Stablecoins: Types, Use-Cases, and Institutional Investments | Ryan Cvrkel (DeFi Chat Ep 03)
Categories: InterviewsPublished On: September 20th, 202219.5 min read
DeFi Chat is a series of educational & informative interviews with world professionals in the Crypto / Blockchain / DeFi / Web3 communities. We aim to provide digestible content in multiple mediums such as video, audio (podcast), and written (blog) form!
Ryan Cvrkel from Securitize Capital had an in-depth discussion about many aspects of stablecoin, especially types & use cases and how this impacts the business world.
Note: This transcript was automatically generated by artificial intelligence (AI) and therefore typos and grammatical errors may be present.
00:00 – 01:33: Introduction
Lachlan: Hey everyone! Thanks for joining Defi Chat. I’m Lachlan and I’m joined today with Ryan from Securitize Capital. Today, we’re gonna be talking about stablecoin going over the different types and use cases, and also how Securitize Capital uses them with institutions for granting greater yields. So, Ryan, thanks so much for joining. Do you mind giving us a bit of background on yourself?
Ryan: Hey Lachlan, happy to join you to talk about stablecoin. Personally, I joined Securitize Capital in March of this year. Prior to that, I have been in the Investment Management Industry, essentially my entire career. Most recently working within the ETF Space.
Ryan: What we do at Securitize Capital is focusing on tokenizing, digital assets and really institutional grants. So risk managed products, I’d say kinda, the 2.0 version of crypto investment products.
Lachlan: Awesome! And for anyone who is not aware, tokenizing is when you represent a real world asset on the blockchain. So, stablecoin is a great example of that, where they are representing real world US dollars on the blockchain.
Lachlan: Ryan, we started chatting and basically, you know a lot of people in the space whether they have some experience with blockchain or not. They sort of, there is a bit of skepticism towards stablecoin, especially in light of the Luna, Terra stablecoin crash a couple months ago.
01:33 – 10:11: Types of Stablecoins
Lachlan: So I think a good point to start off with is going over various types of stablecoins to shed some clarity, because the truth is not all stablecoins are the same. At Stably for example, we use US dollar backed stablecoin with funds held in a trust. Do you mind sort of taking us through the three different types?
Ryan: Sure and you know, speaking of Terra Luna, that’s kinda an interesting lens into space. An unwinding Luna certainly caught the headlines, but if you look at stablecoin more broadly. There is a lot of utility in the stability that is created in products that have the appropriate backing. So there are really three types: traditional-asset-backed, crypto asset-backed, and then in the Luna case, algorithmic backed. I was mentioning that we worked with one particular fund at our firm, our USDC yield fund – which uses USDC, a stablecoin in its makeup. Now this is offered by the center, this specific point and it’s backed one for one with US dollar and cash equivalent.
Ryan: So, when you look at something like USDC, or kind of these more traditional asset backed stablecoin. It is very important to understand what is the collateral that is backing the coin. And the reason we work with USDC is because we trust what is backing, which is dollar equivalent that can be liquidated at any point to get you back your dollar if that makes sense.
Lachlan: Cool, and then decentralized like Luna, Terra basically there is nothing backing it. It is just market forces. Correct?
Ryan: Yeah, so when you look at the spaces like algorithmic stablecoins, they are essentially backed by a computer program. That is in a lot of circumstances to mimic what a centralized bank does, controlling the supply and demand of the currency and if the currency is moving and the price is above where it’s pegged. They would essentially add more to take the price down and vice versa. In the circumstances of Terra Luna, you had a coin that was collateralized and then lost its peg, which caused the death spiral to kinda collapse.
Ryan: I think as you look at algorithmic stablecoin broadly, there are others that are kinda moving into the space, trying to kind fill the gap with more reserves in place or kind… or kind of learning from those mistakes of Terra Luna. But still, I would say when you look at the three different types, algorithmic stablecoins are certainly the one that you wanna be most concerned with their actual stability, just because what backs them is a computer program and not hard assets.
Ryan: I did not screw it over any kind of crypto-backed stablecoin as well, which is kinda unique. You know, as any point suggests, it is gonna be a stablecoin backed by cryptocurrencies. Now here, while you do have typically overcollateralization in those types of products. You also have a lot of volatility, the inherent collateral is volatile, right? So you know, there are some benefits and some negatives there as well. I would say, the unique thing is that all that collateral on chain. You are less reliant on any parties in general when you look at that specific space of the crypto as the back of stablecoin.
