On The Brink with Castle Island - Larry Cermak and Mike Rogers (The Block) on the Stablecoin Market (EP.205)

Episode Date: April 12, 2021

The Block's Director of Research Larry Cermak and Research Analyst Mike Rogers join the show to talk through their latest report on stablecoins. In this episode:  Why the Block chose to focus on stablecoins for this report Larry and Mike's opinion on why stablecoins are so disproportionately dollar-based China's influence in the Tether market The history of Tether and why it attained so much traction initially How you can determine the location of stablecoin users The Tetherification for offshore exchanges – and how it displaced Bitcoin as the reserve asset The influence of USDC in DeFi and whether it represents a systemic risk to the sector Dai's transition to non-native collateral types Mike and Larry's view of algorithmic stablecoins Why stablecoins are so divisive between economists and crypto entrepreneurs Why Tether's dominance is declining Where the NYAG settlement leaves Tether now What Larry makes of USDT on TRON stealing some market share from Ethereum Why investors are settling deals in stablecoin terms The prospects for Libra/Diem Mike and Larry's expectations for the next decade in stablecoins Related content:  The Block's report on Stablecoins  The OTB Crypto-dollarization series Sponsor notes: Copper is transforming how institutional investors engage with digital assets by developing award-winning custody and next-gen trading infrastructure. Headquartered in London, the firm is scaling rapidly across Asia and North America to bring its suite of products to a wider pool of institutional investors. To learn more visit copper.co or reach out on Twitter, @CopperHQ Aave is a decentralized, open source, and non-custodial protocol where users can deposits and borrow digital assets, and earn interest on those assets. Head over to aave.com to experience and learn more about DeFi.

Hello and welcome back to On the Brink. Today's episode is brought to you by Copper and AVE. Let's start with Copper. It's the global provider of blockchain infrastructure solutions for institutional investors who are actively trading digital assets. Its award-winning custody application is connected to 25 of the largest exchanges in the world, ensuring safe storage and movement of assets for the biggest crypto hedge funds, market makers, family offices, and high-net worth individuals.

their clear loop system is the first off-exchange settlement network for digital assets. It's the safest way to trade balances in custody across multiple exchanges without requiring on-chain settlement, on-chain movement of assets. To learn more, visit copper.co or reach out on Twitter at CopperHQ. This show is also brought to you by AVEA, AVEE. AVE is an open source and non-custodial liquidity protocol where users can earn interest. on deposits and borrow digital assets. It's a decentralized community governed protocol.

Learn more and more about AVE at AVE.com. Today you sit down with Mike Rogers, research analyst at the block, as well as Larry Sermak, director of research at the block. They've produced a pretty amazing report called Stablecoins, bridging the network gap between traditional money and digital value. We've talked about Stablecoins a lot on this show. We had our crypto-dollarization miniseries. We've had the coin metrics folks talk about their report on stable coins.

Castle Island produced a report on stable coins while back. We call it crypto dollars. It's an important topic and I generally feel that it's undercovered. There's a lot going on there and the growth has been absolutely explosive and doesn't really show any signs of stopping. So this report from the block lays out the history and the taxonomy of stable coins and also gives an up-to-date data-driven view of of the entire stable coin market. So it's really, really well done. In the episode, we talk about a number of topics

on the stable coin front. Why Tether attained so much traction and whether its market share is waning. The influence of US DC and DFI, Dye's transition to non-native collateral, Mike and Larry's view on algorithmic stable coins, the prospects for DM. why Tether is being used on Tron these days. Just a huge battery of concepts, and it's a great download of their expertise on the topic.

Let's jump right into the episode. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars and all of a sudden people start to worry.

So out of this worry, we have something called the Bitcoin. Today we have Larry Sermak and Mike Rogers from the block. They've written a great report on stable coins, which I'll link in the show notes. And we're going to talk through it. Thanks for coming on the show today, guys. Thanks for having us, Nick. Yeah, really appreciate it. Yeah, really interesting stuff.

I read the whole report, really fantastic, breakdown from a historical lens, taxonomy, conceptual, and then quantitative as well. So strongly recommended. I guess we'll start with either one of you, why stable coins, why devote so much effort to a stable coin report? Yeah, absolutely. So I think, well, first of all, we work with clients. So that's something that they were interested in. So that was one of the main things, but obviously, I think both me and Mike and everyone at the block is really excited in the growth of stable coins. And it's one of the great kind of approximations of how much money is coming into the system.

There's some great associated data with it. And we also knew that, you know, I think the guys over at coin metric did a pretty good report, but there wasn't anything quite as comprehensive. And that was mostly quantitative. So you wanted to combine these two sections and just write something that, you know, if someone who, is not necessarily in crypto, just wants to read one paper. They would just read this one. And so that was our main objective. And overall, I've been really, really interested in stable coins ever since, like,

I started three or four years ago, mainly because they make everything much better. And there's a lot of problems with how people perceive them. There's a lot of problems with information. It just seems like there was a really good spot on the market where we could just come in with a comprehensive report and kind of cover most of that demand. Yeah, well, first and foremost, I just wanted to say thank you to GMO Trust, not to plug the sponsor or anything on the podcast, but really they're the ones that allow us, our sponsors for the research, are the ones that allow us to take the time that we really

need to do the in-depth analysis and research that we have and then put out a great product like this. So realistically, I think that stable coins are the bridge, one of the main bridges from the traditional financial system to the digital assets ecosystem. And that's why we call it bridging the network gap. Realistically, it provides so much value. And you saw just overall the supply itself, 8x year over year to over 50 billion in February 2021.

