Why Are There So Many Stablecoins?

If you’ve ever looked at the crypto stablecoin market and thought,

You’re not alone. I’ve had the same question myself and this edition was inspired by a follower on linkedin who asked me this recently.

I mean just look at this chart from Artemis’ Stablecoin Dashboard.

There’s a growing number of stablecoins, a majority of the USD denominated stablecoins with the goal to be backed by 1 to 1 the dollar, usually backed by t-bills.

Then you have others that are pegged to the dollar but backed by defi loans like with DAI and GHO, or like USDe which is a synthetic dollar backed by crypto assets and short futures positions.

So, here’s a way to think about it: Having a wide variety of large-cap stablecoins with deep liquidity is actually better for consumers.

As the digital economy shifts toward dollarization, we don’t want all that digital dollarization concentrated and dependent on a few entities.

Think about how many banks are out there. As of 6/30/2024, data from the FDIC shows there are 4,548 FDIC insured banks. With massive volume.

And this is just some of the top 10 in the US.

There’s a growing thesis for the globalization of the US dollar and banks world wide offering access to the dollar in emerging markets vs the local fiat currency. Michael Nadeu does a great job at breaking it down.

Stablecoins as the Status Quo

To understand why there are so many stablecoins, I think it helps to compare this situation to traditional banking. For the sake of this newsletter, I am not going to be focusing on payments, more so on custody amongst consumers and businesses.

Historically, different banks have catered to specific needs—local credit unions for small towns, big institutions like Wells Fargo or Chase for the average family in the US or blue collar worker, to banks tailored to enterprise clients, start-ups, the list goes on. Each bank serves a unique function even though they all manage the dollar, and the experience and trust they can provide the consumer.

The same logic applies in the stablecoin space. For example, USDT (Tether) is particularly useful in emerging markets like Africa and Southeast Asia, where people need stable digital dollars for remittances and cross-border payments.

Chase Merlin exemplifies this well in regards to stbablecoin issuance in this comment on my Linkedin post around Paxos stablecoin products.

Meanwhile we can look at stablecoins gaining traffic by geographh, USDC has gained traction in Europe and South America, where institutions favor its compliance with regulatory frameworks. USDT is taking a strong hold in Africa and Southeast Asia. Having a diverse set of stablecoins that cater to different markets, needs, and regulations is essential for global digital finance.

Chains, Incentives, and Risk: What’s Under the Hood?

It’s important to understand that different stablecoins are built on different blockchains, and the blockchain they use can dramatically affect the user experience.

USDC, for example, is integrated across multiple networks like Ethereum, Base, Solana, SUI, and Arbitrum, while USDT does the same with a slightly great focus on Tron and Ton. The choice of blockchain affects everything from liquidity, on and off ramps, pegs, transaction speed, fees, compliance and security.

Then there’s the question of incentives. Do you hold JUST the dollar in your wallet or do you want access to yield?

Yield-bearing stablecoins like Lift Dollar or Mountain Protocol provide a way for people to earn interest from t-bills directly in the wallet as a rebasing token.

Its like a high yield checking account.

Some of these stablecoins offer yields as high as 4.9%, a far cry from the 0.5% interest you’d get in a typical checking account . However, higher yield comes with higher risk—whether it’s the security of the protocol, the regulatory landscape, or simply the volatility of the underlying assets.

If you’re dealing with larger balances, say $100,000 or more, yield-bearing stablecoins may seem like an attractive option. But it’s crucial to perform proper due diligence and ensure compliance with local regulations. For U.S. users, certain DeFi products might not be accessible due to legal restrictions, so always check the rules before diving in.

Centralized Stablecoins and Corporate Adoption

Beyond individual use cases, stablecoins are being adopted by large enterprises. Take PYUSD (PayPal’s stablecoin), for instance—companies like Ernst & Young LLP are using it for invoicing and payments, bypassing slower and more expensive traditional systems like wire transfers and ACH . This shift shows that stablecoins are moving beyond niche crypto transactions and into mainstream corporate finance.

At the same time, decentralized stablecoins like DAI, Stakeup’s upcoming stUSDC, and Ethena sUSDe are making waves in DeFi, offering users staking rewards and yield from liquidity pools. This competition—both among centralized and decentralized coins—helps drive innovation and better services for users, much like how traditional banks compete by offering better interest rates, lower fees, more trust with the consumer and improved services.

Just like you want your digital dollar to always be redeemable 1 to 1 to cash, you want the same trust level there when it comes to the ability of the stablecoin to hold its peg 1 to 1 to the US dollar and be redemable.

Sometimes to USD, other times for the local fiat currencies like EURO, GBP, INR, PHP, NGR etc.

On/Off-Ramps and Inflation: How to Get into the U.S. Dollar

Stablecoins also solve the problem of moving between local currencies and the U.S. dollar, especially in countries experiencing high inflation.

I’ve had multiple conversations with founders in the stablecoin API space about building on/off-ramps for local currencies. The goal is to provide a way for people to move their wealth into a more stable currency like the U.S. dollar. Even though the dollar faces inflation, it’s still viewed as a safer bet compared to many other currencies.

Stablecoins offer a critical bridge in this process. For example, USDT or USDC provides a relatively stable digital dollar that is more accessible than traditional financial services. And in some cases, stablecoins are backed by alternative assets like Bitcoin, Ethereum, or even gold, adding layers of diversification to the market.

Then you have others like Glo Dollar, which funds public goods by using revenue from U.S. Treasury Bills.

Just a banks and private institutions that custody US dollar serve different markets, communities and initiatives, stablecoins can do the same.

The Future of Stablecoins: Competition Drives Innovation

Just like in traditional finance, competition leads to better services and more options for consumers.

We’re seeing stablecoins compete to offer more transparency, better reporting, faster transactions, higher yields, and more robust security.

Whether it’s more centralized and regulated stablecoins like USDT, USDC, PYUSD, RLUSD, USD3 or decentralized options like DAI, GHO, LUSD, FRAX this competition ensures that consumers have access to the best possible products and freedom.

Much like in the world of banking, stablecoins are giving people a choice in how they want to manage their finances.

And as more players enter the space—from fintech giants like PayPal to smaller DeFi protocols—stablecoins will continue to evolve and innovate. In this sense, the growth of stablecoins is a positive trend, ensuring that the digital dollarization of business and finance is spread across multiple trusted entities rather than concentrated in just a few hands.

Closing Thoughts

This piece was inspired by a reader’s question, and I value those engagements. If you have any other questions about stablecoins or the broader crypto space, feel free to DM me on social media. If I have an answer, I’ll write about it!

To dig deeper into the world of stablecoins, check out DeFi Llama or the Artemis stablecoin dashboard for rankings on stablecoins and to see where the market is headed. The future is bright, but as always, stay informed and aware of the risks.

Disclaimer

This article is for informational purposes only and does not constitute financial or investment advice. Always do your own research and consult with a qualified financial advisor before making any investment decisions. Be sure to comply with local laws and regulations, particularly regarding the use of decentralized financial products, as some may not be available or compliant in your jurisdiction.