In this piece, we present to you the ultimate guide to stablecoins – an introduction to the topic and the most important contextual information to understand their role in the short-term debt market.
Around $2 trillion dollars in value were wiped off the face of the market across May and June this year (2022). The crypto market crash reached not only institutional investors, but also crypto platforms themselves. 1’180 employees were laid off by Coinbase. Gemini let go of around 1’000 employees. BlockFi let go of 20% of their workforce. Based on these facts alone, it would be insane to call cryptos a safe investment right now.
Since their inception, cryptocurrencies had one fundamental disadvantage, which has prevented them from becoming a recognized store of value: their price volatility.
In order for a store of value to be recognized as a currency, it needs a certain amount of stability in order to be used for a transaction. This is next to impossible, if you have to wrestle with the idea of your savings getting wiped out by half, overnight. Volatility isn’t a mistake in the design, it’s the trademark.
I regard it as almost insane to buy this stuff or to trade in it. — Charlie Munger, Vice Chairman of Berkshire Hathaway
So, if the price volatility is embedded into a cryptocurrency’s decentralized nature, then how could they ever be adopted for institutional usage? What alternatives exist to regular cryptocurrencies, and how do they work?
What are Stablecoins?
Blockchain Developers have developed a new type of digital asset class, termed “stablecoins”.
Stablecoins are cryptocurrencies whose value is tied to an external asset, such as fiat currencies, precious metals, and even other cryptocurrencies. The point of a stablecoin is to have a digital asset which has a stable price, which would render it adequate for institutional and commercial use for traditional finance.
Stablecoins differ from other currencies by having an extra layer of technology underneath them, which allows for the safety net needed to stabilize the price. Normal cryptocurrencies run on a decentralized network of ledgers throughout a blockchain, which has been hailed as one of its greatest assets. Nevertheless, this decentralization also come with a hefty price, as no central authority regulates the currency. This means that cryptocurrencies are vulnerable to great price volatility. Stablecoins try to solve this conundrum by collateralizing the coin with an external asset, ranging from tangible commodities such as gold, other cryptocurrencies, or most commonly fiat currencies.
Taking all of the advantages of the decentralized blockchain technology, and using the advantages of traditional currencies stability, stablecoins have made a mark on the market, and show no sign of slowing down.
What is the potential of Stablecoins?
With a market cap of $946 billion, according to Coin Gecko, stablecoins make up a formidable amount of money in the newly emerging sector of finance. Its benefit of added stability makes it an appropriate product for traditional institutions looking to enter the crypto market.
The most prominent stablecoins currently are Tether (USDT), USD Coin (USDC), Dai (DAI), Binance USD (BUSD) and Pax Dollar (USDP). However, until recently, one of the most prominent stablecoins used to be the Terra Luna Coin.
At its peak, on April 5th, 2022, Terra reached an all-time high of $119.20. Over the course of a few days in May 2022, the stablecoin started to liquify. By May 8th, the stablecoin traded at 0.985 Dollars. It left a $60 billion hole in the crypto ecosystem.
The Terra token was an algorithmic stablecoin, which relied on its sister token, Luna. Terra aimed to maintain a stable price by countering any price movements caused by changes in demand through automatic changes in the supply. By maintaining an equilibrium of proportional changes of supply in reaction to an increase or decrease in demand, Terra was supposed to keep its price stable. This was what it was designed to do — but its crash has become a cautionary tale for stablecoins and other cryptocurrencies.
The consequences of the collapse of one of the most important stablecoins was widespread. A ripple effect spread throughout the whole market and even bled over into the traditional market sphere.
The prominent hedge fund, Three Arrows Capital, which once managed as much as $10 billion in assets, one of many funds which were badly hurt by the recent crypto crash this May. Terra effectively caused a domino effect which rippled throughout the whole market.
Digital assets are still in their nascence and are a rapidly emerging market. Market inefficiencies are to be expected, and with that, difficulty in finding established infrastructure for these novel products.
How to advance the adoption of Stablecoins in the short-term debt market?
General crypto solutions can’t keep up with the emerging market. Even though many people have the buying power in order to participate in the crypto market, there is a severe shortage of appropriate infrastructure for both commercial and institutional finance. We at CLST have come up with a solution.
Currently, the institutional short-term debt market for stablecoins and crypto assets is heavily underserved due to a lack of large-scale lending and borrowing infrastructure that reduces counterparty and DeFi protocol risks. — Michael Guzik, CEO at CLST
Institutions are looking to engage in short-term debt markets for the “New Money “, where cryptocurrencies and stablecoins can be used for collateralized and uncollateralized lending. This is where CLST comes in — we are bringing established, robust institutional practices and mechanisms into the digital asset era.
Written by Raul Rendon
We created CLST to automate bilateral price negotiation and settlement for institutional lenders and borrowers with the aim to break silos in the New Money Market.
To request early access to CLST Markets, reach out to our team https://clst.com/.