So realistically, that's one of the fastest growing parts of the digital assets ecosystem. And there are so many use cases that you have that realistically, there are, they're a linchpin and they really power a lot of the defy applications as well. Not to mention, it's a way to get those that are from the traditional financial services and policymakers comfortable with digital assets because it's simple. I mean, when you look at the breakdown from what we had in the report, you had about 98% I believe was pegged to the U.S. dollar and you had 94% which was collateralized by fiat. So the majority of what we were discussing when we say stable coins is just purely

digital representation of fiat money. It's fascinating to see how dollarized the stable coin world is, and it doesn't actually reflect like the dollar's prevalence in FX reserves at the international level. It's actually far more. Do you guys have a hypothesis on why the dollar is the de facto currency for stable coins? Yeah, so we actually spent a little bit of the report talking about this, and we obviously, we talked to pretty much all the stablecon issuers. Everyone who's involved in stablecones in some way and asked them this question.

And I think the general consensus, really the main one, is that the crypto space is just like all the traders are just kind of denominating everything in US dollars. So that's really the main thing. And what we found throughout the report is that the vast majority of stablecon users is still connected to traders and arbitrager is just kind of sending money in between. exchanges, likely also some growth in D-5. But really, you know, since early days when a lot of everything was denominated in Bitcoin, US dollar just played a really big role ever since then. Like the vast majority of all the pairs on exchanges is denominated in US dollars. The Euro pairs usually don't have that much volume unless the country actually kind of mandates you to have that currency.

So I think it's mostly just associated with debt. But then there's also a second aspect that almost all stable-con issues mentioned, and that that it's just much harder to make it work as a Euro stable coin on the business side. So obviously all these stable coins are making money from collecting the yields, collecting their interest on a lot of these deposits. And for Euro, it's just traditionally much, much, much, much lower. So, you know, they can do it, but it's just less lucrative. And because most of the traders and most of the demand right now is on the US dollar side,

that's why they're doing it. But my hypothesis is that in the future, as the use cases grow outside of trading, and I think this is happening already this year sort of and will only keep happening more, this is going to change drastically. Because even if they make little money, it's still going to be enough money for it to justify the usage. It's just that the demand right now kind of doesn't reflect that. And we've seen it with like tether launching the Chinese yen stable coin, the euro stable coin, and none of them really got any traction while the tether one keeps growing significantly.

So I think that's the main reason. But maybe Mike has something else to add as well. Well, I think Larry was just that that was a great analysis. as well as I think right there at the end, there's no ignoring the elephant in the room, which is tether. And realistically, I mean, even still with the growth that we've had in, say, USDC and some other stable coins over the past several years, Tether is still the vast majority of the stable coin supply. And you have to look at the regional breakdown of Tether and what it's basically used for in a lot of cases. So from Asia, there's a lot of demand for U.S. dollars.

So maybe that would be kind of like one of the major reasons in my mind. It's kind of maybe used as a conduit essentially. People are looking for that global reserve currency and ways to transport money. That's that's kind of the way that I do it and why it's been such a big use case so far for U.S. dollars. Yeah, I remember seeing some genealysis research where they claim that Tether was responsible for, I think something preposterous, like $50 billion worth of offshoring. from China in terms of offshoring wealth, with Tether being the conduit there, that was when Tether's market cap was much less, which was sort of implying that it was turning over really quickly. I mean, that all seems very opaque to me. Do you guys have a sense of its, you know,

influence in China and how much, you know, Tether's gain, you know, has gained from that sort of use case? So first of all, I think like from from a historical kind of perspective, it's important to realize how Tether even got so much traction initially. And it was mainly because a lot of these Chinese exchanges like OkX, Roby and some other ones, even Binance, they got cut off from the traditional banking system in China when a lot of the exchanges were banned. And so what that did is that they really back then didn't have any other option.

I mean, it was basically only Tether. So the only way they could survive is, you know, we're cut off from the banking system. Let's just plug in Tether and let's just transfer everything there. And so what happened then is that obviously a lot of the capital came from a lot of Chinese citizens back then. And they had a ton of Bitcoin and then Bitcoin started crashing early 2018. And so basically one of the only ways back then was just to transfer some debt into USDT because back then the OTC market wasn't as developed as it is now. By OTC, I just mean the OTC P2P market in China. And so I think that was the main reason.

