The Next Chapter for Stablecoins: Insights from Nic Carter

In a recent episode of the Lightspeed podcast, crypto veteran Nic Carter shared his thoughts on the evolving landscape of stablecoins, crypto adoption, and the future of digital assets. As a general partner at Castle Island Ventures and a prolific writer in the crypto space, Carter's insights offer valuable perspective on where the industry is headed.

The Dominance of Stablecoins in Crypto

Stablecoins have emerged as a critical component of the cryptocurrency ecosystem, now accounting for about 10% of crypto's total market cap and approximately 75% of the dollar volume in crypto transactions. Carter emphasizes that much of crypto activity today revolves around moving dollars, challenging earlier notions that native crypto assets would dominate as payment tokens.

"Basically, crypto became dollarized. People haven't even realized it yet," Carter explains. This shift towards stablecoins makes sense from a practical standpoint. Users prefer stable value in smart contracts, especially for long-duration transactions. Additionally, using stablecoins as a bridge currency when moving between fiat and crypto helps avoid capital gains tax liabilities that would occur with volatile cryptocurrencies.

The Evolution of Stablecoin Models

Carter discusses various stablecoin models, from algorithmic attempts like Terra/Luna to more traditional fiat-backed options. He dismisses the viability of purely algorithmic stablecoins, citing the predictable failure of Terra/Luna due to its lack of credible backing and artificial interest rates.

For fiat-backed stablecoins, Carter advocates for a heterogeneous ecosystem with multiple issuers across different jurisdictions. This approach allows users to choose their preferred risk profile. He notes that offshore issuance is becoming increasingly common for fiat-backed stablecoins, though they remain dollar-denominated.

The Tether Controversy

Interestingly, Carter positions himself as a "Tether apologist," arguing that the controversial stablecoin is unfairly maligned. While acknowledging Tether's past issues, he contends that its perceived riskiness is part of its value proposition for certain users who seek distance from U.S. financial regulators.

"I think tether is unfairly maligned. And I've been tangling with the tether truthers for like six years now. And I'd like them to introspect and acknowledge that they have been wrong," Carter states. He believes Tether's offshore nature and perceived immunity from U.S. government intervention make it attractive to users seeking a "safe haven" from regulatory pressures.

The Regulatory Landscape for Stablecoins

The regulatory environment for stablecoins in the United States remains challenging. Carter points out several recent developments that have made it difficult for stablecoin issuers to operate onshore:

1. The Federal Reserve's denial of a master account to Custodia Bank in January 2023.
2. The Fed's guidance discouraging banks from engaging with stablecoins.
3. The requirement for banks to seek explicit permission to deal with stablecoins.

These regulatory hurdles have pushed much of the stablecoin innovation offshore. While a stablecoin bill is moving through Congress, Carter is skeptical about its prospects for passage in the current political climate.

The Impact of Stablecoins on L1 Tokens

The rise of stablecoins raises questions about the value proposition of native L1 (Layer 1) tokens. Carter suggests that the crypto community may have overindexed on scarcity features and monetary policy for L1 networks. Instead, he argues for viewing these networks more as businesses that provide valuable settlement services.

Ethereum's shift towards a deflationary model and its introduction of fee-burning mechanisms represent an attempt to align network usage with token value. However, Carter cautions that this approach may create tension between users who want low transaction costs and token holders who benefit from higher fees.

The Importance of Composability

One of the key strengths of blockchain networks, particularly emphasized in the Solana ecosystem, is composability. This feature allows different applications and smart contracts to interact seamlessly, creating a more integrated and efficient financial system.

Carter praises Solana's focus on composability, stating, "I think the strongest thing is very strong emphasis on composability." He contrasts this with the emerging landscape on Ethereum, where the proliferation of Layer 2 solutions may fragment liquidity and reduce composability across the ecosystem.

Overrated and Underrated Sectors in Crypto

When asked about overrated and underrated sectors in crypto, Carter offered some thought-provoking perspectives:

Overrated:

1. Gaming and metaverse projects
2. Creation of new L1 networks
3. Excessive tokenization of everything

Underrated:

1. Fiat-backed stablecoins with proper regulatory compliance
2. The "phygital" sector (linking physical and digital assets through NFTs)
3. Deep-fi projects (decentralized physical infrastructure networks)

Carter is particularly enthusiastic about the potential of linking physical objects with digital assets through embedded chips and NFTs. This "phygital" approach could revolutionize how we interact with collectibles, luxury goods, and even everyday items.

The Future of Stablecoins

Looking ahead, Carter shared several predictions for the stablecoin sector:

1. USD will remain the dominant unit of account for stablecoins (95%+ market share).
2. Most stablecoins will continue to be issued outside the US (70-75% of supply).
3. 50% of stablecoin market cap will become interest-bearing within 24 months.
4. About 25% of stablecoin supply will be based on crypto-native collateral within two years.
5. BRICS countries may create a settlement network using a stablecoin issued on a public blockchain.

These predictions suggest a dynamic future for stablecoins, with increased utility and integration into both the crypto ecosystem and traditional finance.

