3 reasons why Stablecoins are going to explode!

PLUS: 4 ways to capitalize on this boom

June 15, 2024

GM! Welcome to Milk Road PRO – your weekly crypto dose that’s more stable than your morning coffee. 

Today, we are going to talk about the biggest crypto use case: Stablecoins. 

They are digital representations of fiat currencies (like the USD) on the blockchain. And people love them.

In fact, stablecoins are responsible for most of the blockchain activity measured in USD, as we can see below.

[

Source: Ryan Watkins (X)

Today, they represent 55% of all blockchain activity and handle more than $3 trillion in monthly volume. In comparison, Visa handles about $1.2 trillion monthly.

Moreover, stablecoins are immune to bear markets (2022 & 2023). 

Looking at the charts below, you realize there was no bear market for stablecoins – unique active addresses and transactions are up considerably since 2020. 

[

Source: Ryan Watkins (X)

This looks rather positive as the trend is continually growing. Even through the bear market, there were about 6 million active addresses sending about 10 million stablecoin transactions daily. 

Outside of speculation, there is no other use case onchain more established than stablecoins. We believe that stablecoins will onboard more people onchain in the next 5-10 years than any other use case.

But as an investor, you might be wondering: “stablecoins are great and all, but how can I capitalize on this trend? Stablecoins are meant to be just that… stable at $1!” 🤔

Well, in today’s report, we’re going to help you understand the magnitude of this opportunity and how you can capitalize on it.

Hint: There are plenty of investments that allow you to capture the upside of stablecoins.

So in this report, we will cover the following key sections:

1. Stablecoins vs fiat: why are stablecoins the future of money.

2. The current landscape of the stablecoin market.

3. The massive market opportunity for stablecoins.

4. Why the stablecoin market is set for explosive growth.

5. 4 ways to capitalize on the booming stablecoin market.

With these sections, we aim to provide a comprehensive overview of the stablecoin landscape and their future prospects.

But let's start with a quick introduction.

WHAT ARE STABLECOINS? 🤷

As we mentioned earlier, stablecoins are digital representations of FIAT currencies. Think of them as dollars that are not sitting in your bank account but instead on the blockchain. 

There are about 160 billion stablecoins today, which is 0.8% of all USD in circulation.

Stablecoins can actually be denominated in any currency—USD, EUR, JPY, CNY, and more. However, 98% of all stablecoins are denominated in US dollars today.

This is likely because the US dollar is still the most used currency in the world and is considered the world's reserve currency.

Now, let's take a closer look at the stablecoin market and quickly explain the different types of stablecoins that exist today.

[

Source: DefiLlama

1. Fiat-backed: This type of stablecoin means that each dollar on the blockchain is backed by one dollar in the bank. The two biggest stablecoins, USDT by Tether and USDC by Circle, are both fiat-backed and have about 90% market share.

2. Crypto-backed: Each dollar on the blockchain is backed by the value of one dollar of any accepted collateral, such as $BTC or $ETH. The biggest representatives of this category are DAI by Maker and USDe by Ethena.

3. Algorithmic: These stablecoins use algorithms and smart contracts to maintain their value at one dollar. They are the least preferred option among investors due to multiple hacks and exploits of algorithmic stablecoins in the past (i.e. Terra Luna 😣).

The majority of the stablecoin market consists of two types of stablecoins: fiat-backed and crypto-backed. 

Therefore, when we talk about stablecoins and their future potential, we are primarily referring to these types.

Now that we‘ve covered the basics of stablecoins, let’s talk about why people actually care to use a dollar onchain rather than in a bank.

WHY STABLECOINS > DOLLARS?? ⚖️

There are three main demand drivers for stablecoins:

1/ An easy access alternative

Many people around the world do not have access to US dollars or other major currencies. The reason this is a problem is that for hundreds of millions of people around the world their local currency is inflating at 10%+/year, and in some cases, 100%+! This is eating away at their savings.

Instead, stablecoins give anyone in the world with an internet connection access to US dollars.

2/ Faster, cheaper, and more secure solutions.

Sending traditional fiat currency is often slow and expensive. Here are a few examples to illustrate this:

1. Slow Transfers: Wiring fiat currencies from one country to another can take several days to weeks.

2. High Remittance Fees: Companies like Western Union charge up to 30% of the transferred amount for sending money internationally. That’s an outright scam! 

