# Stablecoin as the Financial Gateway: Insights from Industry Experts

Rune Christensen, Co-Founder of Sky & Peter Chung, Head of Research at Presto Research Center

[BlockMedia’s Osuhwan] Bitcoin (BTC), born out of the 2008 financial crisis in the U.S., has evolved more into an asset than a currency. This trend has intensified further with the approval of spot Bitcoin Exchange-Traded Funds (ETFs) earlier this year. In contrast, stablecoins, which secure price stability by being backed by fiat currencies or tangible assets, are emerging as a new digital payment solution. According to Defi Llama data on the 10th, the current market capitalization of stablecoins is about $170 billion. The demand for stablecoins is rapidly growing in both traditional finance and decentralized finance (DeFi).

# Two Models of Stablecoins: Centralized and Decentralized

Stablecoins are divided into centralized and decentralized models based on how they maintain price stability. Tether (USDT) and Circle (USDC) are prime examples of centralized stablecoins, backed by reserves deposited in banks. In contrast, decentralized stablecoins use smart contracts and cryptocurrency collateral systems to maintain their price. These typically adopt an over-collateralization method to ensure price stability.

Over-collateralization involves depositing more than $150 worth of crypto assets to issue a $100 stablecoin, maintaining price stability even if the collateral value drops. Smart contracts manage this process automatically, issuing or redeeming stablecoins as needed.

A notable example of decentralized stablecoin is MakerDao’s DAI. Recently, MakerDao rebranded itself as Sky and announced the launch of a new stablecoin, USDS. Existing DAI and MKR tokens remain, and users can convert them to USDS and SKY tokens if desired.

BlockMedia conducted an interview on the 6th with Rune Christensen and Peter Chung, who visited Korea for Korea Blockchain Week (KBW) 2024, discussing the topic of stablecoins.

### Which Model of Stablecoin is More Effective?

**Rune Christensen:** Decentralized stablecoins are more effective. Centralized stablecoins are easy for users unfamiliar with cryptocurrencies to understand and are suitable as a payment method. However, they heavily rely on the legal requirements and regulations of the real economy, which could limit their development. Centralized stablecoins face structural limitations as they cannot escape the impact of legal or regulatory issues faced by their issuing entities.

In contrast, decentralized stablecoins operate autonomously without an operating authority on the blockchain, offering transparent verification. The ability to track transaction history and asset value in real-time makes them appealing. However, decentralized stablecoins can seem complex and difficult for the general public not well-versed in DeFi.

The recently launched USDS addresses this issue by aiming to be accessible to those unfamiliar with cryptocurrencies. USDS ensures price stability through a soft pegging to the U.S. dollar and is immediately recognizable as related to the dollar by including USD in its name.

**Peter Chung:** In the short term, demand remains high for U.S. dollar-based centralized stablecoins like USDT and USDC, which will continue to play a crucial role in the market. The growth of Tether and Circle in recent years showcases where market demand is concentrated.

On the other hand, it may take time for the public to fully understand and embrace the advantages and usefulness of decentralized stablecoins. Many decentralized stablecoin projects are still in their infancy, but they are expected to develop and improve usability over time.

### Evaluation of Bitcoin and Stablecoin as Payment Methods

**Peter Chung:** Bitcoin is currently viewed more as a ‘store of value’ and is deemed unsuitable as a payment method due to its volatility. The instance of purchasing pizza in Florida in 2010 with Bitcoin symbolizes the inefficiency of using Bitcoin for payments today (10,000 BTC, worth $41 at the time, rose to $10,000 nine months later).

In contrast, stablecoins have already established themselves as a payment method globally. However, their usage may seem less frequent in advanced countries like Korea and Japan. In countries with unstable local currencies, like Argentina and Venezuela, stablecoins are crucial for securing U.S. dollars.

Many global companies are moving towards integrating stablecoins into their payment systems. For instance, Apple recently announced plans to integrate USDC into its payment systems, and Visa and Mastercard are developing payment systems utilizing USDC. This trend indicates that stablecoins will firmly establish themselves as a payment method in various countries.

**Rune Christensen:** As Peter pointed out, stablecoins are already widely used in the global financial market. For stablecoins to become more effective, the activation of decentralized stablecoins is essential.

The true strength of stablecoins lies in their ability to be used for payments while simultaneously generating additional profits through reward systems. For example, when stablecoins are deposited in a liquidity pool, the assets used in transactions can generate profits, partially returned as rewards. This staking-like function can increase asset value while blurring the line between payments and asset management. This change provides significant benefits to individuals, companies, and banks, dramatically enhancing the overall efficiency of the financial system.

### Potential of Stablecoins to Interact with Traditional Finance

**Rune Christensen:** Stablecoins have a high potential to act as a ‘gateway’ connecting the cryptocurrency market and traditional finance. The financial system is one of humanity’s most colossal structures, and stablecoins will play a role in maintaining its stable operation. Since stablecoins allow anyone to track asset movements, they can make financial systems more secure and transparent.

**Peter Chung:** I agree. Blockchain-based financial systems are more resilient and transparent than the current intermediary-based financial system. Stablecoins will play a crucial role in building blockchain-based financial systems.

Stablecoins could also increase demand for U.S. Treasury bonds, reducing U.S. fiscal burdens, especially since countries like China and Russia have reduced their purchases of U.S. Treasury bonds in recent years. The increased demand for U.S. Treasury bonds through stablecoins can help maintain dollar stability and curb the rise in bond yields, contributing to financial system stability.

The current U.S. Treasury holdings of USDC and USDT rank 16th globally, more than countries like South Korea or Singapore and slightly less than Norway. This indicates that stablecoins are already playing a role in stabilizing the financial system.

### Risks Associated with Stablecoins

**Rune Christensen:** The technical risks of stablecoins are decreasing, but financial and legal risks related to collateral assets still need management. Well-designed governance is necessary to manage these risks, and continuous monitoring is vital to ensure the system can respond to external shocks.

In addition to price stability, the stability of the governance structure itself is crucial. Participating in DeFi governance currently requires in-depth knowledge. However, the future implementation of Artificial Intelligence (AI) is expected to allow easier participation in governance, significantly contributing to more swift and effective governance operations.

**Peter Chung:** While Rune’s points mainly pertain to decentralized stablecoins, there are two primary risks for the overall stablecoin ecosystem. First, the value risk of collateral assets. The stability of stablecoins relies on trust in fiat currencies or underlying assets. A decline in collateral value or lack of transparency can break the peg.

Second, arbitrage risk. When the price of a stablecoin deviates from $1, arbitrage must quickly correct the discrepancy. If this process is inefficient, the stablecoin might not revert to $1, jeopardizing its stability. These risks necessitate careful management regardless of the stablecoin’s centralization.

Rune Christensen is recognized as a pioneer in DeFi. He founded MakerDao in 2014, establishing a DeFi system and operating the stablecoin DAI. Peter Chung, with a finance degree from the Wharton School, has over 20 years of experience in traditional finance at institutions like Goldman Sachs, UBS, Credit Suisse, and Nomura Securities. Chung joined Korbit in 2018, later becoming the head of Presto’s Research Center in April.