Enterprise payment and transaction network giant Ripple has announced its entry into the stablecoin field, with plans to launch a stablecoin pegged to the US dollar at a 1:1 ratio on its XRP Ledger and Ethereum. Why did it make this decision?
Table of Contents
Why did Ripple enter the stablecoin race, albeit late?
Can stablecoins redeem Ripple?
Even though it’s a latecomer, Ripple aims to grab a share of the stablecoin market
Blockchain service company and creator of the XRP Ledger, Ripple, has announced the launch of a stablecoin pegged to the US dollar, officially entering the stablecoin market with a market size exceeding $150 billion.
According to Ripple, the stablecoin is expected to be officially launched later this year. The stablecoin will be backed 100% by US dollar deposits, short-term US government bonds, and other cash equivalents. It will initially be deployed on Ripple’s XRP Ledger and Ethereum blockchain, and will follow the ERC-20 token standard.
Currently, the stablecoin market size continues to expand. According to data from The Block Pro, trading volume on stablecoin chains adjusted in March 2024 showed a significant increase, reaching $893.8 billion, a growth rate of 41.3%. The supply of issued stablecoins increased by 6.2% to reach $137.4 billion (rising to over $150 billion in early April).
Tether and Circle have almost “dominated” the entire stablecoin market, with USDT accounting for a market share of 76.3% and USDC approaching 20%, giving the two a combined market dominance of over 96%.
So why did Ripple dare to enter this highly monopolized stablecoin market? There are three main reasons:
First, the demand for stablecoins in the market is still growing. In fact, stablecoins are one of the most popular types of digital assets among cryptocurrency traders, theoretically unaffected by the price fluctuations of major cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH).
According to Ripple’s estimation, the stablecoin market size is expected to exceed $2.8 trillion by 2028. The cryptocurrency market has a clear demand for stablecoins that can provide trust, stability, and utility, which is one of the key reasons why Ripple decided to enter this field.
Second, stablecoins help drive the development of Ripple’s ecosystem. As explained by David Schwartz, Chief Technology Officer of Ripple, exploring the stablecoin market also has an element of “opportunism”. “After all, stablecoins are a growing market. Launching stablecoins can make you a ‘bank without interest’, which seems like a good business opportunity.”
If successfully launched, stablecoins can inject more profitability into the DeFi ecosystem of the XRP Ledger. Although Ripple’s supported blockchain also offers DEX services, it must be acknowledged that the usage rate of the XRP Ledger is still lower than other blockchains.
In addition, transparency will be a focus of Ripple’s stablecoin issuance. The main audience for its stablecoin will be enterprises and banks. David Schwartz stated that Ripple will undergo a monthly public audit conducted by a top accounting firm and will take all necessary measures to achieve complete transparency. In his words, “Ripple does not want to squeeze out a few extra cents. We don’t need to do that. Ripple’s balance sheet is solid.”
Furthermore, Ripple’s stablecoin will primarily target enterprise clients and banks, a segment of the market with high compliance requirements. They need to prove to shareholders and regulatory agencies that the decision to use stablecoins is reasonable. Therefore, Ripple will choose local US banks to hold reserve funds and ensure a “compliance-first” mindset throughout the stablecoin market.
It is worth noting that Ripple’s business model based on XRP has shown signs of fatigue. Austen Campbell, a professor at Columbia Business School and former manager of Paxos Stablecoin Fund, stated that no one uses XRP as a means of payment, much like how no one really uses BTC. Ripple’s cooperation with many cross-border payment solutions based on XRP has not been successful. For example, Santander, one of the largest banks in the European Union, decided to end its partnership with Ripple after realizing that using XRP could not meet customer needs. Ripple’s partnership with MoneyGram also came to an end due to the increasing costs of XRP cross-border payments and MoneyGram’s need to establish third-party relationships with decentralized cryptocurrency exchanges in different regions.
Whether XRP is considered a security or not is a question that will only be answered after Ripple’s four-year legal battle with the U.S. Securities and Exchange Commission concludes. Facing the potential fine of up to $2 billion from the SEC, Ripple urgently needs to find new and reliable sources of income. From this perspective, stablecoins are a priority choice.
As we all know, stablecoins are considered one of the most important tools in the cryptocurrency field. Whether on centralized or decentralized trading platforms, in spot or futures markets, most transactions are denominated in stablecoins.
Although the overall market value of stablecoins is not very prominent in the cryptocurrency field, the profits are quite substantial. This seems to be the reason why companies like PayPal, First Digital Trust, and Ripple are rushing to enter this field. After all, the cake is too big.
Andy Bromberg, CEO of stablecoin wallet Beam, analyzed that US dollar stablecoins have become a “profitable business” due to the higher interest rates of U.S. government bonds. According to disclosed U.S. government data, the composite interest rate of so-called Class I bonds (U.S. bonds with interest rates adjusted every six months) issued from November 2023 to April 2024 reached 5.27%. This means that if the scale of Ripple’s stablecoins reaches $1 billion, revenue from interest alone would exceed $50 million.
It is worth noting that achieving a $1 billion issuance scale in the stablecoin market does not seem difficult. Taking the recently launched stablecoin USDe by Ethena Labs as an example, its market value surpassed $2 billion in less than four months and entered the top five stablecoins by market capitalization.
Of course, other cases in the industry are also worth considering for Ripple, such as PYUSD, which has a design concept very similar to Ripple’s stablecoin. In fact, PYUSD issued by PayPal is also backed 100% by US dollar deposits, short-term U.S. government bonds, and similar cash equivalents. It is also deployed on the Ethereum blockchain and follows the ERC-20 standard. However, since its launch, the scale of PYUSD has only reached about $200 million, with less than 70,000 transactions.
One of the main reasons that has hindered the progress of PYUSD is likely the lack of diverse practical applications. Although backed by PayPal, a payment giant, it has been difficult to interact well with DeFi and DEX in the cryptocurrency field.
To be honest, the stablecoin market has not yet formed a “winner takes all” pattern, providing opportunities and development space for many newcomers. If the overall size of the stablecoin market grows 12 times as predicted by Ripple, then this “cake” will undoubtedly become very enticing. If Ripple successfully ranks among the top three in the market, it will undoubtedly further consolidate its position in the cryptocurrency market.
However, whether Ripple can truly succeed in the stablecoin market will depend more on attracting end users to use and stay within its ecosystem. Let’s wait and see.
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