So back then just a ton of capital flew in into the United States. tether. And ever since then, it just kind of retained that that proposition. And now you see, you know, you look at pretty much the P2P market in China, which is the main on rank for everyone. You know, Binance has one, Hobie has one, Oakes has one. And it operates largely, largely in Tether as well. It's incredibly liquid when it comes to just getting access to U.S. dollars. It's honestly, probably one of the easiest ways for Chinese citizens to get access to dollars. So I think that those two are the biggest reasons. Yeah. And you guys mentioned this in the report. There's this timing analysis you can do with transactions where you, you know, you kind of isolate a specific time zone where, you know, transactions happen on chain. And then it tells you about, you know, you can identify a latitude. Is it latitude or longitude? Longitude, sorry, based on, you know, business hours corresponding to transactional intensity.

And that analysis, I think chain analysis does a lot of that, but that pegs it in China, right? I mean, that's where a lot of the usage is. Absolutely. Yeah. Yeah, you look at the contrast between the Tether and USDC, and you see an incredibly clear trend where a lot of the Tether usage is coming from Asia. And I don't think it's only China. Right.

It's also South Korea. It's Japan. And the vast majority of usage of U.S.D.C. is coming from the U.S. And I think it sort of makes sense since, you know, USDC is the more regulated stable coin in a sense. And it also has the easiest on ramps for Americans. So in that sense, it makes a ton of sense. And also, it's also more used to defy, whereas tether is mostly for trading these days and especially for derivatives. Yeah.

So, so interesting to see. You guys point this out, the tetherification of the exchange market. So I think the transition really happened in 2019, I would say. Feel free to butt in and disagree with me there. But basically, Tether became the unit of account and almost the medium of exchange and the primary collateral type on exchanges, especially derivatives exchanges. Is that a fair characterization? Yeah, absolutely. you know initially like late 2016 early 2017 it was it was very based everything was

denominated in bitcoin the vast majority of pairs were in bitcoin now that's turning largely into us d t and a big role of that was obviously binance and both for spot but also derivatives like binance wasn't as prominent before you know you had polo you had betracks and a lot of these pairs were in bitcoin and then as binance started gaining prominence early on the vast majority of their parents and, you know, the ones that got a lot of liquidity were in Tether. And when it comes to derivatives, I mean, we're seeing a very clear trend. And I think part of it is obviously bit MEC's kind of dying slowly. But now, you know, Binance futures are one of the most popular contracts.

And they're pretty much all collateralized by Tether as well. So this trend is like incredibly clear. And I think it's also getting popular in like almost all other aspects. you also look at lending. If you look at the denomination of the Genesis loans, it used to be way more Bitcoin oriented as well, and now it's pretty much, you know, tether and stable coins as well. So I think this is happening for everything, but it is really an interesting trend to watch, honestly.

Yeah, and you have to just think about the maturity. I mean, think about 2017 back when there were only, say, three or four cryptos on Coinbase and then you wanted to buy another, say, altcoin. you had to go over to say Bitrix or Binance, you'd have to copy and paste your alpha numeric key and send it over and Bitcoin would be the unit that you were sending. And then if you were in other alt coins and say prices got volatile, the only thing that you really could go into at that point if you wanted some sort of stability was tether. So that's kind of where a lot of the trading use case came in the play.

But now you have so many different things where think about how many assets are now listed on Coinbase and a lot of those other exchanges, you can't even access them from the United States anymore or transfer certain things. And there's not really a need to do that because things have gotten so far built out. And we also have Defi now. So basically, I mean, what I guess I'm saying with that is that you're going from trading being the major use case for years. And that's where Tether was the majority of the supply.

And it still is the majority of the supply. But it's slowly losing that majority. and there are other use cases that are coming into play. And it's just different audiences really over and kind of target markets. Like USDC isn't really necessarily targeting the same user and customer base that tetherly. It's very interesting to think about a Fiat backed or Fiat collateralized stablecoin. In theory, it's kind of the same product, you know, basically commercial bank dollars and creating a token which circulates on chain, which is a claim on those dollars.

But in practice, they have dramatically different use cases and audiences. Just based on slight differences of assurances, well, maybe not slight. You know, there's dramatic differences in the credibility of these projects, I suppose. Tell us, talk us through a little bit the influence of USDC in DFI. I know some purists, you know, don't like this. because USDC is in theory, you know, something that can be frozen by, you know, the administrators. But that has been a big story of the last year is the growth of USDC and D5. You know, is that kind of sustainable given that it's sort of a contract with like a central administrator?

Does that make sense to you guys? Does it kind of feel like it can, you know, last indefinitely? No, I mean, that's a really good question. I'm honestly a little bit skeptical and also a little bit surprised how popular it has gotten mainly because, I mean, really the main point of defy and decentralized finance is that you don't really have to rely on centralized parties. And in this case, if something were to happen to USDA or if it got regulated and it said that it can no longer like participate in these defy protocols in some way, a lot of these

defy protocols would have some issues, honestly, if that were to happen. And a lot of dye was also collateralized by USDA last year. I don't think that's the case anymore, but it was. So it makes me feel a little bit uncomfortable, honestly, but at the same time, it makes sense. I mean, you know, dye was basically incredibly volatile last year. Every since the liquidity crunch last March, Di traded at like $1.3, sometimes even more. And it was really hard to get it back to one.