Lachlan: And I found that, it is kind of interesting because if you can just have a stablecoin backed by real US dollars, it raises the question of why would you use an algorithmic one? That brings me to the stablecoin trilemma for those who are not unaware of it. It is sort of the idea that you can only choose two out of three when it comes to maintaining the stable peg and being centralized and being capital efficient. So you know, when you have one US Dollar for every stablecoin, it is less capital efficient than an algorithmic stablecoin where there is nothing back in it.
Lachlan: However, algorithmic ones are great in concept, but they are actually new and they have not been thoroughly tested. So as we saw with Luna Terra, there can be pretty bad consequences at times. It is kinda interesting, just that whole trilemma.
Ryan: I mean, even with Luna Terra or algorithm stablecoins in general, if you are trying to mimic the actions of the central bank essentially through a program, the one thing you cannot do is that same ability to control legal tender like the federal government has. So there is less of a back stuff there, a big less of a back stuff. I think people are gonna still try to figure out what might work to kind of satisfy that trilemma you describe: capital efficiency but also stability. And I think it is yet to be seen in a sort of algorithmic stablecoin construct.
Lachlan: And then when it comes to crypto collateralized ones, people might wonder why that exists as well. And I think an interesting application of that is if you have a certain amount of Ethereum that you put down, you want liquidity but you do not wanna sell your Ethereum. You can put this down and take out a loan of say 60% on your Ethereum.
Lachlan: If you have a thousand dollars in Ethereum, take out a 60% loan, you now have liquidity without having to trigger a tax event. I believe through selling your Ethereum while still being able to have it appreciated. But then there is also the risk that in the recent market downfall of crypto, we have seen things go down that people can get liquidated. I mean that’s sort of like a pro and con of going to crypto collateralized.
Ryan: For sure, I mean it is the full transparency of the crypto collateral. The liquidity of it, if you are looking for something that is traditional back, even Tether right? It is gonna have reserve assets, they are gonna be short term treasuries, maybe commercial paper. I am not sure they are exactly today, but there was precious metals in the back. So all these different assets that you would have to think about from a liquidity perspective, actually selling those reserves, if you know, the peg was in danger, right? With something that is crypto collateralized, very easy since these are all liquid currencies.
Lachlan: Yes, definitely! So just to summarize for everyone, there is basically three types of stablecoins. You can sort of make it a bit more broad, like there is rebase signage and stuff like that, but it gets a little more fuzzy. And there is sort of subtypes, but there is algorithmic, there is crypto collateralized where you put in over collateralized by crypto to support the backing of the stablecoin at $1. And there is fiat-backed like Tether, Circle, or Stably US dollar – USDS, which are all backed by US Dollars, which is more compliant.
Lachlan: Ryan, I guess like when it comes to institutions, could they touch like algorithm wire or crypto collateralized or they need to depend on these fiat-backed ones?
Ryan: Well, I think you know the utility is in stability right? And as we saw some of these algorithmic stablecoin lose their peg, that utility went away. So when you look at institutions and how they are engaging, it has been those traditional asset backed stablecoins, something like USDC because you have the confidence that this is always be worth a dollar.
Ryan: USDC is gone as far as have Grant Thornton… more or less doing audit of their reserves on a monthly basis. And you know, that transparent to see what exactly they own. So that’s what the confidence is, what institutions really need to engage when it comes to just the volatility inherent in the crypto space in general, even with crypto-backed stablecoin with over collateralization, there is still risk there.
Ryan: Given kind of what we just saw over the months of May and June, in this kind of seismic event where there is across the entire ecosystem. So I think, you know utility is there but only if disability is there. That’s why we choose to work with USDC, and not to say that we would not work with others, but you know, that confidence is first and foremost.
10:11 – 16:59: Stablecoins use cases
Lachlan: That’s great! And when you are talking about sort of utility, kind of brings to sort of next topic, which is “What are actual stablecoin use cases?”. There are any come to mind for you? I definitely have like a list of them. It is quite interesting.
Ryan: I mean, when you are trading in any sort of cryptocurrency, you are converting to get into that ecosystem to start. If you are looking to de-risk, there is fees associated with taking that crypto and going back to fiat. So something like a stablecoin to really facilitate trading. It is just an ease of use to keep. Essentially within the system and not doing that transaction back to fiat, and incurring all that friction.
Ryan: I even saw recently something to the extent of Binance, the largest exchange. Tether was involved in essentially 40% of their transactions. So there is tremendous utility you are already seeing there from a trading perspective with stablecoin.
