Why stablecoins that are not pegged to the US dollar will matter for the future of cryptocurrency
Stablecoins have become a major part of the growth story of cryptography and DeFi, providing people with a fundamental building block for moving money from the fiat financial system to the digital one. The undeniable advantage of stable coins is their vulnerability to the volatility of other crypto assets, such as Bitcoin and Ether. So far, the main stable coins have been stablecoins pegged to the US dollar. Digital coins based on the US dollar, such as USDT, USDC, BUSD and DAI, have taken a central place as a de facto reserve currency in cryptography and DeFi, they account for more than 99% of the total market capitalization and trading volumes on various protocols, DEX, CEX, etc. It is undeniable to many that in the future stable coins other than the US dollar, especially pegged to national currencies in places such as Asia, will become additional and important building blocks, since it is expected that the next stage of the development of the crypto industry will fall on the eastern countries.
This initial stage of the US dollar's dominance among stablecoins is quite natural, because: a) many of the first cryptocurrency users live in the United States, b) the US dollar still occupies a place as the world's reserve currency in fiat.
Looking at the 2019 data from Chappuis Halde & For example, we will see that North America as a region had the largest number of active crypto traders back in 2019, when the total number of crypto traders worldwide was estimated at 43 million people.
This landscape has changed significantly by 2021 with the growing popularity of cryptocurrencies in regions outside the US, such as Asia. According to the Triple-A report (based on the Chainalysis methodology), Asia as a region currently accounts for more than 50% of the total number of cryptocurrency users in the world, which is 160 million, which far exceeds the number of users from the United States.
The fact that we see that non-American users are massively entering the cryptocurrency, without affecting the increase in the number of stablecoins other than the US dollar, raises the question of whether these alternative fiat currencies of stablecoins really take place in the crypto ecosystem. According to one narrative, the world will continue to dollarize as more and more transactions and financial transactions move online, and stable US dollar coins will retain their hegemonic status due to restrictions around liquidity, distribution, and consumer habits.
However, it should be borne in mind that this is an ephemeral state and a snapshot at a certain time and place in the history of the growth of stablecoins, and not an inevitability that will persist in the future. There are two types of thinking or biases that influence the persistent belief in the dominance of the US dollar in stablecoins: the status quo bias and the early adoption bias.
Prejudice of the status quo
There is a bias of the status quo in the world or a disproportionate fixation of the current state of affairs as a solid baseline and insufficient thoughtful study of long-term trends that could otherwise significantly change it. Simply put, the stereotype dominates: "It was so, so it will always be so."
In the context of stablecoins in US dollars compared to stable coins other than the US dollar, this bias towards the status quo means the following:
- The belief that stable coins backed by the US dollar will continue to dominate in the future, because that's how it's always been for the first 100+ million users (over the last 3 years or so), even though the types of users coming as the crypto market approaches 1 billion crypto users (in the next 5 years) they can completely change this situation.
- The belief that the reasons why stable coins other than the US dollar did not take off (for example, liquidity problems, use cases) is a matter of universal fact, and not a matter of time, circumstances and strategic shortcomings (from previous attempts).
Based on the book “Spreading Innovation” by Everett Rogers, early adopters represent the first 5-15% of your customers who have different behaviors and habits that may be very different from the behavior of most users.
In this case, the first users of cryptography and stablecoins really started mainly from the United States. Those first crypto traders outside the United States are probably already used to the idea of using the US dollar to account for their portfolios. Cryptocurrency could not exist without the first followers, but its future in gaining wider distribution cannot be realized if we base all our decisions about future products on the characteristics of only 15% of the pioneers.
An example of the trailblazers' prejudice against stablecoins:
- A person is trying to find out if people are satisfied with only stablecoins in US dollars.
- He asks users who are currently active users of cryptocurrencies (for example, 15% of the first users) whether they agree with using exclusively stablecoins in US dollars. Many of these early adopters say "yes" or "yes, that's good enough."
