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Health, Wealth, and Happiness

April 17, 2023

“The biggest risk of all is not taking one.”

- Mellody Hobson

In today's issue: We take a detailed look at the top Seven Stablecoin Use Cases, which matter more than ever.

As U.S. lawmakers introduce the new Stablecoin Bill (more on that tomorrow), we highlight some of the top reasons people are using stablecoins like near-instantaneous settlements, transparency, and reduced transaction costs.

If the bill passes, stablecoins will be officially integrated into the U.S. financial system, which is a big deal. Join us and learn about stablecoin use cases, and see how you can place some early bets on the future winners. Read on.

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Today's most important story for crypto investors.

Analyzing ETH’s Big Week(Bankless)

The recent Ethereum upgrade, code-named Shapella, went off last week without a hitch. That's great news for long-term ETH holders.

The upgrade was the final step needed to move Ethereum to proof of stake and enable withdrawals of staked ETH and rewards.

There were two camps prior to the upgrade:

Bulls, who felt that by removing the technical risk around withdrawals, Ethereum would see an influx of new stakers.
Bears, who believed the upgrade represented a major supply overhang that would lead to significant selling pressure.

The bulls won out, with ETH gaining more than 10% since the Shapella upgrade.

Protocols with deep ties to ETH have also rallied strongly. This includes liquid staking derivative governance tokens like Lido's LDO, LSD-Fi protocols like Flashstake (FLASH), and Layer-2 protocols like Arbitrum (ARB) and Optimism (OP).

While outflows have exceeded deposits since the upgrade, it hasn't been a mass stampede. There are roughly 14 days of withdrawals pending, a far cry from the months of delays anticipated by doomsayers. There have also been periods where inflows are outpacing outflows, indicating that many of those who are taking partial withdrawals (the amount over the 32 ETH required to run a node) are re-staking those withdrawals.

Investor takeaway: We told you Shapella would be a good thing in the long term (assuming it went off successfully). It turns out even short-term ETH investing has been a win.

The next milestone to watch will be Lido enabling its own staking withdrawals in early May. While Lido represents more than 30% of the total ETH staked, it's not likely Lido's withdrawals will impact the market. However, Lido may lose market share, which will open up the playing field for competitors.

If you missed out on buying ETH before Shapella, it's not too late. We still analyze it as a great long-term buy.

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New Blockchain Risk Scorecard: Ripple (XRP)

Ripple is one of the crypto OGs. Started in 2012 as a cross-border payments system, it was once in our Blockchain Believers Portfolio and was the subject of the first analyst report we ever produced.

All that changed in December 2020 when the SEC filed suit against Ripple, alleging that XRP is an unregistered security.

However, investors are cautiously optimistic that Ripple might prevail. To date, the SEC has lost five of six cases that went to the Supreme Court. The price of XRP has already started to rally based on the hope of a Ripple win.

Using our industry-leading Blockchain Risk Scorecard, we analyze the current risk of investing in Ripple on our 1-to-5 rating scale (remember that with risk, lower = better).

Premium members: Download the Scorecard here and see how we rate XRP as an investment. Is it too risky a bet due to the SEC lawsuit, or a great future business investment?

Not yet a Premium member? Sign up now for just $10 a month and get instant access to our complete, on-demand library of investor scorecards.

Executive Summary: Stablecoins provide the benefits of blockchain technology while avoiding the volatility associated with cryptocurrencies. Some benefits of stablecoins are near-instantaneous settlements, privacy, transparency, and reduced transaction costs.

These benefits make stablecoins useful for many purposes like on-ramps and off-ramps to fiat, ease of payments, remittances, market liquidity, and stable savings. Stablecoins also facilitate speedy peer-to-peer transactions while reducing costs associated with currency exchange rates and banking fees. Stablecoin volumes continue to expand, indicating stablecoins are useful technologies with many novel uses.

There's traditional money, and there's digital money. Think of stablecoins as the best of both worlds.

