Stablecoin Market Report: Innovations, Trends, and Growth Potential

Author: Andrea Chang, Partner at Oak Grove Ventures

Introduction

Oak Grove Ventures is a fund company focused on cutting-edge technology, Web3, and crypto payments. Under the leadership of its investment partner Andrea Chang, the company has published a research report on stablecoins titled "Innovation, Trends, and Growth Potential," which explores the landscape of stablecoins, key industry components, current trends, and various evaluation metrics for stablecoin companies. With a strong background in crypto payments, Oak Grove Ventures is committed to providing more use cases for stablecoin companies to achieve large-scale applications in the industry. This report is the first in a series on payments. Oak Grove Ventures is an innovative investment fund dedicated to supporting the next generation of technological advancements and financial innovations in the rapidly evolving digital asset and blockchain technology space.

Table of Contents

Introduction 1

Current Landscape of Stablecoins 1-2

Current and Future Growth Drivers of the Stablecoin Market 2-3

Latest Technological Developments Enhancing Stablecoins 4

Outlook: Impact on Crypto-Native CeFi 4-7

Introduction

For a long time, the mass adoption of cryptocurrencies has been the "holy grail" of the cryptocurrency industry, with payment systems serving as the bridge connecting this technology to the "real" world. The traditional financial system has been plagued by issues such as high fees, slow transaction speeds, and geographical limitations.

Cryptocurrency payments not only address these problems but also offer lower costs, faster processing times, borderless transactions, and more efficient and inclusive financial interactions. As the first report in this series on cryptocurrency payments, this study aims to analyze the landscape of the stablecoin market and the driving forces behind its future growth.

Stablecoins play a crucial role in the cryptocurrency payment ecosystem, serving as a bridge between innovation and usability. Stablecoins minimize price volatility associated with various underlying assets like fiat currencies, providing a reliable medium of exchange for users and businesses across Web2 and Web3. Additionally, stablecoins are an indispensable part of all crypto-native applications, such as centralized exchanges, decentralized finance (DeFi) platforms, and wallets. Within DeFi platforms, stablecoins provide stable value for lending, borrowing, and earning opportunities. In the B2B sector, we also see traditional fintech companies exploring stablecoin solutions to enhance operational efficiency. While regulatory uncertainty remains in many regions, more institutional capital is eagerly entering this industry. In summary, stablecoins are vital in driving cryptocurrencies to become mainstream payment solutions that meet the current financial system and consumer demands.

Current Landscape of Stablecoins

Stablecoins can be broadly categorized into three main types—fiat-backed, crypto-collateralized, and algorithmic. Recently, many new projects have begun adopting a hybrid model that combines various assets or chooses real-world assets (RWA) as collateral.

Overview of the Stablecoin Ecosystem

Source: Berkeley DeFi MOOC

Stablecoins are more active than ever;

still hold market dominance.

Data from Glassnode shows that as of mid-June 2024, the total market capitalization of the stablecoin market (including multiple cross-chain assets like Ethereum) has grown to over $150 billion. Among these, USDT accounts for about 74%, USDC for about 21%, and the remainder consists of various other stablecoins.

Stablecoins: Total Supply

Source: Glassnode

Transaction volume figures vary; USDC and DAI show strong growth

However, it is worth noting that when discussing transaction volume, we find that different data sources may use different calculation methods, which may or may not account for zombie trades, outlier trades, and maximum extractable value (MEV) impacts. For example, a report released by Visa in April this year showed that, according to their calculation method, despite a significant gap in market capitalization (21% vs. 74%), USDC's transaction volume has surpassed that of USDT. If we only consider Ethereum, although DAI's market capitalization is lower than that of USDC and USDT, the report shows that DAI's transaction volume is the highest among the three, largely due to the flash loan mechanism.

Stablecoins: Transaction Volume

Source: Glassnode

Currently, stablecoin transaction volume has surpassed MasterCard and may soon exceed Visa Card.