Lachlan: For sure, and you are talking about sort of Fiat to Stablecoin, that is actually one thing that Stably does as well, we have like an on and off ramp.
Lachlan: Basically, I mean it makes a lot more sense for people to go in and out crypto using stablecoin cause they do not want to enter crypto into Bitcoin and then have it plummet 2% or more the next day. And if you are a company receiving payment in Bitcoin, for example, you do not want that risk on your balance sheet. A lot of the time, they convert at least a portion of the funds into stablecoin. It is basically like a way to park your funds in a stableway, within crypto, essentially.
Ryan: Yeah, and even taking app kind of link the investment in trading world and more into kind of real world. It is just the ability to realize real peer-to-peer payments, you do not need to have two different international bank accounts. There is borderless. So the ability just to transact with a stable currency and move money, stablecoin facilitates that. And that is something United States we have always been fortunate to have a very stable currency, but other countries, not as fortunate. You know, that utility is much more.
Lachlan: I actually spoke about that on episode 01 here. We were speaking about sort of stablecoin in Argentina, where people are buying stablecoin to access the US dollar, cause they are limited to only buying $200 worth of US dollars per month in Argentina, despite have almost 70% inflation now. So pretty crazy.
Ryan: In those types of circumstances, you start to see the real world utility of not just stablecoin but you know crypto and general, just the ability. Really all you need is internet access and you are able to have your network being safe right? Something that for so many people out there, that are unbanked, it is essentially a solution.
Lachlan: You sort of touched on institutions sending money instantaneously. I mean, I think that is gonna be huge in the future. We are a bit early on, it is gotta be better regulatory, clarity, et cetera.
Lachlan: Facebook was developing their own Diem stablecoin and blockchain, that was being explored by means in the future. If it is like Amazon or another company, if you are able to get paid in stablecoin, like you are increasing your revenues by like 3% by not paying payment processing fees.
Ryan: Sure, even internally, you know JP Morgan has created their own stablecoin that use in bank for several transactions. You are seeing this, you really across anywhere where this friction’s existence with kind the traditional financial institutions and the processing, almost 2% to 3% fee on every transaction.
Lachlan: Yeah, that is a lot of money though, especially with those massive corporations. If you are bringing in 500 billion in revenue per year, if you can save 2 or 3% of that, that is huge.
Ryan: For sure, even thinking further, just even remittances where these are really high relatives to some of the amount of the money they are being sent. Here, there is a lot of utility that can be experienced by those users.
Lachlan: Definitely! There is a wide range of use cases for stablecoin. They are also the gateway to use to decentralized finance. So right now, decentralized finances and it is in its infancy, like the user interfaces can be a little too hard lending, borrowing can be a little risky if you do not know how to use your wallets and all that.
Lachlan: But in the future, especially as that becomes more clear and regulated and easier for users to use, we can also probably expect more people to use stablecoin there. Just a wide range of use cases for stablecoins.
Ryan: And I think, certainly more to come, you know? I think when you look at businesses out there, customer and reward programs, things like that could kind of build their own. Walmart, recently where Walmart was developing stablecoin where they could actually gather customer reward points and keep track of that in a much easier fashion. Also, kind build brand affinity and amongst their clients. So you know, a lot of things that are relevant. That is actually, I was reading about.
Lachlan: Well, right now say Disney has about 3 billion views globally. Disney has to pay for TV time, internet time, et cetera from others to advertise to these people and to get their attention. But if they have their own token, they can access these people directly and create creative marketing content and programs, et cetera, to interact with their users directly and get them more engaged. They could also do gift cards.
Lachlan: For example, you have a hundred stablecoins for Walmart that you do not want to use. Because you got it as a birthday gift, you could not sell it online to a global pool, global liquidity and maybe pay a 2% fee to Walmart for that, but you know that is sort of worth it. So they are increasing their revenues as well through this. And it creates like a lot of interesting dynamics, probably a lot that have not even been thought of at this point.
Ryan: No, for sure! I think we are just at the infancy stage, it is good to see these big companies looking in that space and starting to do that work. But there is so much potential.
16:59 – 24:16: Securitize Capital’s services
Lachlan: Yeah, definitely! So I guess I am interested in how you touched on it at the beginning, but I am interested in how Securitize Capital uses stablecoin for institutions and what elses do you guys touch on when it comes to stablecoin?