3. Internet Purchase Fees: Almost every online purchase incurs a fee of over 3% due to payment processors like Stripe, PayPal, and others.

The current digital fiat system has many flaws. As Jeff Bezos says, "Their margin is my opportunity." 

Stablecoins offer a solution by making transactions instant and almost free, anywhere in the world

3/ Yield opportunities. 

People are always looking for the best yield opportunities, and blockchain offers higher yields than traditional finance, which might attract more users.

We are reaching an inflection point where stablecoins are starting to really take off and become a part of our daily lives.

But before we talk about its potential growth, let's examine some historical data first. 

WHERE IS STABLECOIN ADOPTION AT CURRENTLY?

This chart shows the total amount of stablecoins in circulation, currently sitting at $160 billion.

[

Source: TheBlock

Obviously, the Terra Luna collapse in 2022 caused some supply reduction, but now we are back on a growth trajectory. 

Next, let's look at the weekly volumes of 4 selected stablecoins. This helps us see how much value is being processed using stablecoins on a weekly basis.

[

Source: Visa

Since the beginning of 2024, the weekly volume has been on a strong uptrend. We can see weeks with $600 billion to $800 billion in weekly volumes. 

For context, Visa processes about $300 billion in weekly volume. 

The trend is further confirmed by the increased number of stablecoin transactions.

[

Source: Visa

Again, we see that since October 2023, the number of transactions has doubled to around 350 million transactions per month. 

Great, let's now look at the users. 

[

Source: Visa

There are about 28 million users (addresses) interacting with stablecoins on the blockchain monthly. In comparison, Visa has about 1.095 billion accounts. 

Using Visa as the benchmark, there are about 40 times more users who could potentially start using stablecoins.

This brings us to our next section.

HOW BIG CAN STABLECOINS GET?

Pretty big. 😅 

Let's start by looking at the inflation rates across the world.

[

Source: IMF

Put simply, all non-green countries have inflation above 3% per year.

People in these countries often have no access to US dollars or other more stable world currencies. 

Therefore, they have strong incentives to use stablecoins to protect their wealth, which would otherwise be depreciated by their local inflation.

We are talking about billions of people! Africa for example has a population of 1.3 billion and an average inflation rate of 17%. 🤯

Another factor driving the adoption of stablecoins is the infrastructure behind traditional financial systems. 

Even though this chart is somewhat outdated, it clearly shows the market opportunities that stablecoins could disrupt and replace.

The chart below shows the volume of stablecoins compared to other financial systems in use today.

[

Source: Visa

These systems are crucial to global finance, but stablecoins are becoming a major player. 

Stablecoins offer faster, cheaper, and more secure solutions onchain, threatening traditional players like Visa, PayPal, and Stripe, who are now looking to adopt blockchain technology. 

It's about creating equitable opportunities and offering better infrastructure, as well as attractive yield opportunities.

Do you remember the map with inflation rates we looked at earlier?

Even people in countries with low inflation (around 3%) are not happy and need to find ways to get some yield to maintain their purchasing power. 

They want to be able to buy the same amount of goods a year from now as they can today.

Let's compare the saving rates with inflation in the US.

 Source: Fed

As we can see from the chart, inflation is often higher than saving rates. This means that people are losing their buying power over time.

So, how can we hedge against inflation? It's quite simple. We need a higher yield than the inflation rate. 

Some people use Bitcoin to fight against inflation but Bitcoin has pullbacks of more than 50-80% in some years. 

So it is still a very volatile hedge, which many can’t use for their day to day savings.

That's the reason stablecoins exist. Because people want “stable” value. Then you only need to tap into some DeFi opportunities to generate higher yield than inflation and you are all set. 

Let's see some stablecoins and their respective yields. We selected 3 stablecoins ($sFRAX, $sUSDe, $sDAI) to see their underlying yields (APY).  

[

Source: Dune

A 27% yield for sUSDe or 8% for sDAI are quite attractive, aren't they?

And the best part? You only need to hold them, and they will automatically accrue value. No additional action is required. 

In the past, users often had to deposit or stake the stablecoins somewhere to earn the yield. But not anymore. Dollars on the blockchain are programmable and can do things that dollars in your pocket simply can’t.

Let's highlight some data to grasp the real potential here:

• Around 1.7 billion adults do not have a bank account plus many more have no access to US dollars, which they desperately need. 

