On The Brink with Castle Island - Nate Maddrey (Coin Metrics) on the rise of stablecoins (EP.103)

Episode Date: July 20, 2020

Nate Maddrey, senior research analyst at Coin Metrics, joins the show to discuss a recent report published by CM in collaboration with Bitstamp, The Rise of Stablecoins. We talk through the report and analyse some of the charts in depth. In this episode:  Why the auditability of public blockchains is so useful for evaluating stablecoins Why fiat backed stablecoins have different price dynamics from 'native crypto collateral' backed ones How the arbitrage growth cycle works for fiat-backed stablecoins What the distribution of ownership and addresses for USDT tells us Liquidity for USDT versus USDC and BUSD Distinguishing stablecoins based on median transfer value Stablecoins as wholesale rather than retail value transfer networks What velocity of stablecoins relative to bitcoin and ether tells us

What's up everyone? Welcome back to another episode of On the Brink with Castle Island. This week we have kind of an interactive episode for you all. It covers a report written by Bit Stamp and Coin Metrics called The Rise of Stable Coins, which is available on the Coin Metrics website. I'm going to pose a link in the show notes here. And we have the chief author, Nate Madri, who is a senior research analyst at Coin Metrics. We're going to talk through the report and specifically look through some of these charts. So I highly recommend that you actually have the report open to follow along here to kind of get in the mind of a crypto data analyst and how to interpret some of this market and on-chain data. Full disclosure, Coin Metrics is a portfolio

company and I sit on the board there. Now, as a side note, we are aware of some audio issues stemming from AM radio bleeding into the microphone. I've done my best to mitigate that, but you might notice a little bit of interference in the episode, so sorry about that. Now, without further ado, let's dive right into the episode with Nate Madrey. 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. Bitcoin. Today we have with us Nate Madry, who is a senior research analyst at Coin Metrics. Nate is going to tell us all about a great report that he wrote called The Rise of Stable

Coins, which is a collaboration between Coin Metrics and BitStamp. So Nate, thanks so much for coming on. Welcome to the show. Yeah, thanks for having me, Nick. I'm excited to be here. So Nate, maybe just before we start, you can tell us a little bit about your professional history in the industry and how you came to be interested in on-chain data. Yeah, sure.

So I guess just a brief background. I took a little bit of a circuitous route into crypto like many of us have. But I actually started streaming music service when I was in college and did that for about five years. After that, I started learning how to code. And while I was at a coding boot camp in 2016, I actually got introduced to Ethereum. And my initial interest in Ethereum was actually as a potential use case for solving some of the problems I saw in the music industry, mainly that a lot of the content, all of the music was owned by the record labels and not owned by the artists and the users. So Ethereum kind of opened my eyes to how a lot of technologies could be decentralized and kind of put back into control of the people who are actually using it. And then from there, I just kind of followed the rabbit hole and got deeper and deeper into it over the next couple of years.

I started my career in crypto at a company called Digital Asset Research. I worked there for about a year doing research and then moved on to Coin Metrics where I focus on on-chain data. And I also lead our Staten Network newsletter, which comes out every Tuesday. And it's kind of a data-focused look at the crypto industry at large. I'm biased, but it's the best newsletter in crypto. What can I say? Just out of curiosity, given your history in music streaming, are there any decentralized music streaming platforms that have like critical mass or seem to actually work? No, not at this point. There have been a bunch of interesting projects of people trying to do it, but nothing that's really broken through at this point.

I'm so optimistic that there will be, but there's just, I don't think Ethereum or other blockchains are really at a place yet in terms of scalability where you can do it the right way. Yeah, it seems insane to insert audio files onto blockchains, but I'm not an expert. Yeah, there are some interesting projects involving digital art. Super rare is one, but that obviously is easier to do and doesn't take the same kind of scalability requirements. So on the topic of the piece, so I'm going to link this in the description. It's called the Rise of Stable Coins. it's a pretty great summary of everything that's happened to date with stable coins, especially from a data-driven perspective.

