The Pomp Podcast - #1239 Peter Johnson | Stablecoins Are The True Killer App of Crypto

Episode Date: September 4, 2023

Peter Johnson is the Co-Head of Venture Investments at Brevean Howard Digital. In this conversation we talk about the epic rise of stablecoins, how they have become the killer app of blockchain technology, where stablecoins are being used, why they are being used, and who is using stablecoins. ======================= Auradine, a leader in web infrastructure solutions including blockchain, AI, and privacy, has unveiled the world's first 4nm Bitcoin mining systems, featuring breakthrough EnergyTune™ technology, setting new standards in performance and energy efficiency. The Teraflux™ product line from Auradine offers best-in-class performance, efficiency, and total cost of ownership (TCO), positioning it as the optimal choice for Bitcoin mining needs. With EnergyTune™, a patent-pending technology, Auradine's Teraflux™ systems enable rapid demand response and optimal energy usage, fostering a symbiotic relationship with electrical grids, and contributing to sustainable energy practices. Designed and manufactured in the US, Auradine's Teraflux™ product line not only ensures cutting-edge technology but also mitigates supply chain risks and provides increased supply chain resiliency. Visit ⁠www.auradine.com⁠ for more information the Teraflux bitcoin mining systems. ======================= Get Better Crypto Data: Do you want faster, easier crypto data? Sign up for Velo Data, a new product that we have been working on to solve this problem: ⁠⁠⁠⁠velowaitlist.com⁠⁠⁠⁠ ======================= Pomp writes a daily letter to over 250,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/

what's up everyone this is anthony pompliano many of you know me as pomp you're listening to the pomp podcast which is my effort to find the most interesting people in the world and sit with them for hours while i ask questions in an effort to learn so it would mean the world to me if you would subscribe to the show on your favorite audio platform watch episodes on youtube and tell your friends and family about the podcast my goal is to help millions learn from the world's most interesting people. So let's get into today's episode. Peter Johnson is the co-head of venture investments at Brevin Howard Digital. In this conversation, we talk about the epic rise of stablecoins, how they have become the killer app of blockchain technology, where stablecoins are

being used, why they're being used and being used by who. I always enjoy talking to Peter. He has been on this focus of stablecoins for years now, and it looks like all of his predictions are starting to come true. Here is my conversation with Peter Johnson. This episode is brought to you by Auradon. They're a brand new startup led by a number of Silicon Valley legends who just raised $81 million to build the future of internet infrastructure. You're probably wondering what that means. Let me explain. There are numerous new disruptive technologies that are being adopted simultaneously from blockchain to artificial intelligence to zero knowledge technologies. In order to ensure that these technologies thrive in this new world, we need new infrastructure, and that is where Ardine comes in.

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That's A-U-R-A-D-I-N-E.com. Go check them out at Auradine.com today. Before we get into this episode, I also want to tell you about a brand new product called Velo. Velo is faster, easier crypto data. Everyone in the industry is always looking for what's the price? What's going on on the exchanges? Where are assets flowing or not flowing? How is things like open interest and derivatives actually playing out in the market?

Well, that's where Velo comes in. It's faster and easier crypto data. You can go to VeloWaitlist.com today. myself and a couple of friends we invested in the business we're advising the founder and we think it's pretty cool this one is something that keeps me informed on a daily basis so you should check them out at velo waitlist.com that's velo waitlist.com anthony pompliano runs pomp investments all views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of pomp investments you should not treat any opinion expressed by pomp or his guests as a

specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. All right, guys. Bang, bang. I've got Peter here with me. Peter, in our conversation about stable coins, I thought a perfect place to start was just how big these stable coins have gotten. You all recently put out a paper that talks about $11 trillion being settled with stable coins in 2022. In context, that number is almost the same for Visa. What's going on and why are stable coins so popular? Yeah, it's huge numbers. I think it's numbers that stun a lot of people. And the growth has been really incredible. It's great to be back on the show. Thanks for having me on. I was last

on three years ago talking about stable coins. And back then, stable coins were 6 billion outstanding. They're now over 125 billion outstanding. Volumes at that time were very, very small and now like you said their visa scale uh in the amount of value that's being settled uh on blockchains using stable coins and that is just on-chain settlement that does not include exchange trading volumes this is actual on-chain settlement and it is as you mentioned 11 trillion dollars last year that is roughly the same as the visa network and almost 10 times uh paypal for another sense of comparison. And another great statistic that Nick Carter just put out is that actually 70% of the value that's transferred on blockchains is stablecoins.

