Stablecoins are on the rise. Not only have they reached a new all-time high in terms of market cap, they are constantly developing with leading companies in financial and crypto world joining the game. As yellow.com already highlighted, we now have giants like BitGo, Revolut and PayPal launching their own stablecoins.
Let’s see what’s going and analyze some of the major stablecoins announcements.
To begin with, stablecoin market capitalization has reached a new all-time high at $168 billion after 11 months of consecutive growth.
DefiLlama data shows that the total stablecoin market cap is at its highest point ever, even beating its last peak in March 2022. Bernstein forecasts market growth to $2.8tn by 2028.
What does that mean? Crypto analyst Patrick Scott, also known as “Dynamo DeFi,” thinks this is a sign that “New money is entering crypto.”
The sector’s leaders, Tether (USDT) and Circle (USDC), together dominate over 90% of the stablecoin market. USDT has reached a market cap of $118 billion in September, its all-time high.
USDC is trailing behind with a market cap of over $34 billion, its highest point for 2024. But it is still a far cry from its all-time high of $55.8 billion in June 2022.
But there are new contenders.
They see the enormous profits stablecoins are making, and want their own pieces of that pie. Some of the big companies, both from crypto and fintech world, including PayPal, BitGo, Revolut and Ripple, have ventured into creating their own stablecoins.
What Are Stablecoins?
Stablecoins are, well, stable digital coins. And by stable we mean a type of price stability that - in cryptocurrency world - can be achieved only being pegged to traditional assets such as fiat currency, commodities, or other financial instruments.
In a nutshell, a stablecoin that is meant to be worth 1 USD is always worth 1 USD, no matter what.
Unlike volatile cryptocurrencies like Bitcoin and Ethereum, stablecoins aim to combine the decentralized nature of digital currencies with the stability of traditional assets.
This makes them highly attractive for businesses and individuals looking to engage with blockchain technologies without being exposed to extreme price fluctuations. If you own some USDT, USDC or other stablecoins you always know exactly how much are your assets worth.
Definition and Purpose
At their core, stablecoins act as a bridge between fiat currency and the blockchain.
They allow for fast, borderless transactions typical of cryptocurrencies, while also providing a level of price stability similar to traditional currencies.
This stability is crucial for enabling practical use cases such as payments, remittances, and international trade.
Simply put, in many cases there is no way you can easily transfer a significant amount of fiat money to a different side of the world. With USDT or USDC, it’s a matter of minutes.
Types of Stablecoins
There are three main types of stablecoins: fiat-collateralized, crypto-collateralized, and algorithmic stablecoins. Each of these comes with its own set of benefits and risks.
- Fiat-Collateralized Stablecoins
These stablecoins are backed by reserves of fiat currency such as the U.S. dollar or Euro. For every stablecoin issued, a corresponding amount of fiat currency is held in reserve. This type offers the highest level of stability, but it requires a central authority to maintain the reserves. That’s something that Satoshi probably wouldn’t like as it goes against the decentralized ethos of blockchain technology. Also - as in the case of Tether - it is sometimes not easy to verify the real amount of assets backing the issued stablecoins. Which leads to all kinds of scandals and mistrust towards the issuer.
2.Crypto-Collateralized Stablecoins
Crypto-collateralized stablecoins are backed by other cryptocurrencies like Bitcoin or Ethereum. Those cryptos are highly volatile. So in order to manage volatility, these stablecoins are typically over-collateralized. This means that for every stablecoin issued, the reserve held is worth more than the stablecoin itself to account for fluctuations in the collateral’s value. Examples include DAI, which is backed by Ethereum. These stablecoins offer a higher level of decentralization but are more complex to maintain due to market volatility. And generally, there is a lower level of trust here. Which prevents the mass adoption.
3.Algorithmic Stablecoins
Algorithmic stablecoins are not backed by any physical or digital asset. Instead, they use smart contracts and algorithms to adjust the supply of the stablecoin in circulation to maintain its price. When demand increases, the algorithm creates more tokens, and when demand decreases, it burns tokens to reduce supply. TerraUSD (UST) was an example of an algorithmic stablecoin that gained popularity before it epically collapsed, highlighting the risks associated with this type. Now let’s take a look at some major new stablecoins appearing on the market.
PayPal: Pioneering Mainstream Stablecoins
PayPal's stablecoin, PayPal USD (PYUSD), has reached a $1bn market capitalisation, CoinMarketCap data shows. Launched in 2023, PYUSD is pegged to the US dollar and issued by Paxos Trust Company, a regulated crypto custodian.
The stablecoin competes with other dollar-backed tokens like USD Coin (USDC) from Circle Internet Financial. PayPal's CEO, Dan Schulman, emphasised the need for stable, digital instruments connected to fiat currencies in a 2023 statement.
PYUSD, an Ethereum-compatible token, is the sole stablecoin on PayPal's payment network. It aims to serve developers, wallets, and Web3 applications. PayPal has been expanding PYUSD's reach through various initiatives.