And I highly recommend that you actually open the PDF if you're on desktop and follow along with the charts as we discuss them, because some of these charts are difficult to kind of describe. And it would be better if you actually had it out when looking at it. that's what I recommend. It's obviously not mandatory. So Nate, where did the idea to to work on this collaboration with BitStamp come from? What was the inception of that idea? Yeah. So, yeah, as you mentioned, we did this in partnership with BitStamp. They had kind of came to us actually with this idea of looking into stable coins specifically since we had done work on

this in the past with kind of just a broad idea for a topic of looking at the rise of stable coins and we ran with it from there. When we initially started it, I was actually kind of doing a more historical look at the growth of stable coins from inception. But then as I dug more and more into the data, I focused in on the growth after March 2020, March 2020, March this year, just because it was so kind of shocking how much it had grown since then. I feel like CM has made a bit of a name for itself in the stablecoin data space. Was that kind of a deliberate orientation of the company? Yeah, it definitely has been.

It's been a big focus for all of us also, you know, kind of based on some of the work that you've done as well. But yeah, I mean, again, I'm biased here as well, but I think we really have kind of some of the best coverage of stable coins in general. And we've always made it a point to try and find kind of the longer tail of stablecoins too and make sure we have the entire picture across the board. Yeah, because there are just so many, I mean, there are, there's only a handful that are actually meaningful in size, but it's, it's kind of worth trying to achieve that completeness. Yeah, definitely.

Especially because, like, the winners aren't necessarily guaranteed yet. I mean, it's not clear which the winning stable coin projects are going to be. Even, you know, obviously the NYG case against Tether is still rumbling. So, you know, TBD on who the winners are actually going to be. Yeah, definitely. I know I'm sure we'll get into this more. But even though Tether is overwhelmingly the biggest stable coin by far, I still think it's such an early stage for stable coins and crypto in general that we'll undoubtedly see other stable coins rise up, maybe even in the near future. And what's the particular virtue of using on-chain data for stable coins? I mean, what insight does it give you that, you know, we wouldn't have had with, for instance, just like the regular Fiat banking system? Yeah, so it really gives you a kind of unprecedented look into what's actually happening. First of all, just with the supply of stable coins, you know, we can see exactly how many stable

coins are being printed. We have a new metric at coin metrics called Free Float Supply, which I know you talked about on your podcast a whole weeks ago with Ben and Tim. But we can look at not only how many stable coins have been issued, but how many stable coins are out in the open supply. basically not being held by the treasury. So that's super interesting. You know, we can also look at exactly how many transfers are happening,

how much a transfer value is for each transfer. That lets us look at a lot of different interesting stats like median transfer value. We can get velocity from that. So it's really kind of a whole new way of looking at this, this sort of currency and just kind of crypto in general. It's interesting that if you think about how available information on stable coins is on chain, it's kind of a level of transparency, which we didn't really have for other dollar denominated assets. You know, like there's no way realistically to track the amount of dollar bills circulating in the world.

Yeah, exactly. It's all just kind of vague estimates. And other, you know, e-money systems. there's no level of precise insight into what they're being used for and what their usage characteristics are like. Whereas with stable coins, I mean, you can audit them down to the last cent, at least the on-chain stuff. And you can really directly apprehend what their beings for, which just blows my mind. Yeah, it's pretty crazy. And it's kind of ironic, I guess, because the big critique of stable coins is that they are untransparent with regards to the quality of the collateral.

Yeah. So it's kind of, it's very transparent in some ways and then obscure in others. Yeah. And in a way, that's kind of a holdover from the legacy systems, you know, especially the non-transparent parts of tether. It's not the parts that are trackable on chain. It's kind of the parts that are off chain. It's the reserves that are being held by tether and the traditional banking system

that are not as transparent. So there's still different, there's still definitely, you know, progress that needs to be made. but I think it's a huge step forward over dollars and other kind of non-digital currencies. So a lot of people are probably somewhat familiar with the kind of rumbling scandal around Tether. I mean, can you just briefly recap what happened there and kind of what we know about the reserves currently? Yeah, so Tether has a long-sorted history. I go over it in the report.

but basically Tether launched in kind of late 2014 by this LLC called Tether Limited. That's always been kind of opaque and non-transparent. So when Tether initially set out, if you read Tether's white paper, their plan was to have $1 in reserve for every tether printed. So say they were going to print a million tether, they would first put a million dollars into their reserve. So each tether was pegged one to one for dollars. that maybe happened for a couple of years.

