30Oct 2018

Stablecoins: A Core Primitive, Underdeveloped

by Henrik Andersson

Stablecoins are an incredibly exciting area of crypto. We are seeing a lot of innovation happening in this area.

Stablecoins are crypto assets pegged to the price of another (stable) asset like US Dollar (USD) or Gold.

Stablecoins are a primitive, a critical building block for mass crypto adoption.

Recently, we have seen Circle and Coinbase, Paxos, and Gemini launch regulated stablecoins in the United States. Earlier this year, the algorithmic stablecoin Basis received over US$130 in funding from Bain Capital, Lightspeed Ventures, Stanley Druckenmiller, among others. A few weeks ago, Andreessen Horowitz made a US$10 million investment in MakerDAO.

Let’s break down stablecoins —

In today’s marketplace, one thing is certain: not all stablecoins are created equal. People are still attempting to create an optimal stablecoin.

We divide the space in three broad sections:

  1. Fiat backed stablecoins: These are stablecoins backed by fiat in a bank account or escrow account. By far the most successful model so far. Apollo Capital invested in TrustToken, which is backing trueUSD.
  2. Crypto backed stablecoins: These tokens are backed by a volatile asset such as Ethereum. The most popular one includes dai/MakerDAO. Apollo Capital is a holder of the Maker token. Others include Australian project Havven and South Korean
  3. Algorithmic stablecoins. These use a form of seignorage shares where supply is adjusted to make sure a peg is not broken. Two projects in this category are Basis and Fragments.

We think there are a number of factors that should be optimised over to create a successful and sustainable stablecoin, not just stability. At least as important are decentralisation, scalability and liquidity.

Generally, fiat backed stablecoins rate very poorly on decentralisation as they are backed by money in a financial institution controlled by a single entity.

It is our view that decentralisation is essential for creating an open financial system. A decentralised stablecoin is permissionless (open to anyone), censorship resistant (transaction finality can be guaranteed) and trustless(we don’t have to trust our funds with a third party).

Fiat backed stablecoins will be regulated. USDC can be blacklisted — it is not decentralized or censorship resistant.

Fiat backed stablecoins will be regulated. USDC can be blacklisted — it is not decentralized or censorship resistant.

The holy grail would be a decentralised, fully backed stablecoin.

Here are some of the reasons we are excited about the stablecoin ecosystem:

– If we can create a relatively stable crypto asset, we can increase the crypto ecosystem massively. Many of economic functions that traditional fiat currencies serve, would be able to migrate.

– We could do merchant payments in crypto without the need to convert back to fiat; we can lend, borrow, and pay salaries using a stablecoin.

– Remittances could be made on the rails of Ethereum, meaning they are fast, cost little, and settle almost instantly.

– We see stablecoins is a basic primitive for smart contracts.

– Derivatives are low hanging fruit for smart contract technology with an integrated stablecoin

– ICOs and STOs, our new methods of fundraising, will likely be financed using stablecoins.

– Stablecoins are mainly used today as a hedge for traders and investors.

– If we have trusted stablecoins, traders may not feel the need to sell back to fiat (and the much slower banking system) during a market correction — and instead stay in the crypto ecosystem.

– As a side effect, as when crypto exchanges create more stablecoins pairs, we will likely see more of a differentiated return profile between crypto assets.

Much work needs to be done to create an optimal stablecoin, but the race is on.

We are seeing an explosion of stablecoins; some that are pegged to the US Dollar (USD), and others to fiat currencies like Australian Dollar (AUD), Japanese Yen (JPY); some to the Consumer Price Index (CPI), and others to Gold. In fact, I’ve been helping Melbourne Mint launch a Gold back stablecoin called Meld (

The crypto market is yet again reinventing itself. However, on the eve of the 10 year anniversary of Satoshi’s white paper, let’s recognise the long-term promise of Bitcoin as not only a store of value but a stable medium of exchange — the ultimate stablecoin.

Henrik Andersson

Henrik is the Chief Investment Officer at Apollo Crypto and is the fund manager for the Apollo Crypto Fund. He also acts as the fund advisor for the offshore Apollo Crypto investments funds, the Apollo Crypto Frontier Fund and the Apollo Crypto Market Neutral Fund. Henrik's expertise in traditional financial markets comes from spending a decade on Wall Street as a vice president in institutional equity sales. His exceptional understanding of DeFi comes from co-founding two successful DeFi protocols, mStable and dHEDGE.