And so, you know, when you see that as a trader, as a person that interacts with these defy protocols, you don't necessarily want to take on more risk when it comes to just, like, having exposure to a volatile stable coin. You know, usually you would prefer you as DC and you kind of turn a blind eye on saying, well, you know, this is centralized, but we'll fix this eventually. But I do think that this is an actual, like, problem for defy. And I think that is a decent solution, but I think there are going to be some more interesting loans, for example, like leveraging some futures platforms where you can create a stable coin just kind of like arbitraging the difference. So I'm excited about those use cases. I think

that is also really, really cool. But I'm not surprised why people would prefer USDC versus die if they don't really think about decentralization too much. I like that last thing that you brought up too, Larry. I mean, this is centralized, but it will fix this and make it decentralized eventually. And I think that that kind of still does speak to the immaturity of a lot of the digital assets ecosystem. I mean, even Ethereum, Ethereum or proof of work, but eventually we'll transition over to proof of stick. And, you know, realistically looking at a lot of that ecosystem, you know how I feel about it, Larry. Nick, just to give you a little bit more color, I cover mostly stable coins and central bank digital currencies and like tokenization of assets so uh security tokens

just because coming over from the traditional financial services world i need a foundational logic to ground myself in and i remember how i was in 2017 reading the white papers and regurgitating what looking back on it was kind of marketing material for a lot of these uh these protocols and teams and you know maybe didn't have such a solid foundational understanding of what was really going on so that's why i'm a little bit skeptical of a lot of the DFI stuff that's going on. But there is a lot of great experimentation and some pretty cool things. It's just that I view it all with a little bit of skepticism in that sense. And I think that there are usually backdoors and other things that kind of come into play with these protocols or that they're not really truly is decentralized.

That's such a, that's a word that's also kind of a buzzword too. And I think distributed in most cases is better. I mean, just looking back at things that we're supposed to be decentralized in digital assets history, say ether delta, you know, you get, you get a notice from the regulator and then, well, we're not decentralized anymore. We can actually shut this protocol down or a Dow. The Dow hack goes on and then you can actually, you know, there's ways around it. Things aren't as permanent as most people think they are when it comes to a blockchain. and things aren't really truly decentralized in my kind of definition, if you want to say purest of the word, like what would be decentralized, like a truly peer-to-peer network like Bitcoin that has never been shut down,

never been down, and doesn't have anybody with complete control of it, or say the Tor network, something along those lines that I view as decentralized. I think this is kind of better in describing a lot of these other things. You're an idealist, Mike. So, okay, on that topic, we have Dye, right? So Dye used to be solely Ethereum collateralized, ether collateralized. And then there was kind of a pivot, I want to say, where they introduced new collateral types in order to grow the system so that you could build a portfolio of sort of in theory uncorrelated assets, which then, you know, means that you need less collateral to, issue dollars basically and then you had this you know I don't want to say um this like infection of

the collateral pool with you know non-decentralized assets but it it was very curious to me when I saw die being issued against USC although Larry as you point out it's influences less in the system today what is it's like 300 million USC yeah and there's almost three billion die outstanding, so its influence isn't what it was. But it's odd that you have this recursive, you know, centralization thing where Dye's meant to be this great collateral for D5, but then if you look beneath the hood, Dye itself has got this dependency on an external kind of commercial bank ultimately backed stable coin. Yeah, you're totally right.

And I think, well, from DICE perspective and from Maker's perspective, it was really the only way how you could get the PEC to actually behave in a way that it should have. Because you can think of Maker as like an almost central bank of Ethereum in some way. And if they want to issue stable coins, they have these levers that they can pull. One of them is the interest rates. The other one is just different assets that end up collateralizing this one. Really, because there wasn't any other lever to pull, this was the only way to do it and eventually thankfully it worked.

I don't think that anyone at Maker thought that that was the ideal solution, but it was kind of the matter of less resort in some ways. And yeah, it's what it is. I mean, today it's better because it has returned back to the PEC so they don't have to kind of resolve to these practices. But it is definitely concerning and it's something that I think people should take, you know, kind of closer look at. understand why and maker system can still severely improve some of the systems that they have to actually

stabilize the interest rate, sorry, the exchange rate. Yeah, it has been very curious to witness the evolution there. On another topic, so one of the, one of the most confusing maybe features of the stablecoin landscape is algorithmic stablecoins. And I, never really believed in any of these, frankly, but you know, you guys have this great ranking in the paper or kind of a, like an appendix almost, where you lay out the influence of all the various stable coins. And in the top 10, there's basically three that are algorithmic, if I'm reading this correctly, top 10 by sort of supply, you know, UST, Tera, empty set dollar fracks that might have changed since you made this table i think as you know market prices changed but either

way you know algorithmic stable coins were sort of rubbish by a lot of critics you know i remember the discourse around basis back in the day what do you make of the like sustainability of these things have they actually proven themselves to potentially work or do we need to disambiguate further within that sort of category i can i can i can quickly and so I know Mike has plenty to say here as well. But I think like we we released this report in a really awkward time, right? Because January and February was really the time when these algorithmic stables exploded. Yeah. And they mainly exploded because there were just a lot of incentives for people to interact with them and for people to basically farm returns. And a lot of

