Jump Capital: Why We Believe Stablecoins Are a Trillion-Dollar Market

Source: ChainNews

Written by: Peter Johnson and Shanav Mehta, partners and vice president at Jump Capital

Compiled by: Perry Wang

Bitcoin was born as a "peer-to-peer electronic cash system," hailed as the ultimate disruptor of the financial system, serving both as a medium of exchange and a store of value. At Jump Capital, we believe Bitcoin will fulfill its mission as the world's leading store of value, and we are deeply attracted to the Lightning Network, as it significantly enhances Bitcoin's usability as a medium of exchange. However, we believe stablecoins will become the primary medium for crypto asset trading in the medium to short term. We anticipate that the accelerated adoption of stablecoins in the coming years will transform payment methods and lead to exponential growth in the total value of stablecoins, reaching trillions of dollars.

Stablecoins are crypto tokens pegged to the value of sovereign currencies (usually the US dollar). Over the past year [Figure 1], the adoption rate of stablecoins has surged, with the value of issued stablecoins growing from approximately $20 billion to about $130 billion. This is partly due to the increase in crypto trading volume, but it also indicates that several new use cases are beginning to gain attention and traction.

Today, stablecoins are primarily used as the base trading pairs in most cryptocurrency trading markets. As cryptocurrency adoption and the liquidity of stablecoins increase, exchanges are flourishing, enabling people in most international markets to easily access stablecoins. We believe that as stablecoins become more accessible globally and interactions with them increase, it will open the floodgates for various use cases, propelling the stablecoin market to a market cap of trillions of dollars. This belief is partly based on the comparison with the Eurodollar market, which represents the value of dollar deposits held outside the US banking system, currently estimated to be around $20 trillion. In some cases, the booming stablecoin market will replace the traditional Eurodollar market but will also significantly increase the availability of dollar-pegged assets outside the US banking system, thereby expanding the overall market size.

Use Cases and Adoption Cycles

Trading

So far, the rise of stablecoins has primarily been due to their use as the trading and settlement unit for cryptocurrency transactions priced in US dollars. Stablecoins allow traders and exchanges around the world to use the dollar as a base trading pair without needing to have US bank accounts. Stablecoins also enable traders to quickly transfer funds between trading venues 24/7. As a result, stablecoin-based trading pairs represent the largest and most liquid crypto markets in the world—approximately 75% of crypto spot trading volume uses stablecoins as the base currency.

The earliest use of stablecoins has driven a surge in user-friendly funding gateways globally, allowing users to exchange local currency for dollar-pegged stablecoins. The use of stablecoins by traders is now a relatively mature use case, paving the way for more mainstream applications.

Cross-Border Transactions

Remittances & B2B Payments

Remittances and B2B payments have been among the earliest use cases for stablecoins. As businesses and workers become increasingly globalized, personal remittance flows continue to grow, and many small and medium-sized enterprises now have international suppliers and customers. Due to capital controls, regulatory barriers, and monopolistic payment channels, these cross-border and cross-currency transactions can be challenging to complete, often taking days and incurring high fees or significant currency exchange spreads. Now, with stablecoins and local fiat currency funding gateways, individuals and businesses can send international transfers in seconds.

Stablecoins are increasingly used in the cross-border branches of these transactions, where one fiat currency is converted to a stablecoin, sent to another country, and then converted to a second fiat currency. New market entrants focusing on cross-border/remittance products are also emerging, abstracting the use of crypto on the backend to serve mainstream audiences. Among the non-trading use cases discussed in this report, we believe this use case is the most mature.

Example Companies:

Cross-Border Payroll

As the workforce becomes more decentralized, companies increasingly wish to hire the best talent without geographical restrictions. For small and medium-sized enterprises without overseas offices, using stablecoins to pay talent distributed across various regions simplifies this otherwise challenging task.

The current gap in this area is a front-end platform that allows businesses to complete the process more easily while helping them comply with local laws and withholding tax requirements. Although some market participants have begun to build this, the penetration rate in this niche market remains relatively low.

Example Companies:

Borderless Capital Markets

In addition to facilitating cross-border payments, stablecoins enable borderless participation in capital markets. Stablecoins now underpin several decentralized credit markets, including over-collateralized loans provided through Compound and Maker, as well as unsecured loans offered through TrueFi and Maple Finance. Global audiences can also borrow from centralized counterparts like BlockFi through interest-bearing deposits. Through both decentralized and centralized platforms, stablecoins allow anyone around the world to access the best capital markets instantly.

Example Companies:

Digital Economy

As stablecoins gain wider adoption, we expect them to drive the growth of a purely digital online economy. From paying for NFTs to tipping on Twitter and online content subscription services, as stablecoins enable everyone in the world to transact with one another, the monetization of online services and goods will experience explosive growth. Regardless of the specific form it takes, this means stablecoins will become the de facto currency of the metaverse.

Local Economy

Ultimately, as the importance of stablecoins becomes increasingly prominent worldwide, and as the aforementioned use cases drive an increase in individual holdings of stablecoins, businesses and individuals will begin to accept stablecoins for local transactions. This is particularly valuable for countries with weak local currencies, as we expect these countries to experience crypto dollarization as stablecoins become the primary medium of exchange.

We also anticipate that as users realize the benefits of 24/7 real-time payments (compared to other payment methods like bank wire transfers), and as fintech and payment companies integrate stablecoins as the underlying funding flow, the usage of stablecoins in developed markets will surge.

Which Stablecoins Will Be Winners?

Stablecoins come in various structures, primarily including:

• Fiat-backed, where stablecoins act as receipts for fiat currency held by centralized entities (e.g., USDT, USDC)

• Crypto asset collateralized, either over-collateralized with crypto assets (e.g., DAI) or using crypto derivatives (e.g., UXD) backed by delta-neutral positions in crypto assets

• Algorithmic stablecoins, which employ algorithmic monetary policies, usually paired with another volatile token to maintain the stability of the stablecoin's value. A prominent example in this area is Terra, which utilizes a system where stablecoins (e.g., Terra USD / UST) can be redeemed at the value of a floating rate token (LUNA), which can then be sold for the native token.

We believe the stablecoin space will not be a one-horse race, as there are diverse types of users with varying preferences for decentralization, stability, capital efficiency, and integration with regulatory frameworks. We are particularly excited about Terra and its dollar stablecoin UST, viewing it as the most elegant solution for creating highly scalable and more decentralized stablecoins.

Conclusion

Stablecoins empower an open network currency system where anyone in the world can hold dollars (or any other fiat currency on the blockchain) and transact, with near-instant final settlement of these transactions 24/7, for the first time in history. With the surge in fiat on-ramps and off-ramps in the crypto space, we believe that in the next decade, the use cases for stablecoins will far exceed trading.

In addition to benefits like speed, low fees, and ease of access, stablecoins do not require a crypto-native front end to operate. This means builders can create user-friendly applications that support mainstream adoption on these rails. As stablecoin rails are used for everything from remittances and cross-border payroll to powering local economies, we believe the total value of stablecoins will grow into a multi-trillion dollar market. At Jump Capital, we look forward to continuing to support the enterprises driving this exponential growth.

Source link: jumpcap.com