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We recently delved into the history of tokenized real-world assets (TRWAs), providing a historical backdrop to understand their origin and evolution. We explored the origins of real-world tokenization and laid the groundwork for how this process transforms how we interact with tangible assets.
Today, we take that conversation further by focusing on stablecoins backed by real-world assets (RWAs). With stablecoins now boasting an annual transaction volume on par with VISA, RWA-backed stablecoins are a powerful development for global finance. We'll unpack what stablecoins are, their benefits and inherent risks, and how their rapidly expanding usage is shifting financial paradigms. By the end of this piece, you'll understand the taxonomy of stablecoins and the crucial role of RWAs in legitimizing this emerging asset class.
Stablecoins often serve as the bridge between traditional finance and blockchain-based decentralized applications (DApps.) Unlike most digital currencies known for their price volatility, stablecoins aim to maintain a consistent value. They achieve this by anchoring their value to something more stable, most commonly the U.S. dollar. This pegged value allows stablecoins to offer the best of both worlds: the near-instant processing, security, and privacy of blockchain, along with the volatility-free stable valuations of fiat currencies.
U.S. Federally chartered banks have used stablecoins for payments and operating independent node infrastructure since 2021. Transaction volumes for stablecoins now rival that of VISA in terms of annual volume, with total stablecoin market capitalization growing from $5 billion in 2020 to over $120 billion in 2021. This market capitalization will be even higher in 2024. We are overdue for a comprehensive and candid look at how stablecoins fit within the global financial framework.
2014: Tether (USDT): Launched in 2014, Tether was the first stablecoin to gain mainstream attention. It was designed to be pegged 1:1 to the U.S. dollar, thus providing a stable valuation in a highly volatile crypto market. Tether’s opaque backing has led to persistent calls for greater transparency in its financial reporting.
2015: Algorithmic Stablecoins Created: MakerDAO introduces DAI, an algorithmic stablecoin. Unlike Tether, DAI isn't directly backed by fiat reserves but uses smart contracts and collateralized assets, such as Bitcoin and other cryptocurrencies, to maintain its value.
2016-2018: Early Competitors: New stablecoins such as TrueUSD and USD Coin emerged during this period. These coins sought to address the transparency issues of Tether, offering more regulatory compliance and regular audits to confirm their 1:1 dollar backing.
2019-Present: Diversification and Maturation: The stablecoin market has since expanded to include a variety of options. In addition to stablecoins backed by fiat currencies, some are supported by other real-world assets like gold and algorithmic stablecoins that use smart contracts to automatically adjust supply and demand, thereby maintaining their value without the need for a reserve.
This evolution of stablecoins demonstrates their growing complexity and variety, making them an increasingly vital component in the financial landscape.
The dual nature of stablecoins—offering both opportunity and risk—makes them a complex but indispensable financial instrument, especially as they find broader applications beyond cryptocurrency trading. As we will see, simply tokenizing an asset does not augment its intrinsic risk profile. However, there are legitimate arguments to be made for the benefits and risks associated with stablecoins.
Stablecoins offer a compelling alternative to traditional banking systems regarding speed and ease of transactions. Traditional bank transfers, especially cross-border ones, can take days to complete and often involve multiple fees. Stablecoins simplify this process significantly. Transactions are almost instantaneous, and the costs are typically far lower, making them highly advantageous for personal and business financial activities. It is this cross-border transferability that, in part, explains why non-U.S. entities and jurisdictions dominate U.S. dollar-denominated stablecoin transactions.
One of the primary concerns regarding stablecoins is the need for more transparency. Many stablecoins, especially pre-2020, have been opaque about the assets backing them. This opacity has led to questions about whether these stablecoins are fully backed by dollars or other assets as claimed. Occasional de-pegging of systemically important stablecoins such as Tether from their 1:1 dollar value has led to crises of confidence regarding the solvency and operational durability of companies issuing stablecoins. This uncertainty can introduce financial risks for individual users and on a systemic level, especially as these assets continue to gain prominence within traditional financial contexts.
The ever-evolving stablecoin landscape intensifies as global adoption and systemic importance increase. However, the cyclical nature of digital asset markets and their largely underregulated nature means metrics shift can shift significantly and rapidly.
USD-denominated stablecoins overwhelmingly dominate the stablecoin sector, accounting for a 98.9% share. This dominance suggests a strong preference among users for stablecoins pegged to the U.S. dollar. Non-USD stablecoins comprise only a fraction of the market, led primarily by commodities-backed options like Paxos Gold (PAXG) and Tether Gold (XAUT).