people, a lot of VCs ended up like supporting them in some way. I think mainly because it just gave them really nice returns. But I mean, in reality, most of them, like you pointed out, most of them have actually decreased in supply significantly. And most of them have broken packs. I would say probably like 90% of them have failed in some way or another since then. So just since two months ago. So I personally really don't believe,

yeah, I personally really don't believe that they're going to be a significant portion of the stable ecosystem in the future because it's very demand dependent. So, like, maybe some of them can survive right now, but it's so dependent on the market conditions. And obviously, the market is going really well. But then imagine if we turn into another, like, six plus months period of just way less demand into any of the cryptocurrencies. This is all going to get thrown out of whack. And I'm personally really, really very, really bearish on almost all the algorithm stable coins.

But, you know, it's also important to point out, like something like Terra actually has this pretty significant traction. in Korea. So, so, you know, some of them still around, but, but overall like, like, ESD, DSD, all those, in my opinion were like blatant cash grabs and didn't make any sense. And I think most people realized that it was just that it was very appealing to make some money while not kind of facing the actual reasons why these things were going up. Yeah. And I think that I'll get to that specific thing in a second, but I think just it says a

lot that the person that came up with the algorithmic style of stablecoin, Robert Sam's, is working on something that's completely different from algorithmic stablecoins. If the founder of something like, say Satoshi, who created Bitcoin, if he all of a sudden was on Ethereum, you kind of get your eyes like, okay, maybe Bitcoin really isn't the thing here. If somebody who created the concept isn't spending their waking hours and time on that type of mechanism, I guess you could say, or that type of stable. Sorry to interrupt. So just for clarification, was he the one behind new bits? Was that, would you say the first algorithmic stable coin?

No, actually, he would, he came up with, um, the senior style paper. Yeah, senior style paper, sadly from 2014. That's what, that's what he came up with. Okay. Yeah, I, I sometimes get lost. I, I miss remember the historical, because there were a few of these back in the early days. of them were never deployed yeah yeah he but he came out he's he's credited with that with coming up with the with the actual concept itself uh and it came out in 2014 uh and it's listed on uh bitmex has it on the research page um we actually interviewed him too and what it was quote said on page 27 he said the senior shares model experiments today place too much emphasis on the mechanism as if the mechanism

alone creates stability right ultimately the ingredients for stability require an incentive mechanical mechanism, but you also need an ecosystem of usage, meaning organic demand that wants the stable coin. No mechanism alone is going to bootstrap that. So there's more to it than the mechanism itself. He said he's seen a lot of white papers written that treat the problem as if it's purely a mechanism, design, and engineering issue. But in his view, it's only half of the problem. And that kind of comes down to me the difference between, say, academia and policy makers and then those who are actually in fields doing things. There is a separation there. You can't, and it does make a lot of sense in that sense. And that kind of also comes down to maybe the theory

and of the first part of the report, which, which I wrote most of, which was basically the idea of how do we, how do we get to stable coins? What really is money? How, how does the actual system, the traditional financial system, how is it constructed? And we broke down the tier. is there from tier one to tier two and tier two to the rest of the economy. And tier one is the central bank. And basically, it's an interconnected chain of IOUs. That's what money really is. And the central bank is the foundation and the route there. And that's really, it's, it's third-party commitment power and its ability to really guarantee and be the lender and the market maker of last resort, which we saw in 2008. And we saw just again a year ago during the COVID crisis.

that is really the thing that provides money with the power that it has. And that's kind of where we get to hear with stablecoins and how you're basically bringing in that commitment power into the digital assets ecosystem one way. Another way would be potentially central bank digital currencies. And that's how the traditional financial system is integrating with the digital assets ecosystem. Yeah, I remember actually doing diligence on base. way back on the in the day and I think the senior shares stable coin concept is the one of those areas in crypto where this the biggest gulf between academia like you know mainstream

economics basically and crypto because if you talk to any I think literally any economist they'll say if you want to maintain a currency board which is like you know basically a central bank version of a stable coin you You need full convertibility and a full backing to retain parity. And they will absolutely scoff at a senior-ed-share-style stable coin. I don't think I've found a single economist that believes the claims of the senior-ed-share's kind of enthusiast crowd. And I'll admit, and like you've seen central banks, like, failing to maintain currency pegs. So that bank advance Amsterdam. Yeah, that's a bit that's one of the big ones.

Many times, many times through history like literally, you know, any number of examples. And so it always led me to wonder, okay, well, you know, if we're talking about like small nations with like armies and, you know, taxation power that can't maintain a peg, like how could we expect, you know, a crypto team to do it? not to like, you know, be dismisses or anything. Well, we talked about in September when I was interviewing you. And we talked about when Soros went up against the Bank of England. And if a central bank like the Bank of England can crack, how could it, how could basically just a program system adapt in that sense? That doesn't have that taxation power.