On a broader scale, stablecoins have been widely accepted, with their total transaction volume exceeding that of Bitcoin and soon approaching the second-largest card network, MasterCard. Although Visa claimed in a recent report that over 90% of transactions come from bot trading, we recognize that the increasing usage and liquidity of stablecoins still have their impact.

Annual Transaction Volume of Bitcoin/Stables and Other Financial Systems

Source: Understanding Stablecoins (Visa)

Current and Future Growth Drivers of the Stablecoin Market

As USDT and USDC continue to dominate the stablecoin market, we have broken down the latest announcements from these two companies to analyze the main growth drivers currently shaping the stablecoin market. In the future, we expect the current main growth drivers to persist, while the initial entry into the DeFi market and innovations in DeFi will further propel the growth of the stablecoin market.

Stablecoins Outside the Ethereum Ecosystem Are Rising

Since the first half of 2024, the transfer value of USDC on Solana has surpassed that of USDC on Ethereum. However, it is worth noting that since most stablecoin transactions come from MEV arbitrage, this transaction volume may primarily be attributed to high-frequency trading rather than new user growth. This also means that stablecoins have greater liquidity, which is beneficial for DeFi trading activities, a point worth considering.

The cross-chain transfer protocol (CCTP) launched by Circle allows for the secure transfer of USDC through native minting and burning methods across different blockchain ecosystems. We expect this trend to continue with the rollout of this protocol. Since March of this year, Solana developers can now transfer USDC from Ethereum natively to other EVM-compatible ecosystems, including Arbitrum, Avalanche, Base, Optimism, and Polygon. Some Solana-based DeFi projects have integrated the cross-chain transfer protocol (CCTP) in early stages. Future support will also extend to non-EVM blockchains. USDC has also expanded its issuance on ZKsync, Celo, and TON.

Source: Artemis

Strong Demand for Stablecoins in Emerging Markets

Emerging markets have played a crucial role in the development of USDT and USDC (the world's top two stablecoin issuers), highlighting the economic stability, financial inclusivity, and cross-border transaction capabilities that stablecoins offer in times of rising inflation.

As local currencies depreciate, USDT has been widely adopted in emerging markets as an alternative to the dollar, becoming the most trusted digital dollar in many of these regions. For example, in Brazil, USDT accounts for 80% of all cryptocurrency transactions in the country, and many other countries are similar. This shift underscores the strategic importance of USDT in ensuring financial stability and accessibility in economies facing currency instability. In June 2024, Tether announced a $18.75 million investment in Taiwanese startup XREX, which focuses on cross-border payments and B2B cross-border stablecoin payments for SMEs in emerging markets.

Innovation and Growth in the DeFi Market

Innovations in new applications provide more use cases for financial activities involving stablecoins. The development of liquidity-focused platforms like Lido Finance and perpetual exchanges like Synthetix Perps (Synthetix's newly launched platform) offers stablecoin holders opportunities to earn yields. In March of this year, Sparklend, a lending platform under MakerDAO's sub-DAO, issued a significant amount of DAI in recent weeks, necessitating authorization for more loans.

The fastest-growing stablecoin in 2024, Ethena, has partnered with centralized exchanges and DeFi platforms such as Lido Finance, Curve, MakerDAO, and Injective Protocol to create an ecosystem with tremendous yield opportunities and user experiences.

Major Institutions Are Ready to Participate in the DeFi Market

It is expected that the Federal Reserve will lower interest rates in the next two years, motivating financial institutions to seek higher yields from the DeFi market.

Although DeFi startups are still in their seed stages, we have already seen increased investment activity from BlackRock, Fidelity, and Franklin Templeton in DeFi startups in the primary market, a phenomenon that is uncommon compared to the previous cycle. These funded DeFi startups have recently focused primarily on liquid staking and risk-weighted assets.