It's unclear. But it came out, I believe it was 2018, where it was revealed that that wasn't quite the case, where they only had 74 cents worth of Fiat currency in reserve for every USDT that was printed. They held the rest kind of in debt and other less liquid assets. But that's kind of been brewing around Tether for a while now, and still unclear exactly what's going on with the reserves. They've published several audits, but there's been questions about how independent they are. So, yeah, that's kind of what I was referring to, where the parts of Tether that are more

opaque are kind of the parts that are in the more traditional financial system, because we can't just go in and audit their reserves without a trusted third party doing it. While we can go in and, you know, anyone can go in and audit their supply on chain, we don't know exactly how much they have in the bank backing that supply. And then as far as the way that Tether actually exists on these blockchains, what are the, what are the biggest blockchains that it's kind of spread across? So the biggest one right now by far is Ethereum. Tether originally launched on the Omni Protocol, which is built on Bitcoin. It was there for a couple of years. Then they also

launched it on Ethereum. A large majority of the supply is now on Ethereum. But as of recently, actually the last couple months, they've been printing a lot on Tron as well. And I believe that Tether has been printed on seven different blockchains or seven different protocols in general. So it's spread out across a lot of different blockchains, which is really interesting. I think it's the first major application that we've seen like this that really has its roots in multiple different blockchains, which is good and bad. I mean, it makes it more decentralized, but it also makes it a little harder. to kind of figure out exactly what's going on and to audit it. And if they eventually do get hit with regulations,

it'll probably make it a little harder to actually go in and regulate it and maybe stop whatever they're doing. Yeah. So Coin Metrics treats the multiple different instantiations of Tether, kind of as separate assets. But I guess in practice, it's all basically the same thing in Tether's eyes, right? Yeah, more or less. If you look at like the tether market cap on most websites, it's going to be the combination of all the different tether issued on all the different blockchains.

So there's some other cast of characters in the story. What are the other major stable coins and maybe you can introduce some of the ones that people will be slightly less familiar with? Sure. So a couple of other biggest ones are USDC, which is backed by Coinbase and Circle. That is the second biggest coin base right now in terms of market cap after Tether. There's also Paxos, Pax, which is another pretty big one. I think their supply is about 250, 260 million right now. Both of those are also backed similarly to Tether, where they kind of have a one-to-one

dollar reserve. Another one that a lot of people have probably heard of is Dye. Dye is a decentralized stable coin, so it's a... issued through MakerDAO, which is a debt built on top of Ethereum. But die is a little unique because instead of having a one-to-one dollar reserve, anyone can basically open up, anyone can mince die by putting a certain amount of crypto, Ethereum, or now they have other crypto, you can use as collateral as well, locking it up into what MakerDAO calls a collateralized debt position. And as long as you're locking up your

your crypto, you can then use that to print dye. It needs to be over collateralized, which makes it a little more complicated and adds some kind of unique risks, which we'll get into later. But die is kind of exciting in a lot of ways because it's at least on paper, truly decentralized and doesn't depend on this kind of trusted third party, like the company that's backing Tether or the companies that are backing USCR PACs. Then a couple of others of note in the last couple of years especially we've seen an emergence of exchange-backed stable coins so we have b usd which is binance gusd which is backed by gemini husd which is huobi and all of those have kind of come into prominence the last couple of years and saw

big spike in activity after march this year as well then the last one that i mentioned the report is also issued by Paxos, but it's called PaxG, Pax Gold. So instead of being backed by a dollar, it's actually backed by gold. So the price, instead of being pegged to $1, it's pegged to about $1,800 or so, which is kind of the price of gold right now. And we're starting to see more and more of these stable coins now that are back to other commodities or other assets other than fiat currencies. It's interesting to see the industry coming full circle where we had these

e-bullion and e-gold projects in the early 2000s that gained prominence, except they were done in kind of a more centralized way, that they were meant to be digital cash backed by gold. And, you know, after all this time, we've come back to that same idea. Yeah, it really is interesting. You know, people haven't really caught on to the gold-backed stable coins yet. They haven't gained a huge amount of traction for whatever reason. Yeah, they get way less usage than the other stable coins in our report.