- It is concluded that stablecoins in US dollars satisfy the needs of all cryptocurrency users, as evidenced by the reviews of only 15% of the first users.
- It does not collect feedback from the remaining 85% who do not yet use cryptography, including users who actually consider the lack of local stablecoins an obstacle to entering the crypto market.
We should try to break down these prejudices and think about what a different future could potentially look like. You can start by looking at the history of stablecoins, and then consider the types of macro trends for the future that prove why the market needs stablecoins other than the US dollar.
The history of the adoption of stablecoins in US dollars
The first stablecoins launched in 2014 were bitUSD and NuBits. But it wasn't until 2015 that stablecoins issued by Tether and backed by off-network collateral or fiat currency really took off. Initially, stablecoins were mainly used as a way for traders to trade the volatility of crypto assets and exit them without having to pay a fee for returning to fiat. Thus, they could leave all their assets on cryptocurrency exchanges.
Stablecoins really took off and grew by almost 400% in 2021 after the DeFi boom, when retail cryptocurrency users deposited stablecoins into various protocols to generate income. Stablecoins, in fact, had been growing a little from year to year until the hype boom in DeFi began.
DAI: Messari data attributes most of DAI's growth to the launch of four specific liquidity mining programs within DeFi: a change in the yield distribution of Compound, which increased DAI's remuneration, the launch of the YFI farming protocol, the launch of CRV and the launch of the yield farm for the UNI token.
Almost 65% of DAI shipments in 2020 accounted for DeFi protocols for pharming.
UST: UST outperformed DAI in terms of market capitalization. The vast majority of the demand for UST mainly came from Anchor Protocol, where users could deposit UST and earn an APY of 19.5% per annum. What this led to - we all know, UST crashed, pulling the entire cryptocurrency market with it.
Many will take a look at the current market capitalization of stable coins in the amount of more than 150 billion US dollars, which is more than 99% based on US dollars, and it will be difficult for them to imagine a market that is not dominated by the dollar, due to the mentioned status quo bias. Nevertheless, it should be remembered that this market was formed only 1-2 years ago, and this process is far from over.
The market is already seeing some of the larger stable coins other than the US dollar gaining momentum from 2021, starting with stable coins pegged to the euro and the Singapore dollar.
According to a report by The Block, euro-pegged stablecoins are likely to become widespread in the coming years. At the moment, there are several liquid stablecoins with a European peg - STASIS Euro (EURS) (market capitalization ~ 124 million dollars) and CeloEuro (CEUR) (market capitalization of 34 million dollars). Also recently, the release of a stable Euro coin from Center - EUROC was announced.
xSGD, pegged to the Singapore dollar, has become the largest stablecoin, with the exception of coins in US dollars and euros. Its market capitalization is 83 million US dollars. It should be noted that its capitalization reached 213 million US dollars at the beginning of this year.
Why do stablecoins other than the US dollar have a future
Now the cryptocurrency market is at a key moment when it begins to move from the first followers to the early users of the majority. If DeFi was the catalyst that prompted more first-time followers and users to create and trade in the crypto space, then new directions like NFT and GameFi that appeal to a more massive customer base will bring an early majority. And many of these first users will come from regions such as Asia, where there has been an explosion of blockchain games over the past year.
However, the digital asset market is still at an early stage, and it needs stable coins other than the US dollar to solve a critical but simple task for the next wave of early majority users.: user resistance.
Despite all the growth last year, various processes in the cryptocurrency are still far from being optimized (for example, cashing cryptocurrencies into fiat is still inconvenient). The impact that stablecoins other than the US dollar will have on the main users of the cryptocurrency will be similar to thinking about creating more intuitive and inclusive interfaces and designs in the cryptocurrency.
The crypto space still has a steep learning curve. It is still very difficult for an ordinary person to navigate and requires active participation from users to connect chains, enter the correct wallet addresses with long sets of characters, learn how to use a Metamask (not always a 100% intuitive application), learn various complex DeFi protocols and income generation opportunities, and much more.