Ryan: We are a provider of different digital asset investment funds. And one of the strategies that we offer is our USDC yield fund and kinda unique thing versus what its is essentially lending to the crypto industry. But, the denomination of those loans is in USDC not US dollar and there is a premium that commands within the ecosystem.
Ryan: So, our USDC yield fund roughly yielding around 7% at current versus something in the traditional fixed income markets, from a risk perspective, is going to be 300 – 400 basis points less just on account of being denominated in USD. So there is an inefficiency out there. To potentially exploit in a return versus just going that traditional route. What we do with the fund is we work with Anchorage Digital, our partner and essentially they will deploy those USDC assets in the lending pool as we dictate.
Ryan: By that way, we can manage the risk of the portfolio and try to maintain liquidity, but at the end of the day, capital reservation is the first and foremost kind of solving a traditional portfolio problem with a very kinda alternative strategy.
Lachlan: So you receive USDC from either institutions or also high net worth individuals. And then through Anchorage, there is lent out to various liquidity pools. Is that correct?
Ryan: That’s right! In these end users, there are high quality institutions that have undergone credit underwriting. We are very much familiar with the risk of that type of lending process with them. And then, they are going to be fully collateralized as well. And as interest is paid back into the funds, that has redeployed into more USDC lending. So what they get is a very efficient way to drive and yield in kind a low risk construct. And this is a regulated fund structure, a raise fee format, credit investor only. But something that we think has a lot of potential use cases for folks that have been having this lurch as interest rates have moved higher, but deflation remains very high as well. So that traditional income, worthy of sources.
Lachlan: And the people lending to you? How liquid is that? Could this be a feasible alternative in the future where people, instead of having cash sitting in their account, could have access to this, but be getting that 7% at the same time and have liquid.
Ryan: Well, this strategy that we manage is specifically for liquidity. So all the lending activities, very short term in nature, and we offer monthly redemption in this fund. If someone could buy it within seven days’ notice, then redeem that much. That is a specific strategy that we offer. There is something like Anchorage is gonna offer different levels of risk as well. There are different pools that people can engage in for different end objectives, from a risk reward perspective.
Lachlan: Awesome, and I mean what are you guys seeing on your side with like progress being made in this? Is it going pretty fast? Has it been ramping up more institutions going into this? Or is it still pretty slow? Do you think it is gonna take another 5, 10 years?
Ryan: Well, I mean the growth rate that you have seen just in USDC over the last three years has been exponential. Now, I think what you have seen this year with the headline risk of the Terra Luna collapse kinda has a cautionary warning for the entire stablecoin marketplace, but the utility and the ones that are doing it right that are completely back and have that confidence, they continue to grow. I think what you are gonna see is for the ones that are able to communicate to the market that confidence, they show it, they prove it, whether it is regulation that comes in, they will be around. For the other ones that are never going to be able to get that level of transparency, I think that will be something that people engage with, on their own volition for whatever reasons, something that would be allowed to regulated framework.
Lachlan: Awesome, I think there is a lot coming in the future. There is also likely going to be US regulation coming out in the next six month or so that should give more clarity as well, make it easier for institutions, businesses, et cetera to make progress. For example, there are sort of hints at what is gonna be talked about in that. I won’t spend too long on that, but for example, it seems like companies won’t be able to issue their own stablecoin so they do not need to have infrastructure in place.
Lachlan: I mean, that is definitely gonna make it a lot easier for businesses to navigate this cause Meta Facebook spent a lot of time looking into their stablecoin.
Ryan: Yeah, and I think one of the things out there is whether the issuer stablecoin is going to be regulated like a traditional bank. And I think we will see how that comes to play. But if that is the case, it is going to be apparently limiting and those that would be able to actually issue a stablecoin.
Lachlan: Well, Ryan, I think we are coming up on time. Thanks so much for joining us today! I think it was a pretty good overview of the different types of stablecoins; different use cases and how this is actually impacting the business world. Because I think we are gonna see a lot of progress with stablecoin in the next few years.
Ryan: Absolutely! A lot of points and hope to be back to joining to share some of those updates as we see them happen. So, I appreciate the time. It is great speaking.
Lachlan: Yeah! And if anyone is looking for the USDC fund, you got your man, Ryan right here.
Ryan: I would also mention, we put our a newsletter weekly, oftentimes commenting on the stablecoin market. Securitize Capital, the name of the firm, check out our website and the newsletter.
Lachlan: It is pretty informative! Awesome, I’m going to check that out myself. Thank you so much, Ryan. Really appreciate it. And thank you for everyone for watching.
Ryan: Terrific. Thanks bud!
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