So stablecoins, it's a killer use case. It's a dominant use case, frankly, for blockchains. And what we're seeing here is that there is an insatiable demand around the world for US dollars. People want to save in dollars. They want to transact in dollars. If you look at commerce around the world the vast majority of commerce is already done in dollars but there's also a lot of people that don't have access to dollars or using dollars is very costly it's inconvenient it takes a significant amount of time and with stable coins it's an open network dollar that effectively anyone in the in the world with an internet connection can hold and transact in a dollar and that dollar can move around the world close to instantaneously and close to free and

And that is a very strong value proposition for lots of people and businesses around the world. So we've talked here about kind of how popular they are by measuring transaction volumes. And obviously, these are stunning numbers, I think, for people who haven't been paying attention on a day-to-day basis. But you also in the report talk about 25 million addresses having at least $1 of stablecoin. And so is that a proxy for trying to understand the aggregate number of people who are using stablecoins? how do you think about not just transaction volume but actually how many people or organizations use this stuff right it's tough to get to the exact number of users because when you look at the on-chain data it's it's blockchain addresses that you're looking at i do think that is a it's a

rough proxy for the number of users uh users obviously can have multiple addresses uh the flip side of that is you're also under counting users that just use stable coins via exchanges or custodial services um but so the net result is it's certainly imperfect but i do think it is a rough proxy for a number of users and as you mentioned there's 25 million addresses that have at least a dollar of stable coins so that i think that's a proxy for usage and interestingly enough out of the 25 most of those 20 million addresses have between one and a hundred dollars uh of stable coins so there's a very large number of small dollar holders and users um when you look at how stablecoins are being used.

And then another way to look at it is how many of those addresses are actually active. Because obviously there could be people abandoned addresses or forgot about them or whatever. But there's a huge number of active addresses. And there's actually 5 million addresses, weekly active addresses, sending stablecoins. And that is the, if you, you know, for folks that have read the report that I just put out on stable coins, that is the chart we started with, is weekly active addresses. Because the growth of weekly active addresses using stable coins has been relentless. It's up and to the right, bull market, bear market, prices go up, prices go down. It doesn't seem to matter.

More and more addresses and effectively more and more people are using stable coins. The growth is unbelievable. So when we see kind of bull and bear markets, one of the interesting data points you guys point out, is that stable coins are decoupling from a lot of this exchange volume. So you're continuing to see growth, but also you're seeing that even when there is some sort of decrease in the market cap, it's at a very different kind of degree or severity. Talk a little bit as to why do you think this decoupling is happening? Is it because the other assets are more speculative in nature and this isn't, or is there some other reason?

Yeah, absolutely. I think that is what is happening. And that is one of the reasons that we wrote this report. We started this report almost a year ago. And the genesis for this was that I was hearing a lot of narratives, and I'm sure you hear these narratives as well. And the two things that a lot of people say are, one is that crypto is just for speculation. It's all trading, it's all gambling, there's no quote-unquote real-world use cases, or there are very few of them. And then the other one, specifically stablecoins, is that as the

market cap of stablecoins started to come down, I started hearing people saying like, okay, stablecoins, it's not working. This is not being used, it's a failed experiment, those types of things. And I did not think that those narratives were true. So I wanted to dive into that and see, okay, what does the data tell us on how stablecoins are actually being used? And we saw, as I mentioned, the relentless growth of active addresses, of transactions, of those types of things. And we also saw, as you mentioned, a decoupling of stablecoin volumes from exchange volumes. Exchange volumes, if you look at starting at the beginning of 2022, you know, when things were hotter in the crypto markets. Volumes on centralized exchanges and

decentralized exchanges, those are down about 60% or more since that time period. And during that same time period, stablecoin volumes are roughly flat. And the number of active wallets and active users, active number of transactions are all up significantly. So I don't, when you look at that data, I think that that is some of the most compelling proof when you look at what's happening with exchange volumes versus blockchain stablecoin volumes, I think the only logical conclusion you could take out of that is,