These institutional giants are also beginning to explore on-chain activities. Franklin Templeton, a $14 billion fund company, launched a tokenized mutual fund on Polygon, competing with BlackRock, which previously launched a similar fund on Ethereum.

Fintech Companies Are Issuing Their Own Stablecoins

Fintech companies, especially those with large payment networks, have the motivation to launch their own stablecoins for added value. PayPal launched the PayPal USD stablecoin last August and began offering it to users of its Venmo payment service a few weeks later. In April of this year, Ripple revealed plans to launch a dollar-pegged stablecoin fully backed by dollar deposits, short-term U.S. government bonds, and other cash equivalents. In addition to dollar-pegged stablecoins, Nomura Holdings has also launched a yen stablecoin, and Colombia's largest bank, Bancolombia, has launched its own stablecoin COPW, which is backed 1:1 by the Colombian peso. In Europe, France's third-largest bank, Société Générale, launched its own euro stablecoin for the first time in December last year.

Synthetic Collateral (including RWA-backed stablecoins) is Continuously Growing

The distinction between stablecoin projects and the traditional collateralized debt position (CDP) model that emerged in the last market cycle is becoming increasingly apparent. For example, Tether's aUSDT is a synthetic dollar that is over-collateralized by XAUT (Tether Gold) on the company's newly opened platform Alloy on Ethereum, allowing users to mint collateralized synthetic assets. Other newer projects that use RWA as collateral are referenced in the appendix below.

Another example is USDe from Ethena Labs. This is a superstar of 2024, having attracted over $3 billion in total value locked (TVL) to date. USDe generates dollar value and yield through two main strategies: leveraging stETH and its inherent yield; shorting Ether (ETH) positions to balance delta and take advantage of perpetual/futures financing rates. This strategy allows for the creation of an incrementally neutral collateralized debt position (CDP) by combining locked Ether (stETH) spot deposits with corresponding short positions through partnerships with centralized exchanges (CEX) like Bitcoin and Binance. Holding Ethena's sUSDe (locked USDe) effectively becomes a foundational trade that balances locked Ether (stETH) spot positions and Ether (ETH) short positions in the market. This setup provides users with yield differentials between these positions, with current yields around 27%.

Embedded Yield Stable Assets: Internet Bonds

Source: EthenaLabs Gitbook

Latest Technological Developments Enhancing Stablecoins

Bitcoin Ecosystem

The expansion of Bitcoin has led to multiple second-layer chains and first-layer innovations (e.g., Runes). The development of Bitcoin DeFi has also created more use cases for these native Bitcoin stablecoins.

For example, second-layer projects like RSK (Rootstock) have enabled Bitcoin smart contracts. With the activation of smart contracts, RSK has opened the door to building Bitcoin-backed stablecoins. These stablecoins are pegged to the value of fiat currencies but backed by Bitcoin, while still leveraging the security and trust of the Bitcoin network to provide users with price stability. A notable project based on RSK is Sovryn. It utilizes this advanced capability of Bitcoin to offer users a stablecoin pegged to the value of fiat currencies while being protected by the underlying Bitcoin network.

Stacks is a second-layer project (L2) that integrates smart contracts, decentralized applications (dApps), and Bitcoin. It builds stablecoins through its ecosystem, prominently featuring the stablecoin USDA developed by Arkadiko Finance. USDA is a decentralized, crypto-collateralized stablecoin that maintains stability by collateralizing STX tokens (the native token of Stacks). Users can lock STX in the Arkadiko Finance protocol to mint USDA. The protocol uses a "proof of transfer" consensus mechanism to support the stablecoin with Bitcoin, ensuring the stablecoin's value. The stability of USDA is supported through over-collateralization, ensuring its value is pegged to real-world assets.

Cross-Chain

Interoperability is crucial for the accessibility and adaptability of stablecoins. Recent advancements in cross-chain solutions have significantly enhanced the ability of stablecoins to operate seamlessly across different blockchain networks. This advancement allows users to effortlessly transfer stablecoins between different platforms, ensuring broader acceptance and use of stablecoins within the decentralized finance ecosystem.

