On Monday October 8, research firm Autonomous Next published its latest monthly figures for the volume of funds raised through initial coin offerings (ICOs), the revolutionary mechanism for founders of new crypto companies exploring ways to exchange value and ownership of assets through tokens on blockchains to build their otherworldly visions into real businesses.
ICO funds raised by end-month ($ million)
|Source: Autonomous NEXT, Pitchbook Data, China Microlenders|
The peak month for ICOs was January this year, when new blockchain based companies raised $2.43 billion through this method, 10 times as much as through venture equity.
By this September, however, the ICO game looked like it had entered its final inning. Firms raised just $279 million, suggesting that since the peak “monthly ICO activity is down 90%, which of course looks a lot like Ether's price performance, but with a three-month lag,” according to the mordant analysts at Autonomous Next.
So, is all this crypto-currency nonsense nearly over?
If Euromoney had an actual dollar for every plan for a new stablecoin we have been told about in the past fortnight, we would be thinking of, well, maybe not retiring but certainly heading out for a very fine lunch. There have been new stablecoins linked to the dollar, to the yen, to sterling, as well as to baskets of cryptocurrencies.
The recent boom and bust in bitcoin, Ether and other cryptocurrencies took place after a sharp turn away from the initial concept of a new medium of exchange and maybe a store of value into highly speculative investments that no one wanted to spend for fear of missing out on their spectacular rise.
Now many of the leading thinkers in the crypto world are trying to retrace their steps back to the original idea of using blockchains as low-cost, high-speed rails for moving money in a new tokenized form.
In stark contrast to bitcoin and other widely traded cryptos, stablecoins are designed to reduce price volatility, indeed to peg their value to an anchor, in many cases the US dollar, and not deviate from it.
It’s an obscure corner of the crypto asset market, to date dominated by a single instrument, Tether, responsible for 93% of aggregate stablecoin market value and 98% of stablecoin trading volume.
That high volume arises because participants in the crypto world want to trade in and out of other crypto-assets through a stable anchor. The crypto exchanges – 50-odd at the last count – trade leading crypto currencies in pairs, and active participants often trade bitcoin and others against Tether, so typically buying into Tether when they sell out of bitcoin before then moving into Ether or Litecoin, Tron, Neo, Monero or any of the many others.
The crypto world is just too volatile to trade directly between two crypto assets that may each be shooting up and down in value on any given day.
Of course, it is this volatility that has recently put off conventional investors in the regulated financial world from dealing in crypto. Could it be that stablecoins, a little-followed or understood feature of crypto trading, might become the mechanism that finally draws real world users in?
Today, stablecoins together represent just 1.5% of the total market value of all crypto-assets, according to researchers at the digital wallet company, Blockchain.
In September, it published a report into stablecoins that drew on feedback from 57 such ventures to create new, low-volatility crypto assets.
“As we say in the report, it is highly unlikely that the perfect stablecoin design exists at present,” Garrick Hileman, head of research at Blockchain, tells Euromoney. “But they already punch well above their weight, with Bitcoin and Tether the most traded crypto-currency pair and Tether now the number two traded crypto asset after Bitcoin itself.”
Hileman adds: “While the dominant design so far typically has been asset backed with off-chain collateral – which doesn’t sound very sexy but might appeal to conventional investors – there is still a clear hunger for a more digitally native stablecoin, and as much money has been raised recently for these kinds of algorithmic projects as for asset-backed attempts to improve on Tether.”
Perhaps the most interesting of these algorithmic models is Basis. Back in April 2018, Intangible Labs announced that it had raised $133 million of real money venture capital through a private placement supported by Bain Capital Ventures, Andreessen Horowitz and others to support a stable currency managed by a set of algorithms that operate as a virtual central bank on the blockchain.
Basis is intended to peg at roughly one-to-one against the dollar. If it gains acceptance as a popular medium of exchange in the crypto world and increases in value to, say, $1.10, the system will print more Basis tokens to increase supply and so reduce the price.
If the price falls below $1, the code will issue bonds worth one basis token each, use the proceeds to buy existing Basis tokens to reduce supply and so bid the price back up, later repaying bondholders when Basis tokens trade above par.
It is a complicated, seigniorage based system.
Much simpler is Circle’s US dollar coin (USDC), backed by off-chain fiat currency collateral and released at the end of September. It already has more than 30 users signed up, including crypto exchanges, wallet providers and other digital market place businesses seeking a transaction currency.
At USDC’s launch, Allaire and Neville explained the importance of this new service in realizing that.
“A fundamental building block of this vision is the tokenization of fiat currency itself, through what are now referred to as fiat stablecoins,” they said. “A safe, transparent and trustworthy layer for fiat to operate over open blockchains and within smart contracts is a necessary precondition to the broader and more revolutionary potential of a crypto-powered global economy.”
Does any of this impact the real world?
As Blockchain points out in its report, a delayed or cancelled flight is a public record that can be queried by a ‘smart flight insurance’ blockchain application.
If a flight is delayed or cancelled, then the smart contract might automatically pay the claimant, eliminating the painful claims process that hundreds of thousands of inconvenienced passengers forget or fail to complete each year.
In travel and many other smart insurance use cases, it would be preferable to denominate the smart contract with a stablecoin, rather than a more volatile cryptocurrency, to keep the whole process on chain.
“Axa announced a pilot for smart insurance on flights from Paris to the US a year ago,” points out Hileman. “I’m sure the insurance companies don’t want to cannibalize themselves, but I think smart insurance is inevitable. Axa may be thinking: ‘If we don’t do it, who else might come along and take our business?’”
There’s just a chance that before long customers start to buy insurance cover without knowing or caring that the underlying processes now work on distributed ledger and use stablecoins.
How might central banks respond? Well, they could offer digital versions of their own fiat currencies to the rest of us instead of just to the commercial banks.
That might put the banks out of business though.