Stablecoins aim for the stability of traditional (or fiat) money with the benefits of blockchain technology. They have all the bells and whistles of cryptocurrencies (transparency, programmability, and cost efficiency), but also provide investors with safe havens from the volatility of the crypto markets.

Here are a few of their benefits:

Instant Settlements

Traditional fiat is often bloated with third-party services. These services add costs without adding much value. Plus, third-party services often lengthen transaction processing times.

By contrast, stablecoins allow for transactions to be settled almost instantaneously. Their decentralized blockchain networks and smart contract technology operate 24/7 and don't require third parties to verify transactions.

Eliminating third-party services greatly reduces transaction costs. In fact, the average stablecoin transaction cost is 98% cheaper than the average cross-border payment cost (0.1% vs. 6.4%, respectively, as of the first quarter of 2021).

Better Privacy

Traditional fiat money can breach consumer privacy through physical surveillance, identity checks, and even data breaches in financial institutions.

Stablecoins offer better privacy and personal security. Users can remain anonymous through:

pseudonyms
stealth addresses
ring signatures
different types of zero-knowledge proofs

These features retain the stablecoin holder's privacy and reduce the risk of identity theft and fraud.

Better Transparency

Traditional fiat lacks transparency, which can lead to issues like inflation and economic instability. For example, without built-in trust mechanisms allowing us to verify the money supply, who's to say how much money governments are printing?

Stablecoin transactions, however, can be audited in real time. Anyone can access transfer-related data using a public key, so issues and disputes are easily resolved.

Note that the identities of the individuals conducting the transactions remain anonymous to retain privacy. Blockchain technology can obscure specific transaction details while allowing validators to verify legitimate data.

Source: Coingecko

Also, many stablecoins regularly publish audit reports that detail their holdings and the assets backing them. The regular reports ensure holders their digital currencies are fully-backed by tangible assets.

Top Stablecoin Use Cases

As stablecoins grow in popularity, we'll explore the most common use cases, and see how this new technology is revolutionizing how we handle our money.

1. On-ramps/Off-ramps

On-ramps are the platforms you use to purchase and enter the crypto ecosystem, while off-ramps refer to converting digital currencies back to fiat.

Stablecoins bridge traditional finance (TradFi) and decentralized finance (DeFi) and help ease the transition into this new monetary system. While you can use your fiat currency to buy any digital asset, stablecoins are widely supported because DeFi platforms and protocols are confident in their stability.

Source: Yield App

2. Payments

Stablecoins can be used to facilitate speedy, peer-to-peer transactions and payments. Even microtransactions can be automated through smart contracts, reducing the need for manual intervention.

Additionally, stablecoins are highly liquid and can easily be swapped with fiat through various exchange platforms. Alternatively, some consumers use a crypto debit card to purchase real-world goods with stablecoins.

3. Remittances

Stablecoins can also be used for remittances and cross-border payments. This eliminates the need for third-party institutions and reduces costs associated with exchange rates and transfer fees. Verification processes are done on-chain, reducing transaction times from days to minutes.

Compared with other digital currencies, stablecoins also reduce the risk of price volatility in remittances.

4. Market Liquidity

Providing liquidity for crypto traders is another popular use case for stablecoins. Stablecoins can be used as one of two currencies that form a trading pair on exchanges. They enable traders to quickly move in and out of positions without opening their portfolios to unwanted risks. As they wait for the next great opportunity, stablecoins provide mechanisms for traders to maintain the value of their assets without needing to off-ramp into fiat.

Stablecoins can be traded globally, giving participants access to new global markets. As of March 31, 2023, the total trading volume for stablecoins has globally totaled over $22bn USD. That is a large increase from the $364 million USD in trading volume of stablecoins toward the end of 2018.

Stablecoin trading volume in the last 90 days (Source: CoinGecko)

5. Savings

An underrated but common use case of stablecoins is to hold money as savings. Stablecoins were created to have stable value. Since they have no vesting or lock-in periods, users can easily transfer money in and out of wallets, saving and spending when they need it.