okay, these stablecoins are being used for a lot of other things and not just trading. When we start to look at that outstanding supply, right? So if people are using them, many of the data points that you've highlighted here, we went from about 3 billion five years ago to now 125 billion. And in the report you all talked about,

well, actually it was 160 and now it's come down to that 125 billion. So there has been some contraction in the market, But to me, getting at why is this happening, right? How much of this is what I'll call like demand-led growth where people are basically just starved for dollars around the world or even in the United States and they want to be able to use it versus actually it's been infrastructure building, right? We see Circle and USDC. We see many other payment processors and different companies starting to add support for stable coins. Like, is it both?

Is it more demand-led? Is it more kind of like supply and infrastructure-led? But how do you think about what's driving such insane growth over the last five years? It's tough to put your finger on what exactly it is because there's so many different factors, as you said. And the growth of stablecoins, what's been in the driver's seat has varied over time. When stablecoins started and Tether got a lot of traction starting in 2018, went from effectively nothing to $3 billion in 2018, that was all driven by exchanges. and exchanges and traders that didn't have access to U.S. bank accounts and wanted to trade using a dollar-based pair and move dollars between exchanges. And that is what gave

stablecoins the initial growth. And then what you had is you had exchanges around the world add stablecoin pairs. So now you have effectively anywhere in the world, you can go from a local currency into a dollar via a local cryptocurrency exchange. So that infrastructure build-out has been just absolutely massive over the last several years. And that infrastructure build-out was not built out to enable stablecoin movement around the world. It was enabled to help these exchanges. But the end result of that is that we now have a system where you can get to dollars

and move dollars and get out of those dollars and almost every currency in the world quickly and cheaply. And then on top of that, you have folks like Circle and others that are building infrastructure, especially for stablecoins. And then you have this whole really explosion of companies now that are building applications on top of this specifically for stable coins. Because the way that a lot of these transactions work right now, it is between exchanges and people are using crypto exchanges to do this. But a crypto exchange really isn't meant for if you just want to save and spend in dollars in stable coins. It's not something you're going to recommend that your mom use, for example.

But now there are applications that are being built specifically for, you know, you're in Latin America, you're in Turkey, and you want to save in dollars and you want to spend in dollars. We can make a great fintech app that does all these things and happens to use stable coins on the back. And it's just a much more efficient way to do it. And it offers access to more people. And that's some of the most exciting stuff we're seeing right now. Yeah, one of the pieces of the report that, frankly, it took me a while to kind of think through. Like, it makes sense, but it's also surprising. is that only about one third of the stable coins are on exchange. So on one hand, it's not a

speculative asset. And so therefore, an exchange, usually people are looking to trade or kind of make some sort of speculative action. On the other hand, only one third being on the exchange, there's not that many places to go get stable coins other than on exchanges. And so how do you guys think through that? And is that a bullish sign for stable coins? Is that a negative? Or are you kind of agnostic to that specific data point? Yeah, I think that that's a great data point. And And that's actually the data point that we started with when we started a lot of this research about a year ago, because we're trying to figure out like, okay, how are stablecoins being used?

Is it speculative? Is it non-speculative? The first thing we looked at is how much stablecoins are on exchanges, because I think that that's the easy way. If it's on an exchange, it's being used for trading. If it's not, it may or may not be. But knowing how much is on exchanges is certainly indicative. And we found, as you mentioned, that less than a third of stablecoins are on exchanges,

that number has been coming down significantly. Now, there's a number of reasons that could be coming down. It could be coming down because of more non-speculative use cases. It could also be coming down post-FTX. People just don't want to leave their coins on exchanges. So it's not a definitive fact, but it's one of the, as we were triangulating how stablecoins are being used, I think a very positive data point in supporting the non-speculative uses of stablecoins. Yeah, that makes sense. Now, I want to talk about some of the technologies here. So obviously, Tether is the most popular stablecoin and kind of has continued to dominate the market. I think USDC is the second most popular and has had a great run in terms of eating some market share,