The company partnered with Anchorage Digital for a custody rewards programme. It also launched PYUSD on Solana, collaborating with Crypto.com, Phantom, and Paxos. A partnership with MoonPay allows crypto purchases using PayPal accounts.
Despite its impressive growth, PYUSD trails behind market leaders Tether (USDT) and USDC. These stablecoins boast market caps of $118bn and $35bn respectively, dwarfing PYUSD's recent milestone. Well, they were launched long time ago, so PayPal still needs time to catch up.
BitGo: Bringing Novel Backing System to Stablecoins
Crypto custody firm BitGo is set to launch a new dollar-backed stablecoin in 2025. It's called USDS and its aim is to shake up the market with a novel backing system, which is called 'open participation'. Unlike most of the stablecoins out there, that are backed by one institution's fund, USDS will reward institutions providing liquidity.
"Existing stablecoins serve a good function," BitGo's CEO Mike Belshe said. "But we see an opportunity to create a more open and fair system."
USDS will be backed by short-term Treasury bills, overnight repos, and cash. This is standard practice in the industry. What's not standard is BitGo's "open participation" model.
That’s kind of a game changer.
The stablecoin will reward institutions that provide liquidity to the network. "A stablecoin's true value comes from the people using it," Belshe explained.
It's all about the rewards. BitGo will distribute a portion of its reserve returns to participating institutions. It's a monthly payout based on asset custody.
But wait, doesn't that sound like a dividend? Belshe says no. The key difference is who gets the money. It's not going to end users, but to the institutions providing liquidity.
Other stablecoins have tried similar models. But they've had to exclude the U.S. market to avoid being classified as securities. BitGo thinks it has found a workaround.
"You end up with either the folks that opt into only the U.S. market, and then the folks that opt into only the non-U.S. market," Belshe said.
He says the difference lies in that ISDS is not distributing the proceeds to the end user, but rather to the institutions providing the liquidity. Thus it can't be seen as an investment contract. And this may pave the way to work in the U.S. absolutely legally.
BitGo has big plans for USDS. They're aiming to list it on all major exchanges. Their target? A cool $10 billion in assets by this time next year.
Ripple: Expanding XRP Ecosystem with XRPL-Stablecoins
In August, Ripple has begun testing its U.S. dollar-pegged stablecoin, Ripple USD (RLUSD), on its XRP Ledger and Ethereum blockchain.
The company announced plans for RLUSD in April. It will be backed by short-term U.S. Treasuries, dollar deposits and cash equivalents.
Killer features? Well, Ripple has already established itself as a leader in facilitating cross-border payments, becoming a universal intermediary. Integrating stablecoins into its ecosystem could further streamline these transactions, making them faster and more cost-effective.
A stablecoin issued on Ripple’s network could easily integrate with existing financial systems and other blockchain networks, promoting broader use.
The stablecoin is currently in beta testing with enterprise partners. Ripple aims to ensure high standards before wider release, pending regulatory approval.
Regulatory frameworks for stablecoins are emerging globally. The EU issued rules in June, with the UK expected to follow. A stablecoin bill was introduced in the U.S. House of Representatives last year.
Ripple's move aligns with its cross-border transaction business model. However, it faces stiff competition. KPMG's Ian Taylor notes numerous companies poised to issue stablecoins once regulations permit.
Andy Bromberg, CEO of Beam, questions market demand for new stablecoins. USDT and USDC currently dominate over 90% of the market. Half of the top 10 stablecoins have less than $1bn market cap.
Yield potential may be driving Ripple's decision. Current U.S. Treasury rates could yield $42.8m annually on a $1bn stablecoin. Bromberg describes such coins as "ludicrously profitable businesses".
Revolut: Fintech Giant Invading Crypto Space
According to sources close to the matter, Revolut is in advanced stages of developing its own stablecoin.
The London-based fintech giant, valued at $45 billion, appears set to expand its cryptocurrency offerings.
Revolut has been providing crypto trading services for years. In May, it launched a dedicated cryptocurrency exchange for experienced traders. But launching own stablecoin is a whole other story.
Revolut aims to become "the safest and most accessible provider of crypto asset services". This goal aligns with their potential stablecoin launch.
Stablecoins are highly profitable, and thus are an attractive business idea, there are no two ways around it. Their value is pegged to real-world assets, often government-issued debt. This provides a steady stream of interest payments. Revolut's move into stablecoins could significantly impact the market. It would leverage the company's existing user base and financial clout.
The company's track record in disrupting traditional banking services suggests a potentially innovative approach to stablecoins. We’ll have to wait and see what kind of stablecoin is Revolut about to launch.
Conclusion
No, there is no immediate and imminent danger to USDT and USDC’s dominance in the stablecoin sector. New players have yet to establish and prove themselves. And that might require significant time and enormous efforts.
But even if these new stablecoins from major companies remain just niche products, it’s still worth mentioning that stablecoins are the gaining momentum and continuing to be the driving force of the crypto mass adoption.