• "Ondo Finance has partnered with Axelar to launch a cross-chain solution called Ondo Bridge, supporting the issuance of native tokens, including USDY, across Axelar-supported blockchain networks."
• The cross-chain protocol for USDC has been developed in collaboration with Chainlink's Cross-Chain Interoperability Protocol (CCIP), significantly enhancing its utility and coverage across various blockchain networks.
• LayerZero's OFT standard—and the recently launched stablecoin USDV—are exemplars of the next generation of stablecoins, facilitating interoperability among multiple blockchain community ecosystems and overcoming the dangers of "one chain dominance."

Outlook: Impact on Crypto-Native CeFi

We note that stablecoins are a key strategy for Web2 and Web3 fintech companies, especially for crypto-native centralized finance (CeFi) platforms. We define crypto-native CeFi platforms as centralized entities that provide services such as payments, trading, and lending in the cryptocurrency space. By integrating stablecoins or collaborating with relevant providers, these platforms can offer more stablecoin options to existing customers and attract new ones.

Alchemy Pay is a leading payment solutions provider that has become an important bridge between traditional fiat systems and the evolving cryptocurrency landscape. Its platform enables merchants and consumers to easily transact using both cryptocurrencies and fiat currencies.

Alchemy Pay has expanded support for Celo-native USDC and USDT, facilitating easy conversions and demonstrating the company's commitment to providing a variety of stable and reliable payment options. In June of this year, Alchemy Pay also announced support for USDT on TON, expanding access for TON users.

Payment Channels

Source: Alchemy Pay

Crypto.com was founded in 2016 and has since grown to become one of the largest cryptocurrency platforms globally. The platform also issues the Crypto.com Visa Card, allowing customers to spend directly from their crypto accounts. Visa began testing how to use USD Coin (USDC) in its financial operations in 2021. The company partnered with Crypto.com on a pilot project that currently uses USDC to fulfill its settlement obligations on the Visa Card in Australia. Using USDC for settlement allows Crypto.com to avoid converting digital currencies into fiat. USDC settlement improves capital management, helping Crypto.com achieve a range of additional business benefits.

By utilizing Visa's USDC settlement feature, Crypto.com can:

|---|---------------------------------------------------| | | Reduce pre-funding from 8 days to 4 days; Decrease foreign exchange costs by 20-30 basis points; Focus on corporate strategy rather than daily operations. |

Source: Visa

USDC Settlement

|---|--------------------------------------------------------------------------------------------------------------------------------------------| | | Issuers (crypto-native companies/exchanges and fintech companies) · Helps drive more payment options and transaction volume; · Supports USDC currency exchange, aiding better management of settlement capital resources. Acquirers · Helps expand product and acceptance range, attracting crypto-savvy merchants and customers; · Can receive payments in USDC and transact on the blockchain. |

Source: Visa

[Appendix 1] Notable Market Projects and Case Studies

Collateralized Debt Positions (CDP)

MakerDAO and Liquity and Curve

Recently, several major stablecoin projects, including MakerDAO, Liquity, Curve, AMPL, and Frax, have made significant progress in enhancing their protocols and expanding their ecosystems. These projects have launched multiple new features, established various strategic partnerships, and integrated with other blockchain networks to improve stability and usability, attracting a broader user base. The major developments and milestones achieved by these projects over the past year are as follows:

MakerDAO

1) GUSD PSM Adjustment: In June 2023, MakerDAO voted to adjust the parameters of the GUSD Peg Stability Module, including lowering the maximum debt ceiling and reducing the fee rate to 0%.

2) Launch of Spark Protocol: MakerDAO launched the Spark Protocol in September 2023. This protocol aims to enhance the DeFi functionality of the ecosystem by integrating multiple stablecoins and providing yield optimization.