For non-traders, stablecoins can also be an alternative to a high-yield savings account. Per the FDIC, a savings account's average interest rate is about 1.28%. Stablecoins can offer as high as 8% APY to offset the inherent risks of stablecoins de-pegging and losing value without insurance or government protection.

6. Lending and Staking

As of February 2023, over $24.5 billion in stablecoins were locked in the top stablecoins. These were USDC, USDT, and DAI.

Source: Dune Analytics

Lending and staking provide liquidity to exchanges, institutions, and sometimes individuals. Unlike Ethereum, stablecoins like USDT and USDC don't use the proof of stake consensus mechanism, so staking on these platforms is like a money market deposit than anything else.

While these mechanisms yield larger APYs than savings accounts, the differences and drawbacks lie in the lockup or "vesting" periods, where you can't touch or transfer your crypto for specified periods. In effect, you trade off liquidity for the benefit of higher rewards.

Proving more money is lent and staked in DeFi because of stablecoins is a simple matter of looking at the total value locked (TVL) in stablecoin protocols. TVL, after all, refers to the total value of assets vested for lending and borrowing. As of this writing, the top three assets by TVL are all stablecoins. They're USDT, USDC, and DAI.

Source: Dune Analytics

7. Gaming

Gaming dapps account for nearly 30% of decentralized applications on the market. In effect, gaming is another industry ripe for stablecoin adoption.

Source: dApp Review

Either as in-game currencies or for gambling purposes, stablecoins can bring in-game assets out of a game's infrastructure and into digital dollars. Stablecoins are used by gaming projects to:

Monetize in-game currency.
Create new payment infrastructures.
Charge commissions on in-game activity.

In doing so, players should be allowed to buy, sell, and trade earned digital assets on-chain and off-chain. While gaming coins in the past have emerged as solutions to revamp the gaming industry's economy, none have succeeded in light of high price volatility and lack of interoperability (issues that stablecoins have already resolved).

The Future of Stablecoins

Stablecoins are viable in these use cases because their inherent benefits (low transaction costs, instantaneous payments, anonymity, and programmability) support the use cases that currently drive the adoption of this technology.

Looking forward, we'll likely see stablecoins redefining how we hold cash and use our money. Crypto investors can expect growth in areas like:

Payment systems
Tokenized markets
Microtransaction facilitators

While many of these use cases may see mass adoption within the next decade, central bank digital currencies (CBDCs) are also being put forward as alternatives to stablecoins. CBDCs present themselves as stablecoin alternatives that resolve many stablecoin issues like liquidity, operational risks, security, and regulatory challenges.

CBDCs will give banks control over the digital currencies issued by central bankers. Finextra's report suggests 20% of central banks are interested in issuing a CBDC within the next decade. This push for digital currency, while good for the overall crypto market, calls into question the feasibility of DAO-operated stablecoins over the long run.

The ready acceptance of CBDCs means traditional banks will own a majority share of the stablecoin market once regulations are established. Compliance and legal functions are weak links for newer players like Tether and Circle, but established banks have infrastructures and loyal customer bases to support the push towards a cashless society.

They need the technology now, and CBDCs remain the likely solutions.

Investor Takeaway

Stablecoins provide transparent, private, and low-cost transactions at high speeds. That's why cryptocurrency's success is contingent on this technology's mass adoption. The technology provides a crucial link between TradFi and DeFi by providing stability and reliability.

However, regulatory and operational risks and the threat of depegging will continue to plague stablecoin technology. That's why alternatives like CBDCs remain attractive to governments.

Our investing approach has between two and 10% of your investment portfolio in crypto assets. Although we follow a long-term, buy-and-hold strategy, if you decide to sell crypto investments, you can keep the cash in high-quality stablecoins, where you can earn staking rewards and remain ready to pounce on the next great investment opportunities.

ICYMI