Non Dollar Stablecoins: Their Use & Their Future

non dollar stablecoins

Having a look at the most popular stablecoins, we don’t see any non dollar stablecoins in the top 10. Why is that? And how could a larger market for non USD stablecoins be accomplished?

The degree to which US dollar stablecoins outnumber other types of stablecoins (euro, pound, etc) is staggering. Just compare the top dollar stablecoin by market capitalisation USDT (Tether) to a top euro stablecoin EURS (Stasis Euro). The market cap of USDT is 72 billion. The market cap of EURS is around 130 million. That’s around a 500 x difference, which is totally out of whack with the balance between ‘real’ dollars and euros in circulation (about 3 to 1).

Maybe surprisingly, the largest market for stablecoins besides the dollar is … gold-backed stablecoins.

Why are Non Dollar Stablecoins Less Popular?

Even the most adventurous algorithmic stablecoins like DAI peg to the good old dollar. Why? There are two main reasons why the vast majority of stablecoin volume is dollar stablecoin volume:

  1. Most people want dollars. It’s still the dominant medium of exchange: world trade is still largely in dollars. People in large parts of the world want and accept dollars. Migrants who send money to relatives in their home country are likely to choose dollars. When shit hits the fan in the world economy, the dollar is the currency that rises in value against other currencies. So it’s no surprise that not just real-world goods like oil are priced in dollars, but so are crypto currencies. Probably the biggest pull for US-pegged stablecoins has been their utility of collecting yield in DeFi.
  2. Non dollar stablecoins are a less profitable business model for the companies that issue them. The issuers of ‘traditional’ (collateralized) stablecoins back their issued stablecoins (we hope) with real dollars. Now mind this: the interest rate on dollar accounts in the US is higher than on euros in the eurozone. The interest rate for institutional lenders In Europe is even negative. The same goes for the yield on US treasuries versus EU bonds (US treasuries are ‘dollar equivalent’ and accepted as collateral for stablecoins by auditors). So there is just less room to arbitrage the yield on ‘real’ euros versus euro stablecoins, compared to dollars. Another issue is that the collateral of the stablecoin issuers has to be highly liquid. When holders of the stablecoin decide to go for a ‘bank run’, the issuers need to be able to sell their dollar stash on a moment’s notice. The US treasury bond market allows for that, as it is the most liquid and deep market in the world.

Different Types of Non Dollar Stablecoins

Even though the dollar is the most obvious choice to peg a stablecoin to, there are endless other options. After all, you can peg a token against anything. But the following are some of the most sensible options for stablecoins to be pegged against:

  • Another currency, like the euro or yen
  • A weighted basket of sovereign currencies (Facebook’s Libra was intended to be such a stablecoin)
  • Gold

What are the Most Important Non USD Stablecoins?

The most important alternatives to dollar stablecoins are gold stablecoins and euro stablecoins.

Gold-backed stablecoins

A big advantage of a gold-backed stablecoin is that while it tracks the price of gold, it is better divisible and transportable. Needless to say, buying stablecoins is much easier than going to a gold shop. Having said that, nothing of course can beat the zero counterparty risk of storing your own gold.

Most gold stablecoins track the price of one ounce of gold and are redeemable for actual gold. The latter is only possible with large sums. Redeeming smaller sums of gold tokens is  better done through dollar stablecoins.

The biggest gold stablecoins are:

  • Paxos Gold (PAXG) is the most well-known gold stablecoin. Paxos is a fully regulated company. PAXG has a market cap of around 620 million dollars. It can be traded on notable exchanges like Kraken and Binance.
  • Tether Gold (XAUT) has a market cap of 460 million dollars. Issued by Tether, XAUT can be traded on FTX and Bitfinex, among others. But also on Uniswap. Like PAXG, it tracks the price of an ounce of gold.

Euro stablecoins

Why use euro stables as a retail investor? Let’s say you live in the EU and use DeFi exchanges like Curve for stablecoin yield. Why not swap your euro fiat to a euro stablecoin and make some passive income while not being exposed to currency risk from the dollar/euro pair?

Currently, Stasis euro (EURS) and Tether euro (EURT) are the biggest euro stablecoins. 

  • EURS has a market cap of 130 million dollars. It’s an ERC-20 token issued by a company named Stasis. It trades on the centralized exchange Bitfinex and dexes like Uniswap and Curve.
  • EURT has a market cap of 200 million or 40 million. It trades on Bitfinex and Uniswap. 

The Future: Stablecoins Issued by Banks?

The dollar/euro foreign exchange market is huge but doesn’t exist in DeFi in any meaningful size. For that to change, the market cap of euro stablecoins would have to increase dramatically. 

Despite the dollar being in highest demand, it is fair to assume that there is a larger demand for non US stablecoins than is currently available. But how to accomplish this, given the above issues with low yield on euro collateral? Add to that the looming obstacle of the strict EU regulation (MiCA) that is upcoming. It is rumored to set a high regulatory threshold for stablecoin issuers.

One way out of this, would be to give good old-fashioned banks a license to issue stablecoins, backed by their deposits. Plus, the Central Bank could backstop the issuer (bank or other issuer) in case of emergency. The Bank of England recently proposed this for the UK. 

With the UST fiasco in mind, it seems quite likely that stablecoins will become more and more regulated/encapsulated in the tradfi system. An upside could be that a euro stablecoin could proliferate more. In such a climate, it remains to be seen how much wiggle room decentralized stablecoins will still get…

Non Dollar Stablecoins: Their Use & Their Future - - 2022

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Non Dollar Stablecoins: Their Use & Their Future - - 2022
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