3) New Types of Collateral: In early 2024, MakerDAO introduced several new types of collateral to the platform, including tokenized real estate and other real-world assets, to diversify and stabilize DAI.

Liquity

1) Integration with Aave: In August 2023, Liquity announced its integration with Aave, allowing users to use LUSD as collateral within the Aave ecosystem, thereby increasing its usability and adoption.

2) LUSD on Optimism: In December 2023, Liquity deployed LUSD on the Optimism second-layer network, improving transaction speeds and reducing user costs.

3) Protocol Upgrade: In May 2024, Liquity underwent a significant protocol upgrade to enhance stability and security, including improvements to the liquidation mechanism and stability pool.

Curve

1) Launch of crvUSD: In October 2023, Curve Finance launched its own stablecoin, crvUSD, aimed at deeply integrating Curve's liquidity pools and governance mechanisms.

2) Collaboration with Yearn Finance: In January 2024, Curve partnered with Yearn Finance to optimize yield farming strategies by combining Curve's liquidity pools with Yearn's vaults.

3) Cross-Chain Expansion: By June 2024, Curve expanded its operations to multiple blockchains, including Avalanche and Solana, to increase liquidity and user base.

AMPL (Ampleforth):

1) Launch of Geyser V2: In July 2023, Ampleforth launched Geyser V2, an upgraded liquidity mining program that offers more flexible and generous rewards for providing liquidity to decentralized exchanges.

2) AMPL on Ethereum Second Layer: In November 2023, Ampleforth expanded its operations to Ethereum's second-layer solutions, enhancing scalability and reducing transaction costs for AMPL users.

3) Partnership with Chainlink: In February 2024, Ampleforth announced a partnership with Chainlink to leverage its Oracle services for more accurate and decentralized data, improving AMPL's adaptive supply mechanism.

Frax

1) Launch of Fraxlend: In September 2023, Frax Finance launched Fraxlend, a decentralized lending protocol that allows users to borrow and lend stablecoins at dynamic interest rates.

2) New Types of Collateral: In December 2023, Frax added several new types of collateral, including tokenized gold and synthetic assets, to support the issuance of FRAX.

3) Governance Token Upgrade: In April 2024, Frax upgraded its governance token FXS and added new features such as yield rewards and improved voting mechanisms.

[Appendix 2] Evaluation Metrics for Stablecoins

Startups and Due Diligence Checklist

Investors are advised to evaluate emerging stablecoin issuers from two dimensions: mechanism design and partnership resources.

Mechanism Design: Focus on collateral debt ratio, liquidation methods, cross-chain support, etc.

Collateral Design: Composition of collateral, types of collateral, health, transparency, and stability of collateral.

Partnerships: Access to major DeFi partners, early users, expectations for liquidity.

Market Capitalization

A high ratio reflects the scale and market adoption of the stablecoin. Generally, a higher market capitalization indicates higher trust and usage.

Liquidity

High liquidity ensures minimal slippage during transactions, which is crucial for maintaining the peg.

Collateralization

A high collateralization rate determines the security and stability of the stablecoin.

Redemption Mechanism

A good redemption mechanism ensures the ability to exchange back to the underlying asset, maintaining trust in the stablecoin's value.

Metrics include associated fees and historical redemption success rates.

Adoption Rate

Widespread adoption indicates trust and utility within the ecosystem.

Transparency

Transparency builds trust between users and regulators.

Security

Good security ensures the safety of user funds and the integrity of the stablecoin.

Community Support

A strong community can drive adoption and innovation.

[Appendix 3] Recently Funded Stablecoin Startups

1) Agora: https://www.agora.finance/

Agora Finance offers yield-bearing stablecoins backed by VanEc, emphasizing regulatory compliance and actively obtaining necessary licenses. Currently, its services are limited to select markets outside the U.S.

