How to become the most successful stablecoin? Should unicorn companies try to emulate Alipay’s success?
Alipay, a third-party mobile and online payment platform that has an accumulation of funds close to $2 trillion, is currently the most successful application that incorporates stablecoin into its business. In fact, the numbers we see in Alipay are similar to the value of a stablecoin, both of which are deposit certificates issued by private companies. Alipay has already loaded renminbi into its account, at an exchange ratio of 1:1.
In addition to Alipay, Wechat payment and Paypal are also popular payment systems that exemplify the strong mechanism of stablecoins. Yet, people rarely pay attention to the regulatory requirements behind these cryptocurrency platforms. We send red envelopes to our friends by using Wechat and scan our QR code to make a payment. Everything seems to be taken for granted and we rarely ask ourselves, “Is it 100 percent sure that sufficient reserve funds are in place to facilitate these payment?” Compared to understanding the truth behind these leading mobile payment solutions, we are more concerned about the convenience and accessibility of cryptocurrency exchanges.
The People’s Bank of China will not take full control over Alipay until January next year. Thus, before that date, the money we put into Alipay is not under the supervision of the central bank. Given this, it is hard to determine whether Alipay will perform better than stablecoins or not.
Alibaba Group and its founder Jack Ma founded Alipay, China’s leading third-party online payment solution, in February 2004. After 14 years of operation, Alipay has finally generated a broader move on the part of the government in China to take more control over digital payment companies. This is a classic example that pushes us to think, what is the business model for stablecoins and where lies their operation focus?
The example of Alipay shows us that a system’s large-scale application and the level of regulatory supervision it faces are likely to be a reverse process. Regulatory supervision does not entail the large-scale application of a particular system. On the contrary, when a system comes into maturity and is widely adopted, regulatory supervision naturally follows suit. Hence, rather than worrying about how to cope with the government regulation of business, a company should focus on diversifying the application scenarios of its system as a way of business management. This is at least true for stablecoin, which is pegged to fiat currencies or any other stable assets.
Recap: how did USDT become the most well-known and successful stablecoin in the industry?
Now, let’s take a look at the most successful stablecoin in the market. According to CoinMarkerCap, the total circulating supply of Tether (referred to as USDT) is the highest in the market, with a daily trading volume exceeding $3.1 billion. In comparison, TrueUSD has a daily trading volume around $14 million, while that for DAI is only $8 million. Even though Tether has been at the center of price manipulation allegations over the past few months, it is undeniable that the availability of a stablecoin in the form of USDT allows traders to reduce financial risks during times of market turmoil.
What makes USDT unbeatable? USDT, a type of digital currency built using the Omni Layer on top of the Bitcoin blockchain and Ethereum blockchain, became available when the cryptocurrency exchange Bitfinex enabled the trading of Tether on its platform. It is worth noticing that Bitfinex is the world’s leading digital asset trading platform. Using Bitfinex as its transport protocol, USDT gained popularity and its legitimacy was not to be speculated. Users purchase USDT via the Bitfinex platform for two major applications: 1. Use USDT to buy bitcoins; 2. Use USDT to transfer USD between countries without worrying about bank interferences. Given these two applications, USDT has attracted users both outside and inside the cryptocurrency industry. USDT has become a must-have for investing in the cryptocurrency industry, transferring assets, traveling, etc.
In contrast, stablecoins such as TrueUSD, DAI and Bitshare lack potential application scenarios. Hence, even if these cryptocurrencies have been upgraded by their parent companies to guarantee decentralization, they still perform poorer than USDT in terms of transaction volume.
Lesson learned from the story of USDT
Despite its widespread popularity, USDT is very flawed in terms of regulatory compliance. Tether tokens are issued by Tether Limited. Rumor has it that each Tether token issued is backed by one U.S. dollar. Yet, there has never been a convincing audit report to substantiate this claim. Moreover, some people have pointed out that Tether Limited and Bitfinex collude with each other to manipulate bitcoin prices. As the USDT controversy continues, people expressed their relief when the New York State Department of Financial Services (DFS) authorized Gemini Trust and Paxos Trust to each offer its own stablecoin pegged to the U.S. dollar.
Many critics in the cryptocurrency industry believe that the market has ushered into a new phase, thanks to these two stablecoins, Gemini Trust and Paxos Trust, that meet regulatory requirements and safeguard regulated entities.