Maybe it's just a matter of time until they start, you know, things like Libra, if Libra ever comes out might help popularize this idea of using kind of other forms of collateral behind stable coins, but also probably has to do just with the price difference, I think. It's a little harder for people to maybe wrap their heads around a stable coin that's not pegged to a dollar. and they're kind of less arbitrage and other opportunities, as we'll probably talk about in a little bit. So starting with the price history, you know, you cover the deviations from the peg for some of these major stable coins. And, you know, USDC tends to be fairly tight in the range.

Others are kind of more volatile, especially dye. So talk us through what's happening with Die and, you know, what the difference is between Dye's re-pegging mechanics and the re-pegging mechanics for just the regular Fiat-backed stable coins. Yeah, so Dye is unique like I was talking about. So, die, on March 12th, when the price of crypto assets just suddenly crashed 50% or more for most assets, it threw Dye into disarray. And the reason that happened is because there was essentially a mass liquidation event on Maker Dow.

So the collateral that was backing die all of a sudden just got liquidated. Basically, the reason that happened is because, you know, when people put in their collateral, if the price all of a sudden falls, then suddenly there's not enough collateral kind of backing this die and just the way that MakerDAO is set up, it automatically will liquidate those positions. But because of that, that threw the entire ecosystem into disarray. and there is essentially kind of an extreme system-wide shortage of dye. And that has kind of reverberated since then, and dye has been way above its peg ever since then.

But die is unique in many ways, and it's also there aren't kind of a similar arbitrage opportunities for die because of this mechanism. And it's also worth mentioning that dye supply is considerably lower than most other stable coins, which also kind of plays into this as well. So how does the arbitrage cycle work for the Fiat back stable coins? What are the mechanics there? Yeah, so basically what I show in this report and what we see is that when the price of certain

stable coins kind of go above a dollar, so specifically we look at Tether, but when it goes above a dollar, that creates arbitrage opportunities for people who can buy the stable coin at a dollar and then sell it on exchanges where it's over a dollar. So the way that, so just kind of bringing it down to fundamentals, the first thing that needs to happen is that there's some demand that causes price to go above a dollar on certain exchanges or OTC desks. And then when it stays above a dollar, then that's where the arbitrage opportunities come in. It's a little unclear where this arbitrage is happening. But at its most basic, if you think whoever has access to printing more tether,

if they can print tether at a dollar, which going back to tether's white paper, that's what stable coins in tether specifically is designed to do. It's supposed to stay at a dollar and all these. be kind of backed by a dollar. If you can print it for a dollar and then turn around right away and sell it for a dollar and a penny or even less than that, you can make a lot of risk-free money really fast. And if you have access to a lot of capital, hundreds of millions or billions of dollars, within a couple of minutes, you can just sell that all in exchange and make a lot of money in a short amount of time.

Although the actual set of entities that can create tether is limited, right? Like, it's not something that everyday people can actually do, right? Yes. So there's a limited amount of people who kind of have access to printing tether. I'm not exactly sure who it is. I've tried digging around to find out. There has been kind of some reports in the past, but it's unclear exactly who's able to print all this tether. A lot of it kind of ends up on Bipfinex and a couple of other exchanges.

But yeah, that's kind of one of the big missing pieces in this puzzle. It's whoever has access to start printing this is probably profiting off it, but we don't know exactly who that is. So you have this great chart in here on page 10 comparing the distance from the peg, the premium or the discount to the peg, to the new issuance as measured by the changes in pre-float. So what is this depict exactly? Yeah, so this chart here on page 10 of the report is showing on the left-hand access, you have the distance from the price peg, so going up to $0.004 and then going down below that. And the right access, you have the amount of new supply that's being issued, and that's the red bar. So basically what's happening here is you see that when the distance from peg for tether is above

a dollar. So when the blue bars are kind of above the zero dollar access, those are the days where price is significantly above a dollar. And then you also see that that corresponds almost directly with the days where new tether was being printed. So basically what's happening here is that a large majority of the new tether supply that was coming into existence corresponded directly with the days where price was over a dollar. So that suggests to me that a lot of this supply issuance was driven by arbitrage opportunities when Tether's price was over a dollar, someone issued new supply and then could basically sell that at a profit.