Agora holds its reserve fund in trust and entrusts its reserve assets to one of the world's largest custodians, undergoing regular audits to ensure high security. The assets are protected from bankruptcy, enhancing investor confidence.

Dragonfly Capital led the investment in Agora, showcasing strong support and trust in its potential. Recent news indicates that Agora is expanding its partnerships with financial institutions to enhance liquidity and accessibility, further solidifying its market position.

2) Midas: https://midas.app/

Midas launched a stablecoin backed by U.S. Treasury bonds and plans to launch its stUSD token on DeFi platforms like MakerDAO, Uniswap, and Aave as soon as possible. Midas leverages BlackRock's purchases of Treasury bonds and Circle's USDC to provide a secure and stable digital asset.

Midas's main partners include custody technology provider Fireblocks and blockchain analytics provider Coinfirm. Its recent business introduction indicates that Midas is focusing on integrating advanced security measures and extending its operations to more DeFi platforms to maximize the utility and adoption of the stUSD token.

3) Angle: angle.money.

Angle's USDA stablecoin is backed by U.S. Treasury bills and tokenized Treasury bonds. Holders of the USDA token from the Angle protocol can earn a target yield of at least 5% from the reserve assets and lending platform income.

Angle is also committed to creating a foreign exchange trading center supported by A16z, enabling seamless conversions between stablecoins pegged to the dollar and euro. Recent developments include increased yield farming rewards, expanding the foreign exchange trading center to include more currency pairs, and establishing strategic partnerships to enhance protocol security and user engagement.

4) Yala: https://yala.org/

Yala is revolutionizing Bitcoin liquidity with its innovative yield-bearing stablecoin YU. YU is a BTC-backed stablecoin that harnesses Bitcoin's power in decentralized finance (DeFi) to generate yield across multiple blockchains.

Using the Ordinals protocol, Yala issues YU directly on Bitcoin and integrates it with decentralized indexing networks and oracles through a meta-protocol. This setup ensures the borderless accessibility of Bitcoin liquidity, allowing users to generate yield from various blockchain ecosystems without leaving the Bitcoin environment.

Yala's recent advancements include implementing mapping and minting mechanisms that enhance users' ability to seamlessly utilize cross-chain yields. This approach not only enhances Bitcoin's utility in DeFi but also positions Yala as a pioneering force in the decentralized finance space.

5) BitSmiley: https://www.bitsmiley.io/

BitSmiley is building a comprehensive financial ecosystem on Bitcoin through its Fintegra framework, which includes a decentralized over-collateralized stablecoin protocol, a trustless native lending protocol, and an on-chain derivatives protocol. The first step of this framework is to launch an on-chain stablecoin generated through over-collateralization of Bitcoin, namely, bitUSD.

bitUSD will serve as the cornerstone of the BitSmiley ecosystem, initially launching on the first BTC second-layer platform in collaboration with BitSmiley, and eventually expanding to other second-layer solutions. The over-collateralization mechanism of bitUSD is similar to that of MakerDAO, eliminating the unfamiliarity for DeFi users. Recently, BitSmiley received investments from OKX Ventures and ABCDE, highlighting the project's credibility and potential in the decentralized finance space.

6) BitStable: https://bitstable.finance/

BitStable is a decentralized asset protocol based on the BTC network. The platform allows anyone to generate $DALL stablecoins from collateral assets within the BTC ecosystem, anywhere in the world. BitStable employs a dual-token system ($DAII and $BSSB) and a cross-chain compatible structure. $DAII is a stablecoin whose value and stability derive from the robustness of BTC ecosystem assets (BRC 20), including BRC 20, RSK, and the Lightning Network.

In BitStable's vision, the cross-chain capability of $DAII connects the Ethereum community with the BTC ecosystem. The total supply cap of $DAII is 1 billion tokens. $BSSB serves as the governance token of the platform, enabling the community to maintain the system and manage $DAII. Additionally, BitStable incentivizes $BSSB holders through dividends and other measures.