Critics expect Gemini Trust and Paxos Trust to have widespread applications. These two new stablecoins might be integrated into other services and platforms to eventually replace USDT. Unbeknown to them, however, is the fact that the New York State Government is not a federal entity. While having control over commercial banks, it does not regulate central banks. This level of regulation is more likely to reduce the possibility of risks than eliminate all potential risks. Moreover, similar to TrueUSD and DAI, these two New York regulators-approved stablecoins might lack application scenarios. If that’s the case, they will become less competitive and face limited deployment in comparison to USDT.
What does the current stablecoin landscape look like? Since there is no revolutionary stablecoin to substitute USDT, it remains one of the most widely accepted stableocoin for many people.
BCH proves to us that technology alone does not determine the success of a stablecoin
The mobile payment platform, led by Alipay, is able to compete with traditional cash payment and bank transfer methods for market share. One may argue that the success of e-payment channels is inseparable from the advancement of payment technology. Yet, the example of Bitcoin Cash shows us that technology alone does not dictate the success of a stablecoin.
Although Bitcoin Cash is not a type of stablecoin, it can still be used for discussion given its large circulating supply. In comparison to bitcoin, Bitcoin Cash has a larger block size limit, allowing a greater number of transactions to be processed by the network at a faster speed. The reality is, however, that there are no such expansive trading demands. According to an analysis by Chainanalysis, payments made with Bitcoin Cash have fallen from $10.5 million in March to $3.7 million now. Thus, even if the technology behind Bitcoin Cash is fancier, it fails to reach the ideal user base as expected.
Trading volume and application scenarios are equally important
If Taobao didn’t initially use its shopping function to secure a large number of customers, and Alipay simply launched a mobile payment method out of thin air, would we still actively use Alipay like we are doing right now? For no plausible reasons, why should one hand over the cash in hand and turn it into a number displayed in an e-payment account? Given this, despite its convenience and accessibility, many people might still be reluctant to try Alipay.
Just to give you an example. Baidu Wallet, which is Baidu’s payment platform, was established in 2014. Sadly, many people may not have used it before. Why did it fail to compete with other e-payment systems? This is because even though Baidu has a large user base, its payment platform lacks application scenarios. Since Baidu fails to give equal weight to trading volume and application scenarios, its payment tool has been neglected for more than four years.
Taobao, on the other hand, has developed unique applications to offer a diverse range of services and functions. As one of China’s premier consumer-to-consumer marketplaces, Taobao allows small businesses, entrepreneurs and customers to buy and sell an almost endless variety of goods in China. Unsurprisingly, Taobao’s number of active users has increased steadily over the past few years. Its payment platform, Alipay, has become China’s dominant e-payment service provider.
Can stablecoin replicate the operation strategies of Alipay?
As the stablecoin frenzy continues, one project has in particular raised our interests. Known as Terra, this stablecoin project is headed by Daniel Shin, founder and president of TicketMonster—one of the leading e-commerce companies in Korea. Designed for decentralized applications to ensure price-stability via an algorithm, Terra has an e-commerce background similar to that of Alipay. With a one million user base and multiple application scenarios, Terra aims to become the “Alipay” of the cryptocurrency industry.
It is also worth mentioning that four cryptocurrency exchanges have already invested in Terra. Bian Labs, Huobi, OKEX and Dunamu (the company behind South Korea’s cryptocurrency exchange platform Upbit) have announced their partnership with Terra, while investing a total amount of $32 million. We have reached out to the founder of Terra, Daniel Shin, in order to understand the strategies behind his immensely successful stablecoin.
Decentralization and dual coin structure to stabilize cryptocurrency prices
Unlike USDT, which enjoys the advantages of a dollar-pegged cryptocurrency, the Terra project has built a cryptocurrency with an algorithmic central bank. In fact, the Terra protocol uses a decentralized fiscal spending and legislative process. Rather than being backed by fiat, Terra adopts its own cryptocurrency token “Luna” as the reserve once transactions increase. By using Terra as the stablecoin and Luna as a dividend bearing collateral coin, the project is able to stabilize Terra’s price.
Terra’s main function is to act as a payment tool in the transaction, whereas Luna is the reserve behind Terra to yield income from transaction fees collected from the network. The total amount of Luna issued is one billion, and investors in the seed round of financing are eligible to purchase 400 million of them. Users are encouraged to deposit Luna to levy variable transaction fees from Terra transactions depending on the workload. For instance, if Luna’s holder pledges Luna to ensure the price stability of Terra, it can be considered as a form of countable workload.