And this kind of, this is no-worthy because there have been a lot of speculation about, you know, potentially Tether being issued in order to buoy the price of Bitcoin or something similar. And what this chart kind of tells us is, well, actually, it looks like the issuance is more a function of whether or not Tether is trading at a premium to the underlying. Yeah, exactly. And it is important to note here, too, that this is specifically looking at 2020. And going back to kind of when Tether was exploding in 2018, that that was probably more directly related to the price of Bitcoin and some shaniness going on there.

But yeah, I think especially now we've reached a unique situation in 2020 where Tether, there was already so much Tether supply and it's already fairly liquid that these arbitrage opportunities exist to do this at large scale. So you also look at the distribution of ownership, which is really interesting because again, this is kind of something which you only really get with on-chain data. I mean, I don't know how you admit you would get this information for traditional assets. You certainly couldn't get it for something like gold,

where you look through bands showing which set of users or what fraction of supplies held by addresses of what size. And effectively, what it shows is that most tether is held by larger users holding a million, a million plus worth dollars. What does this suggest you? What's your takeaway from this? Yes, so this shows that over four billion tether right now is held by addresses that hold at least a million dollars worth of the tether.

So basically, whale addresses hold a large majority of the overall tether supply. And this suggests to me that most tether is being held on exchanges right now. If you go through and actually look at these whale addresses, most of them are exchanges. And you can see on the chart on page 12 that if you look kind of from the bottom up, the green and red bands are the really large addresses that are holding large amounts. So these addresses just kind of exploded since then, added billions of dollars worth of tether. So to me, that kind of suggests that likely people kind of rush to safety

after the March 12 crash basically just parked money on the sideline, on exchanges in the form of stable coins, and that probably had a good, led to a good amount of the increase in demand. And also maybe exchanges themselves are moving more into stable coins. Maybe they're converting some of their fiat into stable coins, which, you know, helps them with portability and kind of liquidity that makes it easier for inter-exchange settlements. And also just kind of we've seen a general move to digital dollars in general and kind of away from fiat currencies. Yeah, it's been interesting watching the discussion around the insane growth in stable coins from March 12th onwards. And I guess just fundamentally, nobody has a single super satisfying answer.

I mean, there's lots of hypotheses, but it's hard to know what is just fundamentally responsible for the growth. Yeah, it's tricky. And I think there's probably a lot of different things contributing to it. I think the Russia's safety might be the biggest one. But there was also a pretty big increase in trading volume, especially stable coin trading volume following March 12th. And Tether's biggest use case, at least up until now, has been kind of trading related, billions of dollars of Tether traded every day,

especially in Asian countries and China, which kind of have stronger regulatory restrictions around fiat trading. specifically. So yeah, I wish we kind of had more data into what exactly is driving the demands, but it also plays back into the kind of opaqueness of Tether a little bit. It's hard to figure out exactly what's driving it. So speaking of the trading use case, I think this really actually points to the reason why, how Tether kind of differentiates itself from other coins. You have this great chart on liquidity. So basically, cost of execution. So talk us through what this chart means and how to interpret it and basically what it says about the difference between tether and something like USDC.

Yeah, so if you look at this chart on page 14, this is looking at the cost of execution for 100 Bitcoin trade by quote asset. So looking at these different stable coins as quote assets. You can see the green line on the bottom is tether, which basically shows that the cost of execution for tether, is considerably less than these other stable coins, even BOSD, which is Binance as stable coin. And this is specifically looking at cost of execution on Binance. So this basically means that it's significantly cheaper to trade using Tether in terms of the fees you're going to accrue compared to these other stable coins. And obviously, you know, if you're trading, especially in large amounts, that's a huge advantage. But this also kind of is a commentary on Tether's liquidity,

