The role of RWAs in the evolution of stablecoins: Report

Medium exchange remains the “killer function” for stablecoins, Circle’s Stephen Leahy notes in latest stablecoin report

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Centrifuge and Adobe Stock modified by Blockworks

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A recent report by Centrifuge delves into the question of what is next for stablecoins, one of the most popular types of tokenized real-world assets today.

Stablecoins currently account for over 70% of all transaction volumes on blockchains today, according to the report shared with Blockworks. The market has over $13 billion in value and has seen steady growth over the past five years. 

Due to rising interest rates and smaller returns in DeFi markets, many stablecoin issuers have been looking for ways to ensure that their tokens are interest-bearing. This is commonly achieved by backing them with real-world assets.

Read more: Stablecoins remain the silver lining for RWAs: Report

An example of this would be MakerDAO’s DAI stablecoin, which currently offers 8% in yields for users who wish to lock up their stable tokens in a savings account.

For stablecoins to continue to grow sustainably, the report suggests that they must meet three core functions. 

Firstly, they should function as a medium of exchange, enabling swift and efficient transfers between parties. Secondly, stablecoins need to act as a reliable store of value, maintaining stability to protect against volatility and preserve purchasing power over time. Lastly, stablecoins should serve as a unit of account, providing a standard measure for pricing goods and services, and facilitating clear and consistent financial planning.

Medium of exchange

Being a medium of exchange has been the most successful user case for stablecoins so far. The report shows that annual transaction volumes for stablecoins are beating the likes of payment giants PayPal and Visa who are too beginning to work on their own stablecoins.

Asad Khan, the head of business development at Centrifuge, told Blockworks that so far, the stablecoin industry has been able to offer a variety of different types of stablecoins, all with their own unique capabilities and different appeals.

“I believe this trend will continue, and while some consolidation will occur to a certain extent, I believe there will be many opportunities for stablecoin platforms to appeal to specific market sub-segments and offer relatively unique value propositions,” Khan said.

Read more: PayPal Ventures uses its stablecoin for investment in crypto transfer platform Mesh

Over time, stablecoins can likely become the primary medium for transactions for capital markets, due to their instant settlement and 24/7 trading capabilities enabled by the blockchain.

“Ultimately, stablecoins are a new financial platform that offers easier to build and use transaction rails, and so it seems natural that different providers will be able to leverage their unique characteristics to make their system standout,” Khan said.

Store of value

Although it is important that stablecoins can be easily exchanged, Mark Phillips from Steakhouse Financial noted in the report that remaining a store of value is also an important use case for stablecoins.

“People in the US and first world countries don’t realize how critical it is, when there is corruption and unstable economies, to be able to take their hard-earned earnings and put them into a reliable medium they can use to make purchases in the future with,” Phillips said.

Read more: Could CBDCs, stablecoins shift institutional funding in emerging markets? Panelists weigh in

As the crypto industry doesn’t have significant ties to local or regional markets, Khan says that it makes sense that the majority of stablecoins today are anchored to the world’s global reserve currency, the USD. 

“These offshore dollar markets use the US dollar for a variety of reasons, but mainly because it allows financial institutions to interlink between the specific markets they serve and the pools of available capital, wherever they might be in the world,” he said. 

Although non-USD pegged stablecoins may begin to address more regional-specific opportunities, Khan believes USD will likely remain the primary vehicle for stablecoins in the foreseeable future.

Units of account

Many centralized stablecoins today rely on the traditional financial market and its corresponding units of account.  The report suggests this is evident through minting and redemption mechanisms, which often require a connection to a traditional bank account with fiat currencies. 

“Their proof of reserves systems emphasize 1:1 backing by traditional units of account. For these reasons, in the future, it is in the best interests of most centralized stablecoins to remain a virtual representation of U.S. dollars or Euros, instead of attempting to establish an independent, new unit of account,” the report said. 

For decentralized stablecoins, though, it would be important to ensure peg stability, preventing another Terra/Luna crash and optimizing for a unit of account functionality. 

Regulatory considerations

Another major hurdle for stablecoins in the near future would be to navigate the changing regulatory landscape in mainstream and established markets.

“Without clarity and support from policymakers, building adoption in more traditional use cases, such as consumer-merchant payments or traditional capital markets exchange, will be incredibly challenging,” Khan said. 

Khan believes that the sentiment from policymakers today feels rather negative, with stablecoins being viewed as a nuisance rather than a fundamental opportunity for markets. However, he notes that this could change after the market extends out of speculative use cases and welcomes more sustainable opportunities. 

Specifically, there are two promising areas that he views could address these regulatory hurdles: on-chain capital markets and transactions in emerging markets.

“Stablecoin providers feel that these markets are more easily accessible and with users who have a natural demand for what stablecoins can offer. Whether participating in DeFi markets or facilitating peer-to-peer exchange, most stablecoins will continue to target these areas to build their brand and network,” he said.


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