Ripple recently announced its plans to venture into the stablecoin arena with the launch of a United States dollar-backed stablecoin. Ripple will be entering a competitive stablecoin market, which already features giants like Circle and Tether. Meanwhile, there are a few other developments in the stablecoin ecosystem, like PayPal launching PYUSD for international money transfers, and Ethena Labs backing its USDe synthetic dollar with Bitcoin collateral.
Ripple Ventures into the Stablecoin Arena
Ripple, the issuer behind the XRP crypto, unveiled its plans to launch a United States dollar-backed stablecoin. The company plans on carving out a big market share in the competitive stablecoin arena over the next five years. In an interview, Ripple's Chief Technology Officer, David Schwartz, shared insights into the ambitious venture which plans on rivaling industry giants like Circle and Tether. Although the stablecoin's official name and ticker have not been shared just yet, Schwartz is referring to it as the "Ripple stablecoin" for now.
This move comes after more than a year of deliberation within Ripple about entering the stablecoin market. Schwartz critiqued the current stablecoin landscape for its lack of diversity and robustness, despite its $150 billion valuation. He predicts that the stablecoin market could grow to over $2 trillion by 2028, and believes that the market is not a "winner-take-all" scenario, especially in decentralized finance (DeFi).
The Ripple stablecoin will have a 1:1 peg with the U.S. dollar and will be initially issued on both the XRP Ledger and the Ethereum blockchain. Ripple plans to back the stablecoin with U.S. dollar deposits, short-term U.S. government Treasuries, and other cash equivalents. Schwartz also made sure to mention Ripple's commitment to transparency and compliance, distancing the company from the risks associated with speculative backing strategies.
To ensure trust and credibility, Ripple's reserve assets will undergo third-party auditing, with monthly attestations published. However, this draws parallels with Tether's USDT stablecoin, which faced serious skepticism about the credibility of its reserve attestations in its early days. For now, it seems like Ripple is banking on its established reputation, track record, and robust balance sheet to minimize similar concerns and secure its position in the stablecoin market.
Schwartz explained that while XRP serves non-bank payment companies for transparent payments, there are still markets inaccessible to XRP that the stablecoin could open up. The introduction of the Ripple stablecoin is also expected to complement the ecosystem's recently launched automated market maker, providing liquidity and capturing volatility and arbitrage opportunities between multiple assets.
PayPal Launches International Money Transfers with PYUSD
In other stablecoin news, PayPal announced that it will allow users across the United States, with the exception of Hawaii, to use its native stablecoin, PayPal USD (PYUSD), to fund international money transfers. This service is facilitated through Xoom, PayPal's international money transfer feature, enabling transfers to over 160 countries without having to pay Xoom transaction fees. Users can convert PYUSD to U.S. dollars in the PayPal Cryptocurrency Hub without any crypto sale fees, and recipients can receive funds in their fiat currency of choice.
This integration offers a variety of delivery options for the funds, including depositing into bank accounts, mobile wallet addresses, or picking up from financial institutions. However, transactions that are not in U.S. dollars will be subject to a currency conversion spread. The service is open to all U.S. users except for those who live in Hawaii, where cryptocurrency holdings with PayPal are not permitted by state law.
PayPal USD is managed by the Paxos Trust Company based in New York and has seen nearly $200 million in issuance since its inception in August of last year. Although this number is modest compared to the market caps of other stablecoins like USDC and Tether, PayPal's initiative is a step towards creating a stable value for users that will improve confidence and utility in commerce and payments.
Ripple’s stablecoin announcement and Nick van Eck’s venture into the stablecoin arena suggests that there is a growing interest in the stablecoin market. There is, however, an increase in new competition as well
What are Stablecoins and Why are They Important?
Stablecoins are digital currencies designed to maintain stable value by being pegged to other currencies, commodities, or financial instruments. They are a solution to the high volatility seen in cryptos like Bitcoin, which experience dramatic price swings that make them unsuitable for everyday transactions. The unpredictability of cryptocurrencies can deter both long-term investors and merchants, as the value can fluctuate a lot in a very short period. Stablecoins aim to provide a more reliable medium of exchange, ensuring short-term purchasing power and encouraging their use in routine transactions and investments.