basically the reason you're going to see these lower fees is because Tether is significantly more liquid than these other stable coins. And that's a lot of what has driven Tether's lead and keeps it way ahead of these other stable coins and kind of increasing the lead. It's just Tether is so much more liquid and kind of ubiquitous already than these other stable coins. And that liquidity kind of begets more liquidity and increases their lead. Yeah. And I think this kind of answers a puzzle that a lot of people have about stable coins. I mean, they look at them and they wonder how they're differentiated. You know, they're all worse about a buck. They all hang around the peg. And, you know, in theory, they're all redeemable for dollars. But then when it comes to the actual characteristics of the

assets on financial markets, they're not vulnerable with each other. You know, the cost of execution really matters, especially if you're moving in size. And it seems like Tether is still the favorite for for larger traders. So you also look at the address distribution. Now, this is one of my favorite charts because it's kind of directionally, I think the derivative of the chart matters as opposed to the absolute level. So, you know, as you say, like a lot of supplies held on exchanges and so that obscures the relationship between an on-chain address and an actual real holder of the asset, because one address could account for many holders. But I do think that these charts are super-informed in terms of telling you what the growth of adoption is generally.

So tell us about this chart and kind of what it tells to you. Yeah, so this is kind of the flip side of the chart we were talking about earlier that showed that whale addresses are holding a lot of tether and stable coins. But this one is showing the breakdown of addresses. So the number of addresses that are holding certain amounts of tether. And this chart basically looks like the inverse of the other one. So if you look from the top up, it's starting. starts with addresses that are holding relatively small amounts, so kind of $1 to $10,

and then going down 100 to $1,000, et cetera, et cetera, going all the way to $10 million. But basically what you see here is a huge majority of the addresses are holding smaller amounts of tether. And there was an explosion in these smaller addresses, too, following March 12th. So we kind of saw two things happening at once. We saw a large growth in small addresses holding $1,000 or less worth of tether. And then we also saw a large growth in the supply held by whale addresses. So that shows that while people are probably increasing the amount, they're holding on exchanges,

there's also an increase in individual addresses holding these small amounts, probably using it for other purposes. You know, it may be for trading, but it could also be for a medium of exchange or for other reasons, not directly related to kind of holding money on the same. sideline four exchanges. So this really shows that you need to put together multiple of these indicators and kind of a mosaic to get a genuine understanding of the behavior patterns because, you know, the other chart

that we're talking about, the supply repartition chart tells us that, yeah, most of this is held by whales and exchanges. But this one also tells us, hey, there's like a meaningful population of people that are holding small amounts of tether and using it. Yeah, exactly. Yeah, and you really do need the kind of look at multiple metrics to get the full picture for this or any other crypto asset. One of the more interesting ones in here, I think, is the median transfer value because this kind of lets you segment stable coins into different buckets. So talk us to this chart.

Tell us what it means and where it kind of lets you kind of taxonomically place these stable coins. Yeah, so this chart is really interesting. because it's showing median transfer values, kind of on a log scale. So there are large differences between these transfer values, but this lets you see the bands of different stable coins. So if we look starting at the top of the chart, we see HUSD and BUSD, which are two kind of exchange back coins. And these have really high median transfer values above $10,000. So that shows you that these stable coins specifically are probably either being used for really large trades or probably, probably, kind of an inter-exchange settlement or other exchange-related purposes, just because they're moving

such large amounts. But then if you start going down, you can see that USDT's median transfer value sits at around $1,000. Most of the other stable coins sit between there and Pax. Pax is about $100. So most of the stable coins median transfer value is kind of between $100,000. That opens up more use cases. You know, US DTs, $1,000 is still relatively high. So that that's probably still shows that it's used mostly kind of for trading. But going down the ones that are closer to $100, those might, you know, those are probably used some for trading, but they're also used for other purposes, which is why their median transfer value is lower. And then if you see kind of at the very bottom that you have packs, Pax G, which is the gold back, gold back packs. And that's really low.