but still it hasn't been able to eclipse Tether. And so some of the data points that you all share is that Tether represents 69% of stablecoin supply. Year to date, it's accounted for 80% of weekly active addresses, 75% of transactions, and 55% of volumes. How much of that is just like first mover advantage. How much of that is, you know, kind of having maybe a different approach to whether it's technology or what they're doing with some of the assets? And then how much of that is just a moat? And like, it doesn't matter how good another stable coin comes. If you're first and you've got, you know, kind of the market dominance, you kind of get to do that unless you really, really royally screw it up. Yeah, I think a lot of it is the first

mover advantage. Like they were there first and they established themselves in a variety of different ways. They became the dominant trading pair on a lot of exchanges. The majority of exchange volume is denominated in Tether. So that is a big advantage and a moat in emerging markets around the world. People just started using Tether. When you go to Latin America or other countries and you ask people, do they use stablecoins? Do they know what stablecoins are? Most of the time they do. And they're most often using Tether on Tron just because that was their first. It's what people use. They've gotten used to it. They got comfortable with it. They're not thinking too much about Tether or the Tron blockchain. It's just that's the way they can

access dollars. So I think that the first mover advantage is a very big advantage for Tether and Tether on Tron. I think it will change over time. I think that USDC, what we saw with USDC, did gain significant market share and started to challenge Tether for a little bit. But then there was what I would consider a series of unfortunate events. One is just the market cap overall of stablecoins coming down. And if you're looking to redeem a stablecoin, go from a stablecoin into a dollar, unfortunately or fortunately, USDC is much easier to do. They have better customer service. It's easier to redeem. There's no redemption fee. That's very important. So if you're looking to redeem, which one are you going to redeem? You're going to redeem the one without

a redemption fee. So it's kind of natural that more USDC is going to be redeemed than Tether and that some stablecoins are going to be redeemed as we go from a zero interest rate environment to a 5 plus percent interest rate environment, the value proposition for holding your dollars in something that doesn't pay interest, it just gets tougher. So we saw flows out. A lot of those flows came out from USTC. And then on top of that, the regulatory environment has been tough in the US. You've had the SVB collapse. And even though that ended up not being an issue for Circle, it did. People freaked out over that weekend. That significantly hurt their volumes and the value i was standing over that weekend so i think that it is um we were seeing what i thought was a

positive trend in usdc gaining share we had a series of unfortunate events that brought that share down but i do think that usdc will if you actually look at a lot of the underlying metrics weekly active users transactions volumes are actually popping back after after the svb issue like i think that they're on a good track and then the paypal entry is obviously just absolutely massive these the scale of paypal the number of customers that they have they already have 400 million users uh they have hundreds of thousands of merchants that are using paypal uh and they're they're they're trusted by everyone there's a survey paypal second most trusted brand in the world uh in a recent survey so so people around the world trust paypal and now you have uh you

can get a paypal dollar anyone in the world with an internet connection can get a paypal dollar like that is going to be absolutely huge if paypal wants it to be and i think that they do i think they're going to be measured in how fast they grow because regulators don't want them to go too fast but their entry is going to be uh i think that's a game changer yeah that makes a lot of sense now let's talk a little bit more about tron and binance smart chain i think people who again haven't really dug deep into uh stable coins haven't read this report they're gonna be shocked by these statistics so 77 of weekly active addresses uh of stable coin activity come from Tron and Binance Smart Chain, 75% of transactions and 41% of volumes.

Most people, I think, would look at both Tron and Binance Smart Chain and say, oh, that's probably some altcoin thing that has nothing to do with day-to-day usage. These statistics are showing the exact opposite. And I'll give you an anecdote. I talked to an entrepreneur from Argentina recently, and he said that most people, they want dollars and they're not going just to buy Bitcoin. They want dollars. And so stablecoins have had this huge rise in popularity and they're using Tron. And when I asked him why, he said, well, it settles quickly and it's cheap. And it was just like so simple. It kind of goes back to your point of like, do people care what blockchain they're using if they can just get simple, quick, and cheap