There are three main types of stablecoins which are differentiated by their stabilization mechanisms. Fiat-collateralized stablecoins are backed by reserves of fiat currency or other assets like gold, with popular examples including Tether (USDT) and TrueUSD (TUSD). These reserves are held by third parties and are subject to regular audits to make sure the stablecoin's value remains consistent.
Crypto-collateralized stablecoins, like MakerDAO's Dai (DAI), are backed by an excess of other cryptocurrencies to protect against their inherent volatility. Lastly, algorithmic stablecoins do not necessarily have reserve assets but rely on algorithms to regulate their supply and maintain their value. However, they lack the institutional trust and transparency of central banks, making them vulnerable in crises, which was very clear with the collapse of the TerraUSD (UST) stablecoin.
Ethena Labs Boosts USDe with Bitcoin Collateral
Meanwhile, Ethena Labs, the innovative team behind the USDe, recently added Bitcoin (BTC) as collateral to its synthetic dollar-pegged product with the hopes of scaling from its current $2 billion supply. The move comes at a great time considering the open interest in Bitcoin has surged from $10 billion to $25 million over the past year across major cryptocurrency exchanges. This expansion allows for the potential scaling of USDe by a factor of 2.5, according to an Apr. 4 post on X.
The USDe initially launched on the Ethereum platform on Feb. 19, with Ethena promising an attractive 27.6% annual percentage yield (APY) on staked USDe. This high yield promise caused a lot of discussions and concerns in the crypto community, especially when the APY peaked at an astonishing 113% on Mar. 5, before settling to a more modest 7.15%.
Ethena sees adding Bitcoin as collateral as a way to enhance liquidity and offer a safer and more robust product for USDe token holders. With BTC derivative markets expanding at a brisk pace, surpassing those of ETH in terms of scalability and liquidity for delta hedging, Ethena leverages a delta hedging strategy in the derivatives market to maintain USDe’s peg against downward volatility.
Previously, USDe's collateral was diversified across Ether (ETH), Tether (USDT), and Ether-based liquid staking tokens, with proportions of 45%, 38%, and 17%, respectively. The bulk of this collateral was sourced from major exchanges like Binance, ByBit, and OKX.
Despite Bitcoin's lack of a native staking yield, unlike staked Ether, Ethena finds the potential staking yields of 3-4% less significant in bull markets, where funding rates can soar beyond 30%. Through this strategic addition of Bitcoin and a reduction in reliance on the traditional banking system, Ethena aims to set USDe apart from conventional stablecoins.
What is a Synthetic Dollar
Synthetic dollars are a digital financial innovation designed to emulate the value of the US dollar without the necessity for physical dollar reserves. These digital constructs are pegged to the dollar through sophisticated financial derivatives like futures contracts or, in the realm of cryptocurrency, through algorithmic strategies. Their primary purpose is to facilitate ease of participation in global trade, investment, and to offer a hedge against currency volatility, particularly for entities outside the US or in markets where direct access to the US dollar is a bit more limited or impractical.
In the context of their application, synthetic dollars are used a lot in international commerce, investment spheres, and in the cryptocurrency market, especially on decentralized finance (DeFi) platforms. They provide an essential bridge to dollar liquidity for those unable or unwilling to engage with traditional dollar holdings, thereby smoothing the path for global financial interaction and investment from various corners of the world.
The significance of synthetic dollars lies in their contribution to financial stability, liquidity, and accessibility to the US dollar's value in scenarios where conventional financial avenues fall short. They are instrumental in safeguarding against the devaluation of local currencies, streamlining international transactions, and nurturing the growth of digital finance ecosystems as a reliable exchange medium. Their user base spans across international corporations, investors, cryptocurrency traders, DeFi entities, and people in regions marred by financial instability or strict capital controls.