• Visa enabled 276 billion transactions worth $15 trillion in total volume in 2023.

• Paypal processed 25 billion transactions and $1.5 trillion in total volume in 2023.

• Global remittances reached over $669 billion in 2023 at an average fee of 6.2%.

• Total US personal savings amounted to $802.1 billion, with a savings rate of 4.4% in 2023.

Stablecoins have potential to disrupt all of that and replace the current systems because it provides 10x better solutions.

We mentioned earlier that we have about 28 million stablecoin users and $160 billion in market cap. There is a clear path for stablecoins to reach BILLIONS of users and TRILLIONS in market cap. This right here is the massive opportunity at hand.

Obviously, we have to mention that these stablecoins include some smart contract risks. However, we see very low risks for all the mentioned stablecoins.

So then another question comes to mind… If it’s so obvious that this is the superior option, why isn’t the market cap of stablecoins in the trillions already? 

WHAT'S HOLDING BACK STABLECOINS? 🤔

This is a great question. Although the whole industry has made significant progress since the first stablecoins were launched back in 2018, there are still some challenges to overcome.

Scalability, security, regulation and usability have all been big pain points for stablecoins.  

However, many of the previous blockers have since been resolved:

1. There are blockchains today which provide fast and cheap transactions while providing high security guarantees (this didn’t exist in years prior).

2. There is much more liquidity in stablecoins onchain as well as on the centralized exchanges. Users don't need to worry about the size of their trades or about the price stability.

3. There are many more projects that offer attractive yield opportunities.

4. People have more on-ramp and off-ramp options. Meaning it is easier and cheaper for people to convert fiat into stablecoins or vice versa.

5. Clearer regulations and legal guidelines for stablecoins are being established. This likely has been a big blocker discouraging some people or businesses from using stablecoins. 

Stablecoins have reached a point where everything is starting to play in their favor. We believe this could be an important turning point, and stablecoins are poised for significant growth from here on. 

Before we get into how you can capitalize on this growth, let’s provide a quick recap so we can all get on the same page.

QUICK & MILKY SUMMARY 🥛

Putting everything together…

The supply side has seen many unlocks in the past few years, enabling stablecoins to scale effectively (see section above).

We also mentioned total addressable market and presented some market opportunities for stablecoins:

1. About 1.7 billion adults lack bank accounts, and many others can't access US dollars.

2. PayPal, MasterCard, Visa, and others process hundreds of billions of transactions annually, with a total volume exceeding $30 trillion.

3. Global remittances are at $700 billion a year, with an average fee of 6.2%.

4. US personal savings amount to $802.1 billion, with a savings rate of 4.4% a year.

But if we combine the number of potential users (5 billion worldwide) with the total volume of all digital transactions today which are in trillions, we get…. Veeeery big numbers.  

That's the opportunity stablecoins are going after. 😋 

Given these compelling reasons for both supply and demand to accelerate, we cannot be anything but bullish on stablecoins.

4 WAYS TO CAPITALIZE ON THIS OPPORTUNITY 🫰 

There are multiple ways to take advantage of this opportunity. It depends on your preferences, but it can be divided into these 4 categories:

1. Stablecoin user - Simply holding stablecoins and getting access to 10%+ yield.

2. Stablecoin issuer investor - Investing in projects who issue stablecoins and could benefit from this upcoming trend. 

3. Blockchain investor - Investing in blockchains, where these stablecoins will be traded and transferred and therefore the blockchain activity as well as blockchain fees will increase dramatically.

4. Stock investor - Investing in stocks, which benefit from the stablecoin’s boom. 

These categories are not exclusive, so many people will be in multiple categories. We know we are. 😝

So let's explain each category a bit more: 

1/ Stablecoin user: Hold sDAI or sUSDe to earn 8% or 35% APY.

If your goal is to hold some stable assets like stablecoins and ideally generate some additional yield on top of it, then this is the option for you.

Ok. But how to find the best stablecoin? We would be looking for stablecoins which:

• are safe (credible projects, time since launch, TVL) 

• crypto-backed stablecoin 

• have enough liquidity (users can buy or sell always at the fair price)

• provide some interesting yield opportunities (robust strategy that generates juicy yield)

• automatically accrue yield (users can only hold and don't need to do anything else) 

Based on these criteria, these are our 2 top picks. 