The Role of Solana in the Evolving Crypto Landscape

While much of the discussion focused on stablecoins and broader crypto trends, Carter also touched on Solana's position in the market. He noted that Solana's emphasis on composability is a significant strength, aligning well with the benefits that make crypto compelling compared to traditional financial systems.

Carter expressed encouragement about recent developments in the Solana ecosystem, particularly its ability to recover and grow following periods of difficulty. This resilience sets Solana apart from many other L1 networks that struggle to maintain momentum after setbacks.

"I think what I'm seeing this Solana space right now is very encouraging. I think they're showing a lot of growth. And that's the hardest thing is emotionally recovering from a big drawdown and from being loved to being hated. And then it's like, how do you recover from that? So the fact they've been able to rally a lot of communities wouldn't be able to do that," Carter remarked.

The composability offered by Solana's architecture positions it well to capitalize on the growing importance of integrated DeFi experiences. As the crypto industry continues to evolve towards more practical, user-friendly applications, Solana's focus on seamless interoperability could prove to be a significant advantage.

Challenges and Opportunities for Crypto Adoption

Throughout the discussion, Carter highlighted several challenges facing the crypto industry, including regulatory hurdles, the need for better user experiences, and the importance of moving beyond speculative dynamics. However, he also sees tremendous opportunities, particularly in areas where crypto can solve real-world problems and improve upon existing financial infrastructure.

The success of stablecoins demonstrates that there is significant demand for improved cross-border payment solutions and more efficient settlement systems. As the technology matures and regulatory frameworks evolve, we may see increased adoption of crypto-based solutions in traditional finance and emerging markets.

The Importance of Data-Driven Analysis

Carter repeatedly emphasized the importance of looking at actual usage data rather than relying on ideological positions or wishful thinking. This data-driven approach has led him to revise some of his earlier views on Bitcoin and other cryptocurrencies.

"I would say I'm very interested in the world as it actually is. Not in the world as I might want it to be. I think as an investor, your responsibility is to try and perceive actual reality as opposed to some fantasy world," Carter explained.

This willingness to adapt based on evidence is crucial for investors and entrepreneurs in the fast-moving crypto space. It also underscores the need for better tools and analytics to understand how different blockchain networks and cryptocurrencies are being used in practice.

The Potential of Synthetic USD Stablecoins

An intriguing development Carter discussed is the potential for synthetic USD stablecoins collateralized by cryptocurrencies like Ethereum. With Ethereum now offering staking yields, it becomes possible to create a stable USD-pegged asset using a combination of long spot staked ETH and short ETH futures positions.

This approach could offer several advantages:

1. Decentralization: Not reliant on traditional banking infrastructure
2. Yield generation: Potentially offering interest to stablecoin holders
3. Alignment with crypto ethos: Value accrues to the underlying crypto asset

Carter predicts that such synthetic USD stablecoins could capture up to 20% of the stablecoin market cap in the future, representing a significant shift in the stablecoin landscape.

The Crypto Tribalism Phenomenon

An interesting tangent in the discussion was the phenomenon of "crypto tribalism," where adherents to particular blockchain projects or cryptocurrencies develop almost religious-like devotion. Carter likens this to how people fill the metaphysical void left by traditional religion with other affiliations.

"You can't ever stamp out religion, I think, is the point here. People want to belong to a tribe. Crypto is so powerful because it recruits marginalized people that have typically minority views on things, especially finance and central banking," Carter explains.

While this tribalism can drive passion and commitment, it can also lead to closed-mindedness and resistance to necessary changes or improvements. Carter advocates for a more data-driven, pluralistic approach to evaluating different crypto projects and technologies.

Advice for Crypto Startups and Writers

For aspiring crypto entrepreneurs, Carter emphasizes the importance of finding aligned investors rather than optimizing solely for valuation. He advises founders to seek capital partners who genuinely believe in their vision and can offer support beyond just funding.

As for aspiring crypto writers, Carter stresses the importance of developing original ideas. "The most important thing with writing is to develop original ideas, and that's what gives you the motivation to actually write them down. If you don't have anything to say, then I would say don't force it," he advises.

Conclusion: A Dynamic Future for Crypto and Stablecoins

The conversation with Nic Carter paints a picture of a crypto industry that is maturing and evolving rapidly. While challenges remain, particularly in the regulatory sphere, there are also exciting opportunities emerging in areas like synthetic stablecoins, "phygital" assets, and improved financial infrastructure.

For networks like Solana, the focus on composability and user experience aligns well with the direction Carter sees the industry heading. As the crypto space continues to grow and adapt, it will be crucial for projects to stay agile, data-driven, and focused on solving real-world problems rather than getting caught up in ideological battles or speculative frenzies.

The next chapter for stablecoins and the broader crypto ecosystem promises to be one of increased utility, better integration with traditional finance, and hopefully, a regulatory environment that fosters innovation while protecting users. As always in the crypto world, those who can adapt to changing conditions and build genuinely useful products are likely to thrive in this dynamic landscape.