Tether (USDT) remains the dominant force in the stablecoin market, with a nearly 70% market share that’s continued to climb slowly. Close competitor Circle (USDC) has lost ground. USDC now holds a 21.1% market share, down from over 30% a year prior. The cyclical nature of the digital asset market continues to influence the relative dominance of these stablecoin options, with bull markets seeing increased dominance of regulated stablecoin assets.
While global stablecoin usage has shifted away from the United States, the prominence of USD-denominated stablecoins like USDT and USDC indicates a strong preference for dollar-denominated assets. USDT has the most significant transaction volume of any stablecoin globally, indicating that more accessible stablecoin options have a global appeal. USDC boasts the deepest centralized exchange liquidity, with over $38 million in bids preventing a 0.1% price deviation at the time of writing.
Ethereum remains the preferred blockchain for stablecoins, accounting for 59.9% of the market at the start of 2023. However, Tron has seen a rise in stablecoin usage on the network, not commanding 36% of total stablecoin volume. This trend is contextualized by a more significant shift in stablecoin volume outside the United States.
Around 90% of stablecoin trading occurs on centralized exchanges, with USDT accounting for more than 75% of trading volumes. This concentration suggests a disproportionate amount of market-making activity occurring on centralized exchanges compared to their decentralized counterparts. Additionally, users prefer the liquidity and user interface centralized platforms provide for trading stablecoins.
USDC dominates in on-chain transactions related to DeFi and NFTs. This prevalence suggests that users actively participating in these sectors are more inclined to use USDC, viewing it as a reliable and versatile stablecoin option.
As global usage of stablecoins increases, their systemic importance to the world economy also grows. What began as a niche digital asset for convenience has now evolved into an integral part of the broader financial landscape. With higher usage comes greater scrutiny and the realization that the risks associated with stablecoins could escalate from being inconvenient for the crypto markets to destabilizing the global financial system.
Initially, concerns about stablecoins were relegated to cryptocurrency frauds and niche digital asset communities. However, the stakes have risen dramatically with the rapid rise in market capitalization and annual volume. A failure or collapse of a major stablecoin could now reverberate beyond blockchain ecosystems, posing risks to the global financial infrastructure.
While not as widely integrated as VISA, escalating stablecoins from a crypto novelty to a potential global financial risk underscores the urgent need for greater transparency and more robust backing mechanisms. It is prescient to facilitate financial inclusion for such a widely used and rapidly growing alternative system sooner rather than later.
Understanding the underlying collateral structures of stablecoins is imperative for framing the growing need for transparency and regulatory oversight. The different types of stablecoins come with varying degrees of transparency, risk, and regulatory scrutiny. Consequently, understanding stablecoin taxonomy paints a clearer picture of which assets among this growing cohort of digital tools pose the most significant risks and opportunities. Generally, stablecoins can be categorized into five key types, each with its own unique characteristics.
Traditional collateralization is the most prevalent stablecoins, backed one-to-one by fiat currency like the U.S. dollar or fiat-equivalent assets such as sovereign debt. With fiat reserves held by a central institution, these entities generally operate in full regulatory compliance with relevant jurisdictional authorities. Notable examples in this category include USDC (USDC) and True USD (TUSD).
Crypto-collateralized stablecoins leverage other cryptocurrencies as backing. These stablecoins operate on-chain via smart contracts and use other digital currencies to underpin their value. For example, when purchasing DAI, you lock your cryptocurrency into a smart contract to receive DAI tokens. These stablecoins are often over-collateralized to buffer against volatility in the backing asset. Many crypto-backed stablecoins also have fiat within their collateral composition, with DAI as a leading example in this category.
These stablecoins are backed by physical assets such as gold, oil, or real estate. While they offer a unique way to invest in and trade commodities, they are not immune to the natural price fluctuations of their underlying collateral. Tether Gold (XAUT) and Paxos Gold (PAXG) are leading examples in this space.
Algorithmic stablecoins are not backed by any collateral, whether fiat or crypto. Instead, they rely on algorithms and smart contracts to regulate their supply and maintain price stability. These stablecoins contract or expand their supply based on their current market price relative to a peg, often the U.S. dollar, and are generally less popular than collateralized stablecoins. Ampleforth (AMPL) is an example of an algorithmic stablecoin.
Despite claims of being one-to-one backed by U.S. dollars, there's considerable opacity surrounding the reserves of some popular stablecoins such as Tether (USDT)) A lack of full transparency puts any claims regarding dollar backing under scrutiny, requiring users to trust the stablecoin issuer’s word. As naive as this trust may seem, Tether has become systemically important in the cryptocurrency market and, increasingly, broader financial circles. This prominence and lack of transparency make a compelling case for regulating these multinational currency issuers.
