Are Stablecoins > Bitcoin + Visa + Dollar ?

Stablecoins have been the only use case which has found considerable traction among both Web2 users and Web3 users.

As of today prices, Bitcoin marketcap is sitting at $827 bn and stablecoins marketcap is $130 bn. As of last 2 years, stablecoins growth has outpaced Bitcoin and Ethereum in the past 2 years and is set to accelerate due to network effects and different scaling platforms coming making multi chain transfer easy. According to Bloomberg Intelligence crypto market analyst Jamie Coutts, stablecoins on several Layer-1 networks transacted $6.87 trillion in 2022, surpassing the transaction volumes of Mastercard and PayPal. However, the stablecoin volumes still lagged behind Visa which processed nearly double the volume at $11.6 trillion

To illustrate the potential growth of stablecoins, we conducted a hypothetical thought experiment using data from the Top 100 crypto-adopting countries. By estimating that 5% of post-tax incomes from these regions might flow into stablecoins, our projection reached a staggering $1 trillion in value. Notably, in countries like Argentina, surging inflation has driven a significant shift towards stablecoins tied to the dollar. This hints at a potential multi-trillion-dollar market for stablecoins, prompting governments worldwide to intensify regulatory efforts due to their growing significance.

However, I believe there's a more compelling narrative that will shape stablecoins and the entities behind them

But Is above the real story ?

What is velocity?

The real narrative that will propel stablecoins into an indomitable force within the global financial and cultural landscape is their velocity.

Velocity refers to the speed at which a currency circulates within an economy. In the case of stablecoins, their velocity is astonishingly high compared to traditional forms of currency. One stablecoin is turning over at a reported rate of 914x per year right now. Another is at 158x, and another is at 70x. By looking at publicly available blockchain data, it’s easy to confirm that the average velocity of U.S. dollar stablecoins is at 109x — again, this is verified data. These are eye‐​popping velocities relative to the velocity of traditional forms of U.S. dollars.

This high velocity is attributed to several key characteristics: Fast Settlement, Settlement Finality, Traceability, Public, Open-Source Protocol & Programmability

The combination of these characteristics gives stablecoins a high natural velocity, creating liquidity without the need for traditional forms of leverage. Historically, monetary policy relied on leverage to generate liquidity, but stablecoins achieve this through technology alone.

How high velocity leads to high Liquidity ?

Liquidity is the lifeblood of any economy, and it must flow seamlessly through the financial system. Higher velocity of stablecoins can serve as a tool in lieu of leverage to support monetary policy. By enhancing the velocity of stablecoins, you can potentially manage liquidity without the need for conventional leverage.

Monetary policy has traditionally relied on forms of leverage to create liquidity, such as traditional money multipliers or collateral re‐​use. But stablecoins don’t need leverage to create liquidity. The technology on its own generates the liquidity, without the need for leverage.

Let’s unpack this concept. Liquidity that greases the wheels of commerce must, by definition, flow through the financial system, and it can come from three places — from expanding central bank balance sheets; from expanding private financial institutions’ balance sheets; or from higher natural velocity of both official and private‐​sector institutions’ existing balance sheets. So, it’s not necessarily true that the financial sector’s aggregate balance sheet must keep expanding in order to provide the liquidity needed by the nonfinancial sector. Higher velocity of existing financial‐​sector balance sheets, delivered via technology in lieu of leverage, could be a tool in the monetary policy toolkit too.

In the next newsletter, we will discuss the possible challenges which will be brought by this high stablecoin velocity.

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Cheers,
Akshit Vig
Founder, Autonomint