Cambridge Digital Money Dashboard
Fintech

What Are the Biggest Stablecoin Innovations?

In recent years, digital currencies have been all the rave. However, the idea that digital assets are exclusively some form of currency is slowly falling by the wayside as different use cases are emerging and being rapidly adopted. This May, The Fintech Times is looking to showcase some of these new methods and explore how the digital asset ecosystem is evolving.

Cryptocurrencies offer a myriad of benefits for cross-border transactions. The lack of fees to transport money abroad massively sets it apart from traditional money movement platforms. However, crypto’s volatility often means transferring money this way can be risky, as by the time the recipient gets the funds, they may be worth less. This is where a stablecoin can step in.

Stablecoins are digital assets pegged to another asset – often government-issued fiat money. As such, stablecoins have the capability of utilising crypto payment avenues (which are often quick and have less fees) without running the risk of a volatile value.

Laurent Descout, CEO of Neo
Laurent Descout, CEO of Neo

Laurent Descout, CEO and co-founder of Neo, the corporate cross-border solutions provider, commented: “Stablecoins are becoming an increasingly viable payment option for goods and services in the real economy. Many see the huge potential that they could bring from bypassing the inefficient and slow processes of traditional payments to the increased security, recordkeeping and transparency.

“While it’s too early to say if stablecoins will eventually replace traditional forms of payments, treasurers need to start preparing. They should read up and stay abreast of the latest developments and start having conversations about their viability and digital wallets which allow them to hold and utilise them. Those who don’t, risk being left behind.

“Large firms and institutions have taken notice and have begun to make moves to ensure they remain at the forefront of any changes in how we make payments. PayPal has grown its crypto presence from initially accepting payments via Bitcoin to launching its stablecoin late last year. While J.P. Morgan unveiled an improved tokenised payment platform following the success of its JPM stablecoin.”

Yield-bearing stablecoins
Seb Widmann, head of strategy at Komainu stablecoin
Seb Widmann, head of strategy at Komainu

Tether’s success has caused many businesses to come into the stablecoin market looking to replicate the results. However, Seb Widmann, head of strategy at Komainu, the regulated digital asset custodian, notes that there are some outliers in the space with new offerings.

“Stablecoins have surged in popularity as a viable business model following the recent increase in interest rates. This uptick has enabled leading stablecoin issuers to realise substantial profits derived from the underlying reserves that support these stablecoins.

“As an example, Tether booked over $4billion in profits over the past quarter alone. This attractive and simple business opportunity led to multiple new stablecoins coming to market, with little differentiation from existing ones.

“However, the market has still seen some innovation, specifically with the emergence of yield-bearing stablecoins that pass on some of the yield generated from treasury assets to the end-client holding the stablecoin. This therefore makes it an attractive alternative to existing stablecoins such as USDC and USDT. We have seen this with projects like USYC from Hashnode or USDY from Ondo Finance, as well as others.

“In parallel, following the crash of TerraUSD and the Luna ecosystem in 2021, we are again seeing traction in algorithmically backed stablecoins.

“Whilst DAI is still the largest algorithmically backed stablecoin relying on a reserve of other digital assets (and also traditional assets as of recently), a new stablecoin launched by Ethena, USDe, generated significant traction this year, amounting to over $2.3B in value locked as of time of writing.

“Unlike fiat stablecons such as USDT or USDC, USDe is a synthetic dollar, backed by a basket of cryptocurrencies and corresponding short futures position. USDe therefore currently maintains a peg through the use of delta hedging derivatives positions against protocol-held collateral.”

Laying the regulatory groundwork
Jill Wong, partner at Reed Smith stablecoin
Jill Wong, partner at Reed Smith

The biggest stablecoin success will revolve around regulatory acceptance says Jill Wong, partner at Reed Smith, the international law firm.

“Although the regulatory regime is not yet in place in Hong Kong, some stablecoin issuers are already laying the groundwork. One innovation I see is the use of innovative technology to secure transfers of stablecoins and provide verification of the stablecoin’s reserve backing.