Dollar-pegged stablecoins that are not backed by dollar assets require a level of trust in the full faith and credit of the issuing institution. This trust is the foundation for the stablecoin's value, especially in volatile markets where traders and investors seek a safe haven for their assets.
When full dollar reserves or real-world assets back these stablecoins, this trust paradigm shifts. Instead of relying on the creditworthiness of the issuing institution, the trust is transferred to the stability and integrity of the U.S. financial system or the real-world asset that backs the stablecoin. These real-world assets include dollar-equivalent government debt, such as Treasury bills and bonds.
Therefore, RWA-backed stablecoins represent the apex of the stablecoin evolution. They combine the benefits of blockchain technology—speed, security, and privacy—with the stability and reliability of traditional fiat currencies, effectively achieving stablecoins' original use case with a new layer of assurance and insurability.
The trend is clear: stablecoins are now an integral and growing part of the global financial system. This pivotal moment is underpinned by, at the time of writing, the pending Bitcoin and Ethereum ETFs in the United States. The pending opening of the floodgates of institutionally compliant, crypto-curious fund managers entails a sincere need for more transparent stablecoins.
Understanding RWA-based stablecoins is crucial for anyone navigating this evolving financial landscape. As stablecoins continue to gain wider societal acceptance and use, those backed by real-world assets will likely eclipse the tried-and-true yet opaque earlycomers. The technological advantages of blockchain and the financial assurance and stability provided by real-world assets make them indispensable for future financial planning and strategy.
Angle
Type of Stablecoin: Fiat-backed, Algorithmic
RWA-Backed? Yes
Type of RWA backing: Tokenized Euros, ETFs
Collateralization Status: Over-collateralized
Ticker Symbol: agEUR
Brief Description: Angle issues agEUR, an RWA-backed stablecoin over-collateralized by tokenized assets. Users can deposit their assets into the Borrowing module to receive agEUR tokens. Angle uses a Transmuter to ensure a dynamic backing to issued agEUR tokens, with the bulk of reserves held via the Transmuter as bC3M tokenized EURO ETF and Circle’s EURC stablecoin. You can view Angle’s collateral composition using their analytics tool.
Notes: The "Sensor" is the price oracle, and the "Reservoir" is used for liquidity provision. Angle aims to maintain a collateralization ratio of over 100% at all times and further seeks to diversify the Transmuter’s underlying collateral composition.
Brale
Type of Stablecoin: Fiat-backed
RWA-Backed? Yes
Type of RWA backing: Dollars
Collateralization Status: Fully Collateralized
Ticker Symbol: SBC
Brief Description: Brale's SBC is a fiat-backed digital dollar designed for businesses in specific US states. It offers interoperability across public and permissioned blockchains, allowing users to swap between networks. The stablecoin can be custodied with qualified custodians and is designed to be customizable.
Notes: SBC is unique in allowing cross-chain swaps without wrapping or locking, ensuring a one-to-one match with its treasury. It also offers customization options for businesses to create branded stablecoins using the same underlying technology
Circle
Type of Stablecoin: Fiat-backed
RWA-Backed? Yes
Type of RWA backing: Dollars, Euros, Sovereign Debt
Collateralization Status: Fully Collateralized
Ticker Symbol: USDC, EURC
Brief Description: Circle is best known for issuing USDC, one of the most popular fiat-backed stablecoins. It also offers a Euro-pegged stablecoin, EURC, and a suite of financial services like business accounts and APIs for payments and treasury operations. USDC is one of the most widely used stablecoins in the world and boasts the most transparently liquid asset peg of any stablecoin.
Notes: Circle is a fully regulated financial institution, providing both fiat and crypto financial services beyond just issuing stablecoins.
Frax
Type of Stablecoin: Algorithmic, Fiat-backed
RWA-Backed? Yes
Type of RWA backing: Crypto, Dollars, Sovereign Debt
Collateralization Status: Over-collateralized
Ticker Symbol: FRAX, FPI, frxETH
Brief Description: Frax offers a range of algorithmic stablecoins: FRAX (USD-pegged), FPI (consumer goods-pegged), and frxETH (ETH-pegged). The protocol employs subprotocols like Fraxlend for lending and Fraxswap for automated market-making. Frax recently onboarded FinresPBC as a reserve custody partner. The corporation’s primary objective is to grant the Frax Protocol entry to secure cash-equivalent assets and yields near Federal Reserve rates. Frax's goal is to benefit from off-chain RWA partner capabilities, including holding US Dollars in FDIC-insured savings accounts, minting, redeeming USDP and USDC, and holding and trading US Treasury Bills, all of which would be subjected to earning yield.
