close enough for our numbers.
In looking down the list of coins, it is evident that most are tied to the US dollar.
So how does this compare to the distribution of dollar? For this, we look at the most recent H.6 from the Federal Reserve. This comes in at $2.3 trillion.
We have to realize this is banknotes (and some coins). This means, it is the physical cash. Of that total, more than 70% of those banknotes exist outside the borders of the United States, an important point to note.
Even if we simply focus the conversation upon cash, we see the stablecoin market is about 10% of the size. For this reason, there is plenty of room to grow.
Physical cash in a digital world is counterproductive. There are a number of drawbacks which could hinder the use.
The first is the creation and distribution. As the world moves away from cash, the call for more is waning. This impacts the amount the Fed has printed. Here we see where the printing press go brr. At the end of 2019, there was $1.7 trillion, an increase of $600 billion in the past 5 years. It is an insignificant amount when we look at global economic activity.
In addition to supply constraints, there is the issue of theft. While crypto scams and rugpulls get a lot of attention, it is easy to overlook the crimes that take place around the world. It is easy to rob someone who is carrying vast amounts of cash.
On top of this, there is the safe storage. This is the problems banks have. They tend not to want a lot of cash on hand due to the fact they have to store it. Fortunately, they have vaults. Humans who are keeping thousands of dollars tend not to have access to similar facilities.
Finally, money is dirty. In an era where people are more aware of germs, touching something that hundreds passed around it not a pleasant thought.
All of this feeds into the setup for stablecoins.
The proposition I am making is the US dollar, in physical form, operates mostly outside the United States. What this tells us is people are seeking it out.
Stablecoins can meet this demand. Not only is there the ability to expand, it is easy to distribute. Stablecoins are digital in form.
For this reason, studies such as this should come as no surprise:
Brazil’s central bank chief Gabriel Galipolo recently highlighted a significant rise in cryptocurrency adoption across the country. Speaking at a Bank for International Settlements event in Mexico City, Galipolo noted that over the past two to three years, the volume of crypto transactions has surged dramatically.
Interestingly, he estimated that around 90% of this activity is tied to stablecoins—cryptocurrencies designed to maintain a stable value by being pegged to real-world assets such as the U.S. dollar.
This is stunning. It is estimated that 90% of all crypto activity comes through stablecoins. That tells the entire story.
It is one that is likely being repeated through Venezuela, Nigeria, the Mexico, and southeast Asia. Gaining access to the US dollar, in a digital form, is something most countries are prohibited from.
A USD stablecoin helps to protect against a countries native currency. Many such as Nigeria suffer from massive value decline against the USD. Having access to US dollar denominated assets can buffer this.
So far, Tether and Circle are the dominant players.
We are going to see the number of USD stablecoins explode. So far, we are dealing with asset backed coins, using a combination of cash and T-Bills. It will expand as institutions get involved, such as Blackrock, who create tokens for transactions at that level. They will incorporate other USD denominated assets.
While the asset backed category will grow, the algorithmic arena is also primed to expand.
The former is still part of the banking system. It is dollars that are used to initially create each token. A large portion of the total is then swapped into T-Bills, integrating financial institutions. Under this scenario, the expansion of the money supply is outside the hands of the commercial banks (and The Fed) but still operates within it.
Algorithmic stablecoins change the game completely. They are backed by something other than dollars (or dollar derivatives). Under this scenario, the US dollar is simply a unit of measure.
For example, the Hive Backed Dollar (HBD) can be converted into $1 worth of HIVE. There are no actually dollars involved in the process.
Here is where we exit the existing banking system completely. Creation of HBD expands the money supply yet there are no ties to Wall Street banks, investment or commercial.
As utility increases, we are going to see an explosion of both types of stablecoins. My estimate is we will need to match the banknote total. To achieve that, a 10x in the number of stablecoins is required. Since we are entering the AI (agent) age, it is likely the demand will require a much higher number.
This is the killer DApp for crypto. In fact, it is the only part of the industry that fulfills the medium of exchange.