transactions? I don't think so. I think that that is the primary, well, the primary driver is that the first mover advantage is that we moved from Tether on Omni, Tether on the Bitcoin network is where we started. And then it went to Ethereum. And then we moved to the faster and cheaper chains. And unfortunately, the first faster and cheaper chains that they went to were Tron and BSC. So we got a lot of adoption there. And then once you can have a fast, cheap dollar transaction, most users aren't thinking too much about which blockchain that's running on. So we've seen this adoption of Tron and BSC. I think that will change over time. And if you dig in a little bit further and you look at the sizes of holdings and sizes of

transactions, you actually do see that a lot of higher value holdings and higher value transactions are on the Ethereum blockchain. The average Ethereum transaction is, I don't have it in front of me, but something like 10 times the size of a Tron transaction and something like 70 times the size of a stablecoin transaction on VSC. So you are seeing the higher value transactions on average on Ethereum, which does make sense because it's a more decentralized blockchain with stronger settlement assurances, et cetera. I do think over time, we're going to see much more on other um layer ones which are more decentralized like solana and then certainly on on layer twos uh we're seeing a lot of activity there now we're already seeing stablecoin volumes increased

uh very dramatically on on layer twos and i think over time we i think we will and i certainly hope we will move from uh chains like tron and bsc to things like solana and layer twos talk a little bit about the stablecoin issuers you know we've seen both tether and uh circle come out and just report monster quarters some of that is obviously being helped by interest rates going up in a very aggressive manner but these businesses are shockingly big how do you guys evaluate is it sustainable can competition eat away at some of these profits what do you kind of foresee happening here yeah they are absolutely monsters in in terms of profitability i think that's another thing a lot of people from the outside probably don't realize that you have

crypto businesses to how they're making a billion dollars a quarter in profit. That's incredible. Is that sustainable? I don't think at this level, it's not sustainable. I think that they are going to, one, eventually interest rates will come down somewhat. Also, there's going to be competition from a number of angles. One of those angles will be interest-bearing stablecoins. I think we're going to see more interest-bearing stablecoins. There are issues there from a regulatory perspective. That may be a security in the US. MICA in Europe explicitly doesn't allow that. But there's going to be ways to pay interest on stablecoins, and that will bring some of those margins down. And then I also just think you are going to see more competition from new entrants

like PayPal. I think other entrants are going to come in, and that will put pressure on some of these businesses. But in general, this is a fantastic business, especially when rates are high. You effectively have zero-cost deposits that you're earning 5% on. That's a great business. Talk a little bit about CBDCs. Do you see the private stablecoins competing with replacing? Could they actually be hurt if central bank digital currencies come out from large central banks? How do you see these two things interacting with each other? Central bank digital currencies is not something that I think is actually something that would actually happen in most developed countries.

And most central banks don't actually want to do a retail CBDC. If you talk to folks at the Fed, they have many times explicitly said they are not looking to do a retail CBDC. They have no interest in doing that. Any CBDC is more of a wholesale CBDC, which really, at that point, it's very similar to what we already have in Fed and FedNow. So it's not disruptive to stablecoin issuers, which are on a retail level. So I think it's an interesting thought experiment for central banks to go through the idea maze

on how the different ways they could potentially do this. But at the end of the day, unless you're going to go the China route and really focus on surveillance, know where and how retail people are spending all of their money, it doesn't really, I don't think it's possible for, or it's not practical for most central banks to actually issue a CBDC, a retail CBDC. One of the things I've kind of done the thought experiment on, and I don't know what the probability of this is, but it seems like if all of a sudden, out of the 330, 340 million Americans, if you had more than 50% of them using dollars with dollar stable coins by a private company, regardless of who that company is, does the

government all of a sudden say, you know what, that sounds like we should own that or we should be involved in that in some form or fashion? Again, we have banks, obviously, that have users and use certain technologies, but this feels like a little bit closer to what the government historically has enjoyed as their role in the financial market. How do you see that relationship? So if the government doesn't issue a CBDC, but the private companies become highly successful in getting adoption does maybe the government's you know kind of evaluation change i think it will i think it should and i think it will i think that we should be passing uh federal stablecoin regulation right now there is no reason that that is not passed i have yet to hear a coherent here