Yeah, I think also one thing worth having here is if you look at basis and, you know, back then they basically blame that the regulatory, pressure was the reason why they shut down. I think that's actually false. I think that was just kind of like scapegoat for figuring out that this is not going to work. I think that was the main reason. And you can kind of see that, you know,

the guy who's behind it, I'm pretty sure he's the guy beyond BitClub now, just doing completely different things and completely disinterested anymore in the system. And it's not because of the regulatory issues. You can't say that when there are teams like doing way crazy things with like borderline securities.

It's just about our retranging regulations. So I think the main reason was just people are trying, people are starting to figure out that these systems don't really make sense. I'm kind of with you on that, Larry, because, you know, if you look at the powers that be and the backers of that project, they're very connected in a lot of areas. So I think that if they really wanted to do something like that, they would have continued with it. And I think that, I think that, yeah, there's, there's a lot of, don't waste your time, basically. There's a lot better things that you could be building out in the digital assets ecosystem.

And I mean, we're talking so much about senior style. I mean, it's really what? Like 1% or 2% of the actual sable coin supply. So it's really, it's not even that much. Yeah. But it captures so much attention, which is interesting that Delta there, I think, because they're sort of investable, whereas, you know, you can't really invest into other USDC. Exactly.

Yeah, yeah, you nailed it. Right after we published a report, I had like maybe three or different, three or four different algorithmic stable coins, just reach out to me and be super angry about nothing, us not including them. It's just because these tokens just exactly like you said, they create an investable opportunity for a lot of these people. And most of them don't even understand how they work. Honestly, they just kind of roll with it. So I think that's the main reason. And, you know, we sort of see this similar thing with Maker and die. But most of the other stable coins, obviously, especially the cash set up don't have.

have an investible token. Very, very tribal. We got, we got a lot of great responses to the report, but then other ones, you'll always get, it's the tribalism of crypto. You'll just, why weren't we included? Or this year, it doesn't correctly characterize what we're doing. And it, and like, it's, it's crazy. Yeah. That's, that's, that's, that's, it's just the, the nature of the beast, I guess. That's right. So, man, there's so much I want to hit here, because the stable coin space is so multifaceted. First, first of all, like, Tether's dominance declining, you guys pointed out, I think it's continued to decline, you know, in sort of a transaction volume, market share, supply market share. What do you make of that? And, you know, is that healthy overall?

Yeah, well, I think it's, it was just dominating so much that at some point it had to go down a little bit, you know, at one point, like a couple of years ago, it was like 95% of the supply, 95% of all transaction value. So now it's, I think, around like 80% or something. So it's been declining slightly. But to your point, I mean, you know, Tether is mainly used for trading and USDC is mainly used for DFI and for other opportunities. So as the trading use case gets smaller, the dominance of Tether will get smaller as well.

But I think it's going to be very difficult to disrupt Tether's kind of prominence in trading. But, you know, USDC, for example, is thinking about like really. cool use cases like, you know, actually using it as deposits to regular bank accounts or using it for actual payments with merchants instead of paying with credit cards. And they're actually doing a lot of work pushing this forward. And then we are seeing other stable coins like GMO, like trying to get more active in the FX market. So I just think it's going to be very obvious in hindsight that Thether is the one that dominates

trading. USD is the one that dominates the other use cases. And then perhaps GMO or some other stablecoins could down. like FX use cases. But I think that's really the main reason. And that there's still continuous dominate pretty much everything. Yeah. Cross-border payments is a big one that people are trying to get into as well.

I guess it depends upon what you really think that stable coins can do and how big you think the digital assets ecosystem will get. And I'm not even just talking about Bitcoin and digital gold size. I'm talking about just how big do you think the digital assets ecosystem will be? what will be the actual use cases? What is programmable money? Which is another thing that I'm still trying to figure out the complete answer to because a lot of people push it out.

But where will stable coins fit with, say, if I had a company and I just wanted to use it from a wholesale application, those are stable coins. You also have, say, if you have your employees and you have an international organization like GMO, and you wanted to send basically this asset in certain, currency denomination. There are a lot of things that you can do with it.

And cross-border payments is one that a lot of people think is going to be a big thing as well. But you hear that with a lot of digital assets too. So it's really kind of getting to the point where it's don't tell us, kind of show us, and show us with the actual data and statistics that Larry and Lars helped dissect with all the data providers, which was great. But yeah, well, I mean, I think that, you know, Tether, tether's really been quite resilient, too, in a lot of ways. And, you know, there's always been, I think all of us have been on the side of, you know,

kind of like skeptical in a lot of senses. I wish they were more transparent, but I'm not as concerned as I used to be years ago, just say about like going concern type thing. I think it's more so they kind of integrate and, you know, maybe other things just get bigger because there are more legitimate use cases that grow out. And then, you know, they just have what they're really there for. Yes. I don't want to dwell on this necessarily. And you guys don't in the report either. But because we also did a whole series really on crypto dollars and Tethers and we talked to Bitfinax and, you know, various traders that have used it. So those episodes are totally available for, you know, people's perusal if they want to learn more about it.