“For example, one aspiring issuer of a stablecoin to be backed 1:1 by the Hong Kong dollar, has announced a collaboration with a decentralised computing platform to enable secure and reliable cross-chain and cross-border transfers. All the while, it also provides reliable on-chain verification of the stablecoin’s reserve backing. In future, real-world assets tokenised in the stablecoin can also be reliably and securely transferred.”

Beyond fiat currencies

Matthew McAndrew, founder and managing director of Bubbly Consulting, the digital marketing agency notes how the stablecoins are exploring other values to be pegged to.

“Whilst traditional stablecoins such as Tether (USDT) and Circle (USDC) are pegged to the value of the US dollar, recent stablecoin innovations have expanded beyond fiat currencies. Novel non-fiat-backed stablecoins can be tethered to commodities, hedged derivatives, multiple cryptocurrencies (similar to a fund) and even real estate.

“Commodity-backed stablecoins are pegged to the value of the underlying commodity, such as gold, silver, platinum, diamonds or oil. Tokenised versions of commodities offer several advantages over traditional commodity-linked derivatives and indices, which often include indirect exposure beyond the value of the commodity itself, such as mining company stocks.

“Tokenised commodity pricing is pegged purely to the underlying commodity. Additionally, tokenised commodities enable users to own fractions of assets and can also provide holders with increased liquidity on a 24/7 trading basis, depending on the asset.

“Another recent stablecoin innovation is Ethena: a decentralised alternative to traditional stablecoins that is built on Ethereum. USDe is a synthetic dollar protocol that maintains stability by delta-hedging Ethereum and Bitcoin collateral.

“Ethena is referred to as the ‘Internet Bond’ for global savings, combining yield derived from staked assets (e.g, staked Ethereum), as well as the funding and basis spread from perpetual and futures markets, to create the first onchain crypto-native solution for money and provide holders with internet native yield. The current sUSDe APY is 15.9 per cent, and there are approximately 180,000 Ethena users, with a TVL of $2.3billion locked in the protocol.

“The ENA token was airdropped to early participants and is currently trading on several cryptocurrency exchanges, such as Binance and Bybit.”

No sector can escape AI
Peter Wood, CTO at Spectrum Search stablecoin
Peter Wood, CTO at Spectrum Search

Undoubtedly the most impactful technology that has emerged in recent times is artificial intelligence (AI). It seems no sector, nor subsector can escape it. Peter Wood, chief technical officer at Spectrum Search, the web3 recruitment firm, explains how AI has impacted stablecoins.

“This year has been significant for stablecoin innovation, particularly through the application of advanced AI technologies to improve stability mechanisms. We’re witnessing a surge in algorithmic stablecoins, which use real-time data and machine learning models to dynamically adjust supply, ensuring closer adherence to their pegs.

“This AI-driven approach not only enhances stability but also introduces a level of responsiveness previously unattainable, showcasing a leap forward in how digital currencies can mirror traditional financial stability with a modern twist.

Mainstream adoption

Nick Maynard, VP of fintech market research at Juniper Research, the market researchers, reflects on how innovations are impacting the adoption of stablecoins.

“We have seen a number of key innovations in stablecoins – a lot of new stablecoins have been launched and seen growth. For example, PayPal launched PayPal USD in August 2023, which is a major development in the space. We have also seen major adoption forming in B2B payments, and cross-border payments, which we believe will be major areas for stablecoin disruption going forwards. Ripple has also entered the stablecoin space, pledging to launch its own coin.

“The biggest development is really how mainstream stablecoins are becoming – Visa has recently launched its own analytics dashboard for stablecoin availability, with Stripe recently announcing that it will begin accepting the USDC stablecoin for transactions.”

Author

  • Francis is a journalist and our lead LatAm correspondent, with a BA in Classical Civilization, he has a specialist interest in North and South America.

Related posts

Risk Management in Islamic Finance Addressed in IsDBI’s Latest Book

Francis Bignell

UK Government Strengthens Ties with the Powerhouses of Asia

Manisha Patel

Digital Payments Drives Growth as UK Fintech Hits 86% Consumer Adoption Rate

Polly Jean Harrison