an argument against a federal framework for stablecoin issuance uh it's i think it's shocking that we it seems like we're not going to get that legislation this year which is fine we have stablecoin issuers. They operate under state frameworks, but we should have a federal framework. It should be overseen by the Fed. They should probably have Fed accounts, so they can hold funds directly with the Fed. And that's where I think we'll get to eventually. I think we're still in this in-between phase, which we often are in crypto, where people still think this just might go away. But hopefully, some folks will hear you on CBDC and read my report and realize Stablecoins aren't going anywhere. They're great for the U.S., by the way. They encourage the use

of the U.S. dollar. They create a new buyer for treasury bills. It gives the U.S. law enforcement and regulators more control over them to some extent. I think that as people come to that realization, we will get federal stablecoin regulation, which will be good for the industry. My last question for you is the relationship between stablecoins and take Bitcoin. Bitcoin, obviously in the white paper talks about being electronic, peer-to-peer cash. Stablecoins seem to be the choice technology today for a lot of these transactions. Bitcoin still has quite a bit of transaction volume as well, but is the adoption of stablecoins eating away at potential adoption of Bitcoin? Are they harmonious and kind of actually help each other and it's like all

boats rise together? How do you view that relationship there? And is it a net positive or a net negative for Bitcoin? I think it's a net positive. I think it's harmonious. I think the conclusion that i came to a long time ago and i think you did too is that bitcoin is bitcoins are not great as a payments network people don't want to be buying everyday things with a unit of value that is fluctuating as much as bitcoin does and bitcoin transaction times and a lot of things about bitcoin just make it it's it's not a good uh payments network it's a good store of value network it's a fantastic store of value network it's the best store of value the world has ever known in my view and it should play that role and stable coins offer a way for people to it's the

best payments network in the world and that gets people into crypto and once you're into crypto i think that also opens you up to okay now i want to store my some of my wealth in a store of value that is not subject to the government whims and money printing and all of those types of things and once you go down that path i think you will logically end at you know things like bitcoin maybe Ethereum, which are great for portfolios, offer diversification, all of those things. And I think that that is really the role that they play much more so than being used for payments. Peter, when you think about the work that you guys are doing, how do investment firms interact with stablecoins? Is it something where you can just store cash, move it more quickly, maybe

pay folks? How do you see the financial world, not retail, but the actual financial institutions interacting with these assets? Yeah, so at Bremen Howard Digital, we're a very large macro hedge fund. With Bremen Howard Digital is our crypto division. In Bremen Howard Digital, we obviously we trade on many crypto exchanges. So we are dealing with stable coins all the time to move money between exchanges. On the venture side, we will fund investments with stable coins. And it starts to work its way into the operations of trading firms in those types of ways. And then I think you will see more and more of that, like, OK, we're funding investments with stablecoins.

Are there other things that we can do with it eventually? Again, a lot of that infrastructure needs to be built up, I think, before that's used on a more widespread basis. And I also think the value proposition for stablecoins in the US is not the same as it is internationally. It's a much stronger value proposition internationally in the U.S. I have access to dollars. My credit card works just fine.

I don't really need stable coins, frankly. And Jeremy Allaire has said 70% of USDC adoption is outside the U.S. Tether adoption is much higher than that outside the U.S. And that's where the real value proposition is. And I think that's also why a lot of people in the U.S. are surprised when you start giving them these statistics is because the value proposition doesn't resonate with them. The value proposition of Bitcoin also doesn't resonate with people in the U.S. nearly as strongly as it does other parts of the world, because we have lots of store of value and our currency isn't having massive inflation and all of these types of things. So I think that it's a the U.S. developed market perspective on stable coins, on crypto is often very different than it is in other parts of the world.

world. I think that makes a lot of sense. Peter, where can we send people to find you on the internet or find out more about Brevin Howard Digital or even maybe read the paper that you just put out? Yeah, you can find me on Twitter. I am at the Chicago VC. The paper is also posted on Twitter, so it's probably the easiest place to find it. Awesome. The all-time Twitter handle of the Chicago VC. Pretty clear what you're looking to do. I locked myself in there. Awesome. Well, thank you so much for doing this. We'll definitely do it again in the future. Thanks, Tom. Appreciate it.