But the NYUG settlement, you know, does that settle the issue? It's kind of mixed, you know. In some sense, a lot of the allegations were true, you know, according to the settlement, you know, there were periods where they had virtually no banking kind of thing. And then in another sense, you know, maybe there's, you know, reason for optimism where, apparently Tether is going to do these quarterly out of stations. So does that kind of settle the issue or still, you know, outstanding questions there? From my perspective, it settles most of the issues.

Honestly, I think they're still, they can still get way more transparent and they can still improve in a lot of ways. But, I mean, a lot of the early criticism of Tether was mainly because they just couldn't do any better, in my opinion. They did make a lot of mistakes and they could have been more transparent. But, I mean, it was a struggle of getting. getting banking connections and it was also a struggle. I mean, if they said that they lost this amount of money,

they would probably lose even more confidence from people. So it was just a tough situation to be in. I think most of it honestly is settled. And I think there could be some other issues and could be some other regulators that kind of raise some problems with it. But I don't think people should be really concerned anymore. I think this matter is mostly just finished. I'm a little more skeptical only because,

I started out my career as a financial services auditor at a EY. Actually with with with with our bud. Larry's yeah. Yeah. Yeah. Yeah. Oh, he's really you know, we were both talking about quantitative easing in our in our training and we were at the same training.

Training table in like 2015 in New Jersey and we were just both like yeah, we're not going to be financial services auditors for too long and both of us were out in a year in different things. but yeah basically you know because a lot of things did come out so a lot of the skepticism was actually true it's just that a lot of people didn't care or maybe you know it's just one of those things where people just want to move forward with it so look if the stable coin ecosystem ends up being a trillion dollars two trillion dollars three trillion dollars one day whatever it could potentially get to because of other use cases like foreign exchange cross-supporter payments and just kind of being used as collateral for different digital assets applications.

Realistically, I think that tether might have just pigeonholeed themselves where they have reputational risk and a lot of other things where they'll be able to service their market, their use case for what they were for. But I think that other ones, as the years go on, they'll overtake them eventually in the whole supply. if you understand what I'm saying. And they kind of pitch to hold themselves in that use case because once you lose credibility and you're known as not being transparent, certain people can work with you, but other ones can't, unfortunately. So I think that other stable coins, say over the next 10 to 20 years, will overtake them from a supply standpoint.

Yeah, that'll be very interesting to play out. The resilience has kind of surprised me. Larry, I have to ask you this on the relative usage, you know, the underlying blockchains. I actually checked last night. I think Tron does more transactional count than the Ethereum version of Tether. What do you make of that? I mean, you know, is Tron the new venue for stable coins? Yeah, well, that's a really good question.

I mean, I was really skeptical that this would happen, but it did. and it's mainly because Ethereum is just getting too congested. And like even when you have large traders and, you know, when you have them doing arbitrage between different exchanges, it's really hard to justify paying like 30, 40 bucks for fee when most of the exchanges also support Tron and you can do it for like less than a dollar. So I think it's a short-term plaster solution where obviously Tron is making tradeoffs that not many people are willing to accept.

What does make sense, though, is that like if you have a centralized box, chain transferring centralized stable coins, you don't really care because both of them are like, you know, there's a safety net for both, basically. So I've even used Tron as dirty as you say. Oh my God, it all comes out. Yeah. So, but because it just saves you money and it's like, even if you can save like 15 bucks a day, I mean, it's a significant amount of money. So, so, you know, I totally understand it and I totally get it. However, I think that it's going, it's not going to be a long term solution. I think long term is going to be some sort of a layer two or a side chain versus just centralized blockchains. But it is a really interesting trend to watch.

Yeah. I mean, I didn't believe it either until I, you know, I don't think the flippinging is complete. I think actually a theorem still does more transactional value for Tether than TORN. Tron has more sort of active addresses, more transaction count. So it's sort of still mixed there. I mean, the other interesting trend, not just for Tether, Tether is straddling a bunch of chains. As you guys point out, you have this great chart. USDC is now going multi-chain. I mean, is that the, because that's the future of stable coins, you're going to have one issuer, and then it'll straddle like dozens of blockchains.

Is that kind of the way that you expected to go? Yeah, I absolutely do myself, mainly because, you know, it just doesn't hurt them to to add more alternatives. And it's just a logical step forward in my opinion. Like I said, like if Ethereum is getting overloaded and it costs too much, it's very simple. You just switch to a different chain. And for centralized stablecoins,

you just don't really care that much. So I think this is going to be a trend. I think it's also 100% possible that some version of these stable coins exist on some centralized like enterprise blockchains as nonsense sick as they are. I think that will happen. And I also think that it's going to be

way more prominent on, on Ethereum L2s, and different L2s as well, and perhaps even side chains. I think Tether is experimenting with that a little bit, but I think that it's absolutely going to be a big trend. But yeah, Nick, I actually have a question for you as well. Okay, all right, turn it around here. Yeah. So one thing that I've noticed quite a bit is that recently a lot of the raises, a lot of the VC raises,

companies are actually more open to accepting stablecon. So like both USDC and feather. And I'm starting to see that trend, you know, almost get out of crypto as well. Like backing projects that are not really focused on crypto. And they're preferring to USDC because it's faster settlement. It's just easier to raise from foreign entities and stuff like that. So I'm just wondering if you're also seeing that if it's just my kind of. No, we absolutely have.