Facts + Figures

• Stablecoins now account for about 10% of crypto's total market cap and approximately 75% of the dollar volume in crypto transactions.

• The USD remains the dominant unit of account for stablecoins, with over 99% market share currently.

• Carter predicts 50% of stablecoin market cap will become interest-bearing within 24 months.

• About 25% of stablecoin supply is expected to be based on crypto-native collateral within two years.

• 70-75% of stablecoin issuance is predicted to occur outside the US in the near future.

• Synthetic USD stablecoins could capture up to 20% of the stablecoin market cap in the coming years.

• The Ethereum staking rate was around 4.5% at the time of the podcast, similar to the 3-month Treasury yield of 5.5%.

• Carter estimates that 99.997% of the time, projects don't actually need a token when they think they do.

• Tether, despite controversies, remains a popular stablecoin due to its perceived distance from US regulators.

• The "phygital" sector, linking physical and digital assets through NFTs, is seen as an underrated area of growth in the crypto space.

• Carter suggests that identifying Satoshi Nakamoto is possible and could be done by a committed journalist in about six months.

• The podcast was recorded on August 29, 2023, providing context for the predictions and market observations discussed.

Questions Answered

What are stablecoins and why are they important in the crypto ecosystem?

Stablecoins are cryptocurrencies designed to maintain a stable value, usually pegged to a fiat currency like the US dollar. They are important because they provide a stable medium of exchange and store of value within the volatile crypto ecosystem. Stablecoins now account for about 10% of crypto's total market cap and approximately 75% of the dollar volume in crypto transactions, indicating their crucial role in facilitating trades and providing stability in the crypto market.

How does Nic Carter view the future of stablecoins?

Nic Carter is optimistic about the future of stablecoins but sees significant changes coming. He predicts that USD will remain the dominant unit of account for stablecoins, but most will be issued outside the US. Carter expects 50% of stablecoin market cap to become interest-bearing within 24 months and about 25% of stablecoin supply to be based on crypto-native collateral within two years. He also anticipates the emergence of synthetic USD stablecoins collateralized by cryptocurrencies like Ethereum.

What is the regulatory landscape for stablecoins in the US?

The regulatory environment for stablecoins in the United States is currently challenging. The Federal Reserve has discouraged banks from engaging with stablecoins and denied master accounts to crypto-friendly banks. There's a stablecoin bill moving through Congress, but Carter is skeptical about its prospects for passage in the current political climate. These regulatory hurdles have pushed much of the stablecoin innovation offshore, with Carter predicting that 70-75% of stablecoin issuance will occur outside the US in the near future.

How does Carter view the importance of composability in blockchain networks?

Carter emphasizes the importance of composability in blockchain networks, particularly praising Solana's focus on this aspect. Composability allows different applications and smart contracts to interact seamlessly, creating a more integrated and efficient financial system. He contrasts this with the emerging landscape on Ethereum, where the proliferation of Layer 2 solutions may fragment liquidity and reduce composability across the ecosystem. Carter sees strong composability as a key advantage for blockchain networks in competing with traditional financial systems.

What sectors in crypto does Carter see as overrated and underrated?

Carter views gaming, metaverse projects, creation of new L1 networks, and excessive tokenization as overrated sectors in crypto. On the other hand, he sees fiat-backed stablecoins with proper regulatory compliance, the "phygital" sector (linking physical and digital assets through NFTs), and deep-fi projects (decentralized physical infrastructure networks) as underrated. He's particularly enthusiastic about the potential of linking physical objects with digital assets through embedded chips and NFTs, which could revolutionize how we interact with collectibles, luxury goods, and everyday items.

How does Carter view the phenomenon of "crypto tribalism"?

Carter likens crypto tribalism to a form of secular religion, where people fill the metaphysical void left by traditional religion with devotion to particular blockchain projects or cryptocurrencies. He sees this as a powerful force in crypto because it recruits marginalized people with minority views on finance and central banking. However, Carter cautions that while tribalism can drive passion and commitment, it can also lead to closed-mindedness and resistance to necessary changes or improvements. He advocates for a more data-driven, pluralistic approach to evaluating different crypto projects and technologies.

What advice does Carter give for crypto startups and writers?

For crypto startups, Carter emphasizes the importance of finding aligned investors rather than optimizing solely for valuation. He advises founders to seek capital partners who genuinely believe in their vision and can offer support beyond just funding. For aspiring crypto writers, Carter stresses the importance of developing original ideas. He suggests that the best writing comes from a place of genuine insight or disagreement with prevailing views, rather than forcing content without a clear perspective to share.

How does Carter view the role of Solana in the evolving crypto landscape?

Carter expresses encouragement about recent developments in the Solana ecosystem, particularly praising its emphasis on composability. He notes Solana's resilience in recovering and growing following periods of difficulty, which sets it apart from many other L1 networks. Carter sees Solana's focus on seamless interoperability as a significant advantage, positioning it well to capitalize on the growing importance of integrated DeFi experiences as the crypto industry evolves towards more practical, user-friendly applications.