As shown by the Terra protocol, when the exchange rate of Terra goes down, the system buys up Terra from the secondary market and burns it. On the other hand, when the exchange rate of Terra goes up, the system will issue a new Terra. After taking votes and proposals from Luna stakeholders, the system will put the newly minted Luna into circulation and engage it in a decentralized fiscal spending process.
A similar case is MakerDao’s dual-token concept involving two stablecoins, namely, DAI and MKR. DAI is a stablecoin backed by Ethereum, and its value is stable relative to the U.S. dollar. After the algorithm automatically adjusts the exchange rate, DAI is generated by users through a smart contract platform known as Maker. This platform will automatically adapt to market dynamics. Fees accrued by generating DAI can only be paid in Maker. As the currency remains pegged to the U.S dollar, it provides traders with stability regardless of the state of the market.
Terra has partnered with the ever-growing alliance of global e-commerce platforms
Terra’s founder, Daniel Shin, also revealed that Ticket Monster has a three million users base as South Korea’s second largest e-commerce platform. It is also in strategic partnerships with more than 15 e-commerce companies, including the food-tech firm Woowa Brothers, the online shopping company Qoo10, the web-based consumer-to-consumer marketplace Carousell, the Bangkok-based fashion e-commerce site Pomelo, Vietnam’s fastest and most trusted e-commerce platform TIKI, etc. These partnerships will allow Terra to expand its user base to almost 45 million, and these global platforms will form a single e-commerce alliance. Its ideal annual trading volume is expected to be about $25 billion dollars.
Shin intends to build an ecosystem in conjunction with his e-commerce partners in these Asian countries, and the stablecoin Terra will be a price-stable payment tool in this ecosystem. By bringing together a variety of other applications, the project aims to foster Terra’s ability to command services. Terra as a stablecoin will also have applications in other financial businesses such as insurance, credit, etc. The final expectation of the project is to make the Terra platform as as successful as Ant Financial, which is the highest valued fin-tech company and the most valuable unicorn company in the world.
Government regulation is “not a concern?”
Terra has resolved the issue of cryptocurrency instability and the lack of application scenarios. In terms of regulation, Shin believes that it will not be a hindrance to Terra’s development, given the fact that Terra is not a digital version of any legal currency. It is rather a protocol of money that ensures price-stability by algorithmically expanding and contracting supply. Because Terra seeks to increase cryptocurrency usability while retaining the benefits of a decentralized currency, it is unlikely that the government of any country would want to regulate Terra, according to Shin.
Terra is an ambitious crypto project to build a stablecoin through e-commerce
According to Terra’s recently updated roadmap, it does not have a clear ICO plan at this moment. Terra plans to release the minimal viable product (MVP) in November 2018 and officially launch Terra on Ticket Monster’s e-commerce platform in December 2018. Shin expects to issue Terra and Luna on trading platforms by the end of 2018. According to Shin, 90 percent of the $320 million U.S. dollars, which was raised at the end of August, will be kept as reserves to smooth out the price volatility caused by insufficient trading volume and lack of diversity when the stablecoin Terra was initially launched.
Launched with a formidable alliance of e-commerce platforms, Terra is on its way to build the next generation of digital money, based on blockchain and cryptocurrency technology. The key to future development lies in its ability to convert original users of e-commerce platforms into users of the newly minted stablecoin, Terra. According to Shin, the use of Terra will be very easy. Even if one does not have a cryptocurrency wallet and an exchange account, he or she can still be a Terra user. As such, the application scenario of cryptocurrency will no longer be limited to trading exchanges, and the beneficiary of cryptocurrency will not longer be exclusively investors. If Terra can achieve this, it will bring incremental growth to the cryptocurrency industry. In addition, Terra’s token mechanism is designed to provide users with incentives. Additional Terra tokens will be issued to circulate in the market as shopping coupons, further encouraging people to use Terra.
In terms of regulation, Shin’s idea of bypassing government regulation may be overly idealistic. When the Terra project grows into maturity and has large-scale applications, with potential trading volumes of billions of dollars, it is unlikely that regulatory supervisors will perform no effective oversight of Terra’s financial activities. In a world dominated by central governments, regulation prevails in many lines of business. As the government becomes increasingly knowledgeable about the operation of cryptocurrency exchanges, a regulatory agency is likely to watch over the trading of virtual currencies as well as individuals and businesses that provide related services. Rather than adopting an evasive attitude, the founder of any cryptocurrency project should be prepared to cooperate with regulators.