And we settled deals in USDC now. We settled on a weekend the other day, a new financing. I mean, all of the startups we back are in the crypto space. but oh yeah I mean we've done multiple deals in USDC now it's it's much more convenient I mean I still get the hebie jibis a little bit when I do a big on-chain transaction and you know I'm like verifying the first 10 characters of the address or whatever so oh wait I never yeah maybe we can find a solution of that especially when it's like you know fiduciary money it's like LP LP Caffe but I yeah it's

It's a better model than, you know, we've had bank wires rejected. You know, we've had like, we sent a wire and then it turns out that the banking support for a startup in question was withdrawn while the wire was in flight. You know, classic problems with the banking system. So it's better to use USDC to settle a deal 100%. I'd say it's 10 times better or maybe 100 times better. I don't know. So, yeah, totally catching a lot. on at least like in, you know, venture land, I think, you know, the Silicon Valley firms are like

pretty comfortable with the idea now. So, you know, we're winning hearts and minds over here. That's really cool. So let's see. Before we go, wanted to touch on DM a little bit, Mike, you know, this is probably your expertise, you know, so DM looks like it's going to launch. It looks like it's going to be, you know, somewhat permissioned, at least at inception. What do you expect there? Do you think that it has a real chance of sort of dislodging the sort of existing stable coins? I think that having the backing that they do, I mean, they are the global stable coin that the BIS and the G7, they are always referencing the global stable coins in their reports. And that, you know, the fight, well, just talking on that, that, they can't even call

them stable points they call them so called so called so called yeah it's one of my favorite things i think that yes they uh they're going to have they're going to carve out a nice niche for themselves they have the backing of so many other corporations and they have the power to leverage uh governments um which they've done in so many other cases and the guys from there are really cool too uh dante and uh julian are really every time that we've used them for, say, our CBDC report and our StableC report. And just getting in the CBDCs, too, which is something that the second white paper discusses, I mean, that in and of itself is a really big use case that they can use. So if you integrate, say, some sort of a hybrid between central bank digital currencies and stable coins,

you have a pretty big market right there. And that's kind of the synthetic CBDC that the IMF is referring to. I think that they can really carve out a nice role with that. Yeah. So before you go, first of all, thank you, gentlemen. This has been really, really informative, really, really excellent. And I'm going to plug the blocks data dashboard here, which is my favorite data dashboard out there. You guys have such a good breadth of content that you pull in a bunch of different sources.

it's really outstanding. They did a great job with that. We're up to like 100,000 people checking it out a day, if not more, Larry, right? Wow. Yeah, it's growing in popularity a lot. And one thing I'll say before we jump off is if anyone who's listened to this podcast, if you have feedback, if you want us to add more charts, we can do it easily since we're working with like almost 20 data providers now.

So if you have feedback, please let me know. And we're going to make it as good as possible. Yeah, it's really excellent. The report is great. strongly recommend the report to. Last predictions from each of you, you know, what do you expect in the next five to ten years? Does stable coins get hybridized and, you know, end up being backed by base money by central bank reserves? Do Rohan Gray? Does he manage to kill stable coins and replace it with the CBDC? Or is it going to be crypto-native stable coins like die that go to a trillion

$820, what are your predictions on that? Oh, my God. Well, it's funny. It's so funny how we have like, we're all like one degree of separation from each other and how Rohan got to mention in the report for sure. Okay, real quickly. Yeah. I think that CVDCs and stable coins are compliments.

So I think that realistically, my view is that we'll see a lot more fintech companies and, you know, maybe even crypto companies gaining access to, central bank accounts. And that kind of goes back to the beginning of the report with the tier one and tier two breakdown, which I would recommend everybody check out. We're already seeing that. We're in England, some other companies outside of like commercial banks are getting access to the Bank of England's balance sheet. So I think that we'll see more of that and that we'll have some sort of a, as I said, synthetic

mixture of stable coins and central bank digital currencies. that will really help propel the digital assets ecosystem into what we all think that it will be over the next 10 years. And we're talking about trillions of dollars. Yeah, I honestly agree with that. We don't have to go too much in more detail. I think that was a great summary.

And Nick, really appreciate you having us on. Yeah, thank you. My pleasure. My pleasure, gentlemen. I'm always up for stable coin conversation. I think, you know, in my view, it's the most interesting thing happening. outside of Bitcoin. I know that's a controversial view. But I think it's going to be incredibly

disruptive, not in like the meme way that things are disruptive, but like literally disruptive to sovereign currencies. And we, you know, we might see some episodes of crypto dollarization here. Stay tuned. Thanks again for coming on. This has been awesome. Great. Thanks, thanks, Nick. Appreciate it.