That's like $10 to $20. And that's probably just. because it's being transferred so much less than the other stable coins and hasn't really gotten too much real usage yet. My takeaway from this chart is that stable coins are actually not really retail facing transactional rails. They seem to be more like wholesale rails or things that larger traders or funds or businesses would be taken advantage of. Is that kind of your interpretation too? Yeah, I think that's right. I think we were truly seeing stable coins being used at a medium of exchange. or kind of via retail rails right now,

you'd see lower median transfer values, probably kind of $100 and less. Yeah, so I mean, that's still informative because it says, well, we know there's a couple billion dollars worth of transactional value on stable coins a day. So clearly there's a demographic out there that's taken advantage of these things and finds them useful,

but it's not regular folks. It's not a transactional pattern like Venmo. It's more like people sending bank wire. is people that want final settlement on a cross-border basis. Yeah, exactly. And I think that's probably will be, if it's not already happening. I think that's kind of the one first major use cases for Sablecoins outside of an exchange and kind of institutional investor level.

If you think about especially what's happening right now in the world, there's a real need for cross-border payments, for global remittances. And Sablecoins on crypto in general are just perfect for that. You can send any amount of stable coins across the world pretty much instantly, more or less, for relatively low fees. So I think we'll probably start to see more and more evidence of that kind of use case, especially as the world continues to change. But at least up to now, it hasn't really looked like that's been the case. So on that same topic, talk us through the velocity chart, because you actually compare a stable coin velocity and explain what that term means. and you compare it to Bitcoin and Ethereum, and this is a really startling finding.

So tell us what's going on here. Yeah, so velocity is basically a measure of the amount of times that an average unit supply has been transferred in the past year. So it can be thought of as a rate of turnover. So say your average unit of tether is exchanged 100 times in the past year, then the velocity would be 100. So if it's kind of bouncing from one address to another. So basically the higher, the velocity, that implies that it's being used as kind of more of a medium of exchange.

It's exchanging hands a lot. Low velocities imply that it's being just held by individuals. It's kind of being more treated as a store of value. So again, this chart shows on a log scale, so you can see the different bands. And if you look at kind of between five and seven velocity, you see Bitcoin and Ethereum there. So pretty much all the stable coins except for Pax Gold are considerably above that. Dye is the highest and it's kind of been increasing since March. But this shows that stable coins are actually being transacted and transferred a lot more than Bitcoin and Ethereum.

So they're changing hands more often. So this really does imply that they're being used more as a medium of exchange. It doesn't necessarily mean that people are using them to exchange goods or as a medium exchange. but they're acting at least more like a meaning of exchange and they're changing hands more often than Bitcoin and Ethereum. Yeah, and this is a really kind of stunning finding, in my opinion, because there is a Bitcoin in an ether denominated economy. These are used for cross-border settlement. They act as reserve currencies. They're collateral.

And they're used for purchasing goods and so on. But stable coins, even in their kind of brief couple of years of economic. existence have totally eclips Bitcoin and Ethereum when it comes to that transactional velocity, with Dai being by far the most active of the whole cohort. Yeah, it really is quite astonishing. And it kind of lends credence to the theory that staple coins are kind of taking over that medium of exchange vision that was touted for Bitcoin in the very beginning, but it hasn't hasn't necessarily played out.

But yeah, it's just a natural, natural kind of use case for stable coins to be that medium of exchange for crypto instead of Bitcoin and Ethereum. And you have this great chart at the end, which shows the adjusted transfer value, which is some proprietary adjustments that coin metrics makes, showing that actually the real flippinging has occurred. Stable coins as a cohort are currently more, they're settling more value per day than Bitcoin. Yeah, this is pretty crazy. And yeah, it just happened recently.

It just passed in July. They've been above Eath for a while, but even Bitcoin is now playing second fiddle to stable coins. Yeah. Yeah, it's pretty crazy. And to me, there are a lot of things you can take away from this. I kind of see stablecoins as maybe the first true killer app built on top of Bitcoin Ethereum and other blockchains.

So this is interesting because it's, it's, showing that the somewhat quietly, this real use case for, for crypto is catching steam and even eclipsing Bitcoin and like you said, eclipse Ethereum a while ago. Do you, does this worry you at all? Because, you know, the, the security of Bitcoin and Ethereum currently under proof of work relies on, you know, people holding the native asset and transacting with it. And in theory, that be that reservation demand being price accretive, which means its security spend is higher and then the whole system is secure. And if they're using the kind of settlement qualities of these blockchains while not holding a

native asset, while holding a non-native asset, is that parasitic to you? Is that kind of something that throws the economic model of blockchains into question? I think it's definitely a concern. Yeah, I think more so for Ethereum than Bitcoin. But like I was saying, I think this is kind of an example of the first real use case in killer app. So Ethereum and Bitcoin are going to have to figure out how to solve this. I mean, this has been stablecoin explosion has been driving up Ethereum fees, especially over the last couple months, which then kind of reverberates throughout the rest of the ecosystem. It prices out other DAPs.