Notes: Governance is facilitated via Frax Share (FXS) and FPIS tokens. The protocol aims for full collateralization, mixing crypto and real-world assets, and adapts to Federal Reserve Interest rates for certain operations. Dune Analytics has a Frax dashboard.
Gemini USD
Type of Stablecoin: Fiat-backed
RWA-Backed? Yes
Type of RWA backing: Dollars
Collateralization Status: Fully Collateralized
Ticker Symbol: GUSD
Brief Description: The Gemini dollar (GUSD) is a stablecoin issued by Gemini, a New York trust company regulated by the NY State Department of Financial Services. Pegged 1:1 to the U.S. dollar, it merges the stability of the USD with the benefits of cryptocurrency. GUSD undergoes monthly audits by BPM to ensure parity between USD reserves and GUSD in circulation. Its ledger is transparently stored on the Ethereum blockchain and has been security-audited by Trail of Bits. Available on multiple exchanges, GUSD incorporates full KYC and AML screening for enhanced security and compliance.
HomeCoin
Type of Stablecoin: Commodity-backed
RWA-Backed? Yes
Type of RWA backing: Mortgages
Collateralization Status: Fully Collateralized
Ticker Symbol: HOME
Brief Description: HomeCoin is a stablecoin backed by U.S. mortgages, similar to those held by banks and governments. It aims to offer a stable asset while redistributing mortgage payments back to HOME holders, providing an alternative to traditional banking systems for wealth preservation. Users deposit their assets and receive HOME tokens, allowing them to claim proportional revenue from lien payments. The lien against the property underpins the value of users’ initial deposit, similar to traditional mortgage lending institutions.
Notes: HomeCoin claims to offer returns 10-30x higher than conventional bank accounts due to its efficiency in cutting out mediators. It exclusively uses mortgages approved by the Federal government, adding an additional layer of trust and compliance.
Ledgity
Type of Stablecoin: Fiat-backed
RWA-Backed? Yes
Type of RWA backing: U.S. Treasuries
Collateralization Status: Fully Collateralized
Ticker Symbol: LDY
Brief Description: Ledgity Yield offers stable and high-yield returns for stablecoin holders, bridging DeFi and traditional finance. It employs a bank-grade custody setup and adheres to financial regulations. Users deposit stablecoins and receive L-Tokens as proof. These deposits are converted to fiat currencies, like USD for USDC, through partners such as Circle. The fiat is then invested in T-Bills and Bonds via institutional partners. Ledgity Yield operates on multiple EVM chains and offers a diversified RWA-backed portfolio. Notably, there's no liquidation mechanism ensuring reduced risk. The protocol also features detailed analytics for users.
Notes: Ledgity is designed for high efficiency, diversification, and compliance with financial regulations. The protocol operates on multiple EVM-compatible chains and does not implement a liquidation mechanism. It uses L-Tokens as a proof-of-deposit for stablecoin holders.
MakerDAO (DAI)
Type of Stablecoin: Crypto-backed, Fiat-backed
RWA-Backed? Yes
Type of RWA backing: Dollars, Sovereign Debt
Collateralization Status: Over-Collateralized
Ticker Symbol: DAI
Brief Description: MakerDAO's DAI is a decentralized stablecoin pegged 1:1 to the US Dollar. Governed by MKR token holders, DAI is created by over-collateralizing assets like Ethereum in smart contracts using a system of Collateralized Debt Positions (CDPs). It employs autonomous feedback mechanisms and incentivizes external actors to maintain its peg. As of 2022, new forms of collateral, including tokenized real-world assets (RWA), have been integrated to diversify and scale operations. This expansion forms part of Maker's 10-year "The Endgame Plan," fortifying DAI's role beyond just a stablecoin.
Notes: DAI maintains its stable value through automated mechanisms and smart contracts, eliminating the need for centralized control. It's a cornerstone in the DeFi space and widely accepted across various platforms. Dai Stats offers an interactive dashboard for DAI statistics and trends.
Mountain Protocol
Type of Stablecoin: Fiat-backed
RWA-Backed? Yes
Type of RWA backing: Dollars, U.S. Treasuries
Collateralization Status: Fully collateralized
Ticker Symbol: USDM
Brief Description: Mountain Protocol's USDM is a nationally-regulated, yield-bearing stablecoin backed by short-term U.S. Treasuries. It is designed to give non-U.S. users access to U.S. Treasury yields. It features a daily rebasing mechanism similar to Lido Finance's stETH, offering a 5% APY.