Simply put, no one will argue with the claim that improving interfaces in cryptography will help promote wider adoption of services. A good UX will pay off by creating more pleasant experiences, increasing loyalty and, consequently, the attractiveness of cryptocurrencies in the mass market.
However, most people think about one level of the definition of "resistance"- "interaction resistance", and not about others, such as cognitive or emotional resistance (see the hierarchy of user resistances below).
Interaction Friction refers to the resistance that a user experiences when interacting with the interface of a software product. This covers all aspects of the user interface that may prevent users from achieving their goal.
Cognitive Friction refers to the total amount of mental effort used in working memory.
Emotional Friction refers to the emotions experienced by users that prevent them from achieving their goal.
For people who sit in markets outside the US and make up an earlier majority (than early adopters), there is cognitive and emotional resistance that arises from having to rely on US dollar stablecoins as a workaround because they have no other better choice. Two examples illustrate this:
Cognitive resistance: Lack of a familiar unit of account currency
If the user grew up in the Philippines, he is used to thinking and acting in Philippine pesos as a unit of account. And this habit will be very strong due to the fact that people often think of Philippine pesos for making monetary decisions.
If we assume that he makes about 10 decisions and actions related to money per day (for example, lunch, utility bills, gasoline, taxi fare), this is 3,650 decisions per year. If we assume that the average age in the Philippines is 26 years old, and monetary decision-making begins at the age of 10, this is 58 thousand monetary decisions and actions during a lifetime made in Philippine pesos as a unit of account.
If the user lives in the Philippines, he buys a bag of rice, pays for tuition, buys a house, thinking in terms of Philippine pesos. After making 58 thousand monetary decisions in Philippine pesos, a sudden transition to a denomination in US dollars is unnatural. He will need to go through a cognitive load, constantly converting from US dollars to the currency of the Philippines any number of thoughts and decisions, such as:
- How much do I actually earn from farming USDC in Philippine Pesos (PHP)?
- What is the current value of SLP in Philippine pesos, given the SLP to USDT exchange rate and the USDT to PHP exchange rate?
- I want to take out a loan in DAI for my business, but what will be the interest rate in the future in PHP, because my income is expressed in PHP for my business?
Of course, there are Axie Infinity fans and other P2E players in the Philippines who use stable US dollar coins such as USDT, but it must be remembered that they represent the first users, not the rest of the early majority. And even if you ask existing P2E players, they would be happier using a stable PHP coin if such a liquid option was available.
Emotional resistance: Currency risks and Uncertainty
Uncertainty can be a big emotional drag for users because they lose a sense of understanding and control over the future. In the context of US dollar stablecoins, the uncertainty and risk of currency exchange between the US dollar and the local currency create obstacles for users.
Historically, PHP has changed by 5-10% against the US dollar, and although it is not as volatile as in markets such as Myanmar or Venezuela, this is enough to create a sense of discomfort due to currency risk.
Let's imagine that a business owner in the Philippines is considering obtaining a USDC-based DeFi loan to finance a small business, and the interest rate on this loan is 10% and is subject to repayment within 3 months. The source of income for his business will be the denomination in PHP, because his client base is local Filipinos. He may face some fluctuations in obtaining this loan, because the interest rate for him is essentially a floating interest rate, which could potentially be 11% if PHP falls by 10% against the dollar, which reduces the profitability of his business.
Thus, creating local stablecoins is a key part of a more inclusive crypto ecosystem, along with improving interfaces and flows. And it will become an important part of the adaptation of the next billion users coming to this area.
Conclusion
It should be remembered that the history of stablecoins is quite short. The market is far from the verdict that stable coins other than the US dollar have no place in this ecosystem just because there have not been very successful and scalable models so far.
Author: Elvir, analyst Сoin-signal.com Club
https://coin-signal.com/cryptonews/why-stablecoins-that-are-not-pegged-to-the-us-dollar-will-matter-for-the-future-of-cryptocurrency/
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