And like you said, I mean, Ethereum in general and Bitcoin, it really depends on the fees. So if some of these fees are, if some of the settlement and even some of the fees are eventually paid in stablecoins or other assets, that would really, that could really jeopardize the underlying blockchains. But I think in the long term, I'm optimistic that kind of rising tides raise all ships, and they're going to figure out a way to make this work. Because if they can't make, you know, if you can't make this stablecoin use case work on Ethereum, then the rest of these cases are kind of in trouble, too.

Right. So much relies, so many defy apps rely on the existence of stable coins. I guess there really is a big, it's worth noting that there's a big difference between crypto collateralized stable coins and the fiat backed ones. Because ultimately, the crypto collateralized ones like die, they do close the loop in that they are backed by, mostly by ether. So they're quote unquote giving back in terms of security, you know, by inducing people to hold ether to lock it up in the contract. Whereas, you know, USDT or USCC, like there's no ether that's being collateralized to support those.

Yeah, that's a great point. And I think we'll probably start seeing more and more stable coins over the years that use Dyes model, or at least try to use something a little more similar to. that. But at the same time, I mean, now MakerDAO is adding more collateral options. So they're introducing other cryptos in addition to ether. So it's a tricky problem for sure. I think it would be interesting to see that on Bitcoin along the idea that Bitcoin over time is going to change and become more akin to a collateral or a reserve asset, which is kind of the role at place today, being one of the reserve assets of the crypto industry. But being a a reserve asset against which you could mint notes or effectively stable coins in the same way

that Eath plays that role for Dye today? Yeah, I think that's right. And I think that's why I think Bitcoin, especially in stablecoins, will also be ultimately be mutually beneficial because Bitcoin really does act as that reserve asset now. And I think that's probably its main use case, at least in the short term, moving forward. So as long as you kind of have that reserve asset and Bitcoin as basically the most secure chain, stable coins can exist side by side with that. Yeah, and like I said, I think Ethereum has a little more of a concern about whether stable coins will be more parasitic in the long

run. So with all this in mind, what are your kind of ultimate takeaways from this investigation that you've concluded here? Yeah, so I think it's just fascinating, first of all, how much stablecoins have grown, how much they've grown in the past and now, especially given tether's issues and their upcoming issues. I mean, they're still in the news for being under regulatory scrutiny. One kind of the interesting takeaways from me was kind of the paradox of Tether is how stable coins, their whole purpose is to be stable and peg to the dollar. But at the same time, since Tether doesn't always do that and it's volatile and it goes above a dollar, that is creating a lot of the opportunities that are kind of really driving the growth. So the

bottom kind of has to fall out at some point. Tether can't keep on going off its peg forever and still be kind of a staple of the crypto ecosystem and be a true stable coin. So things have to change eventually, but it's also just shocking how much of a lead that Tether has and kind of continues to have over all other stable coins. So, Nate, where would you reckon that people can follow your future work on this topic? Yeah, so you can check me out on Twitter. My handle is Nate Madri. sure to check out the State of Network newsletter, which I lead and comes out every Tuesday. And you can find that through Coin Metrics, Twitter, and through our substack. And I guess if you like the visual look of the charts and the metrics in the article,

Coin Metrics is going to be rolling out charts that visually look and feel like the ones that are in this report. So stay tuned on that front. And there's a bunch of good community data if you go to Coin Metrics I.O. too, that we have most of the data that's in this report, you can kind of look at on your own for free through our community data portal. Yeah, and we'll link to that. So yeah, you can get dynamic and live updated versions of these charts on the site, including Free Float, which is a metric that the CM folks put a lot of effort into. So strongly recommend that. Well, Nate, thank you so much for coming on, sharing your thoughts with us. It's been a pleasure. And thanks a lot, Nick. This has been

great.