Notes: Mountain Protocol's USDM is not available to U.S. customers and is not registered as a U.S. security. It holds a Digital Asset Business license from the Bermuda Monetary Authority, a globally recognized financial regulator. The stablecoin offers a daily rebasing mechanism for yield generation, targeting global users who face barriers to accessing high-yield U.S. financial products.
Tangible
Type of Stablecoin: Commodity-backed
RWA-Backed? Yes
Type of RWA backing: Real Estate and Collectibles
Collateralization Status: Under-Collateralized
Ticker Symbol: USDR
Brief Description: Tangible is a protocol for tokenizing real-world assets, offering a stablecoin called Real USD (USDR), backed by real estate and other tangible goods. The protocol allows users to purchase and trade tokenized physical assets, represented by Tangible non-fungible tokens (TNFTs), in a liquid and efficient manner. The platform addresses the illiquidity and transactional inefficiency of alternative asset classes like art, wine, and antiques by converting them into tradable TNFTs. Tangible also offers fractionalization tools for large ticket items, providing an innovative asset ownership and investment approach. It caters to crypto natives looking for stable value storage and real-world collectors looking for liquidity.
Tether
Type of Stablecoin: RWA-backed
RWA-Backed? Yes
Type of RWA backing: Dollars, U.S. Treasuries
Collateralization Status: Fully Collateralized (?)
Ticker Symbol: USDT
Brief Description: Tether (USDT) is one of the earliest and most widely used stablecoins, designed to maintain a 1:1 peg with the US dollar. It provides the cryptocurrency market with liquidity and a stable asset for trading pairs, offering a bridge between fiat and digital currencies.
Notes: Tether has faced regulatory scrutiny over the full backing of its coins and has been the subject of various audits. Despite this, it remains a significant player in the cryptocurrency ecosystem, often serving as a default trading pair on many exchanges. Tether has begun to offer greater transparency in reporting in recent years
Paxos
Type of Stablecoin: Fiat-backed
RWA-Backed? Yes
Type of Collateral: Dollars, U.S. Treasuries
Collateralization Status: Fully Collateralized
Ticker Symbol: PYUSD
Brief Description: PYUSD is PayPal's stablecoin developed in collaboration with Paxos to enhance PayPal's crypto services. It is pegged 1:1 to the U.S. dollar via dollar deposits, US treasuries, and cash equivalents. While PYUSD offers a regulated entry point to crypto, leveraging PayPal's extensive user base, it's confined to the PayPal ecosystem for specific functions. Users can buy, sell, hold, and transfer PYUSD within PayPal and to Ethereum-compatible wallets. Designed for easy payments and programmability, PYUSD allows seamless transactions and serves as a foundation for developers to build new blockchain services.
Notes: PYUSD offers a mainstream and regulated gateway into the cryptocurrency world, benefiting from PayPal's large user base. However, it is limited by its confinement within the PayPal ecosystem for certain functions and transactions.
Stream Protocol
Type of Stablecoin: Fiat-backed
RWA-Backed? Yes
Type of Collateral: U.S. Treasuries
Collateralization Status: Fully Collateralized
Ticker Symbol: Not specified
Brief Description: Stream Protocol offers a stablecoin platform that generates returns via U.S. Treasury Bonds. Users can deposit USDC, which is then converted into short-term U.S. Treasury Bills. The platform operates on a performance fee model and offers up to 5% APY.
Notes: The platform is not open to residents of certain jurisdictions like the US and UK. Vault phases include an open deposit period, a lock-in period for interest accrual, and a withdrawal window. Third-party provider Primal Holdings holds funds in offshore brokerages. Stream offers transparency through monthly and upcoming live reports.
Real-world asset-backed stablecoins are a watershed moment in the ongoing interplay between traditional and decentralized finance. Understanding this evolving landscape is essential as stablecoins become further entrenched in global financial systems. RWA-backed stablecoins shift the trust paradigm from opaque issuing institutions to more stable and transparent collateral, working towards greater regulatory oversight and financial inclusion.
Integrating real-world assets can fulfill the initial promise of stablecoins as a bridge between traditional finance and decentralized economies. As the lines between crypto and traditional financial products continue to blur, these real-world-backed assets stand as a testament to the maturation and growing legitimacy of the digital asset space.
In these ways, stablecoins, particularly those backed by real-world assets, are not merely a temporary fixture or convenience for a niche digital economy. They are a transformative financial instrument playing a critical role in shaping the future of global finance.