P.S.: We won't go deeper about these stablecoins or the projects behind them as we have reports for both of them: Maker, Ethena

But back to our favorite stablecoins:

$sDAI: It is a stablecoin from Maker, which provides an 8% yield. Be aware that you need to hold sDAI and not just $DAI in order to get that yield automatically. 

You can check the current yield here (DSR Rate).

$sUSDe: It is a stablecoin from Ethena. It currently offers 35.7%. Again you have to hold $sUSDe and not just $USDe. You can check the updated yield here on the top right corner.

And because we think these are the 2 best stablecoins out there, there is an opportunity to invest in the projects that are behind these stablecoins. It brings us to the second category: 

2/ Stablecoin issuer investor: Buy $MKR or $ENA.  

If stablecoins are really about to explode, the projects who issue them will benefit from it the most. Stablecoins are basically their products. The more products they sell, the more money they make. 

Let's use our 2 selected stablecoins and look at their respective tokens. 

$MKR: Maker, the issuer of $DAI, generates $300 million in revenue per year. And we can see from the chart below that the demand for $DAI is increasing. 

[

Source: Makerburn

$DAI has experienced positive growth in the past 3 months, increasing the $DAI supply by 0.8 billion. 

Currently, the total circulation of $DAI stands at 5.26 billion. And the trend is quite clear. This is the reason why we hold $MKR in our Milk Road PRO Portfolio. 

We think that $MKR is one of the most undervalued tokens in crypto.  

The second token representing stablecoin issuer is $ENA. 

$ENA: Ethena issues USDe, which is the fastest growing asset on the blockchain in history. They also generate about $350 millions in revenue per year and provide unparalleled yield in crypto –35% currently. 

USDe has also seen remarkable growth over the past 3 months, adding 2.3 billion USDe to its circulation. 

[

Source: Ethena

This brings the total USDe in circulation to approximately 3.1 billion. We expect this trend to continue. That's why we also hold $ENA in our Milk Road PRO Portfolio.

Great, let's move to the third category on how to capitalize on this opportunity. This is less of a direct investment into this trend and you can use multiple tokens to speculate on this. 

3/ Blockchain investor - Hold $ETH, $TRON, $SOL as these represent the underlying blockchains where stablecoins exist and trade.

We can see on the chart below that stablecoins are pretty much on all blockchains. Why does it matter? 

The more stablecoins -> more liquidity -> more volume -> more users -> more opportunities etc… It starts the flywheel which is positive for every blockchain.    

[

Source: DefiLlama

We can see blockchains measured by stablecoins market share:

• Ethereum ($ETH) - the biggest and most successful smart contract blockchain so far with 50% stablecoin market share.

• Tron ($TRON) - the home blockchain for the biggest stablecoin in circulation – $USDT. 56 billion USDT exist on this blockchain. 

• Solana ($SOL) - the most performant blockchain which attracts giants like Visa, Paypal and others.

However in terms of blockchains, stablecoins are only 1 piece of a puzzle. Blockchains need other things to work out in order to succeed. 

So even if we see much more stablecoins on some particular blockchain, it doesn't necessarily mean that the price of that blockchain will go up. So be aware of that! 

4/ Stock investor: Hold $COIN as indirect exposure to the growth of USDC.  

Coinbase has a stake in Circle, which is the issuer of $USDC, the second biggest stablecoin today with 31 billion $USDC in circulation. 

Circle is going to IPO this summer, meaning that its shares will be publicly traded on stock exchanges.

Of all stablecoins on Coinbase's L2, Base, 95% are in $USDC, which clearly demonstrates the benefits of this partnership. 

As we can see below, the number of $USDC holders has been growing continuously since the launch of Base.

[

Source: TokenTerminal

Base launched in September 2023 and the number of USDC holders on Base only grew since then, reaching 626k. 

The combination of a centralized exchange with a large user base, its own Layer 2 solution, and the second biggest stablecoin is a very strong proposition.

If $USDC continues to grow, Coinbase will benefit from that growth as well.

So let's wrap it up. 

We hope this report provides more clarity and reasons why we believe stablecoins represent a significant market opportunity that is ready for explosive growth. We also acknowledge that we don't comment on MiCA, the European legislation for stablecoins, which will become effective this summer.

We are excited to be a part of it and we will monitor this market closely. 

Good luck out there and don’t F this up. 🥛

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