“It’s not just ‘stablecoins’. It’s stablecoins, stablecoin equivalents, and stablecoin adjacents.”
The crypto industry has no shortage of jargon. Even the most well-informed industry participants are regularly faced with having to decipher new terminology. Yet despite what seems to be a collective quest to provide “novel” labels to each new aspect of crypto, the word “stablecoin” gets used as a catch-all for a swath of products that may or may not look like one another under the hood.
Stablecoins are generally defined as cryptocurrencies which maintain a pegged value to an underlying asset, most commonly the US Dollar. Until relatively recently, it has been straightforward to identify which assets should be considered stablecoins, with two of the largest examples by market cap, USDC and Tether, seen as the defacto solutions in this category.
However, the breadth of use of the word “stablecoin” sparked a fascinating question during a recent panel of industry peers: given the growth of non-USD stablecoins as well as RWA-like tokens is stablecoin even the right term?
The consensus was yes, stablecoin is probably the right word, because it is useful and is well established. Yet as we consider the emergence of stablecoin-like products that may or may not indeed be correctly described as a ‘stablecoin’, our terminology needs to be expanded upon.
While I’m hesitant to add more jargon to the crypto lexicon, I advocate for the segmentation of the e-money token world into additional buckets. Specifically, basing these buckets on a given asset’s primary purpose as well as its underlying collateral. Taking some inspiration from the world of accounting, I want to introduce two new descriptors with the aim of adding clarity to discussions around stablecoins:
Stablecoin Equivalents: similar collateral backing to fiat-backed stablecoins, but possibly different end user functionality; and
Stablecoin Adjacent: different collateral backing to fiat-backed stablecoins, but likely similar end user functionality.
What are Cash and Cash Equivalents?
As with the word “stablecoin” in crypto, in TradFi the word “cash” gets used interchangeably to refer to a variety of financial assets. Depending on the context of the conversation, an entity or person “holding cash” could mean currency deposits with a financial institution (‘cash’) or holding a range of short-term highly liquid investments (‘cash equivalents’ as defined by the ASC).
Accounting standards put cash and cash equivalents (CCE) on the same standing on a corporate balance sheet. Yet in our current interest rate environment, the economic impact of holding “cash” in the form of currency deposits versus short term government securities yielding 5+% can be significant. “Cash Equivalents” and “Cash Deposits” are treated the same from a liquidity and risk perspective but do not necessarily have the same economic benefits to the holder.
Using the terms of TradFi accounting as our guide, how should we designate different digital assets that currently fall under the “stablecoin” banner?
What are Stablecoin Equivalents?
While fiat-backed stablecoins maintain the lion’s share of “stablecoin” AUM and mindshare, the last 12 months have seen impressive growth in what are often referred to as “RWA (Real World Asset) Stablecoins”. Critically for prospective holders of these assets, interest is passed to the token holder as opposed to retained by the issuer. However, a survey of just a small subsegment of these assets brings into question whether “stablecoin” remains the correct terminology.
Without making a collectively exhaustive list of these sorts of assets, these assets are not all definitionally stablecoins. And this is partially by design – as issuers are first addressing the problem of providing yield on highly safe and stable underlying assets. Each of these assets possess a collateral profile like one another and like non-interest-bearing stablecoins. This is where the parallel to “cash and cash equivalents” proves helpful in describing this new subclass of digital assets.
These assets are not necessarily stablecoins, but rather they are stablecoin equivalents. Equivalent in that they are of equivalent monetary quality just as bank deposits are viewed as equivalent monetary quality to assets such as short-term US Treasury securities.
From my vantage point, it has been exciting in recent months to see increased acceptance of these types of assets as trading collateral. Trading desks and exchanges are increasingly willing to accept these assets in the place of USD and USD stablecoins – as they should be.
What are Stablecoin Adjacents?
One of the most hotly discussed crypto topics of the past 6 months has been the launch of the Ethena Protocol and its corresponding USDe ``synthetic dollar” token. Unlike fiat-backed stablecoins and the aforementioned stablecoin equivalents, Ethena’s USDe is not backed by holdings of fiat currency or other cash equivalent assets.
Ethena maintains USDe peg stability through “the use of delta hedging derivatives positions against protocol held collateral.” This design, according to Ethena, enables the creation of a digitally native asset which maintains reasonable stability with underlying assets held outside of the traditional banking system.
Ethena was designed to function like a fiat-backed stablecoin yet with a radically different collateral profile. For that reason, it is useful to view USDe – and the variety of similar products coming to market – as a stablecoin “adjacent” asset. Adjacent in the sense that these assets are intended to function in the same manner but make no representations of having the same collateral risk profile as fiat-backed stablecoins.
This is not to say that adjacent assets like USDe have an inherently worse risk profile than stablecoins. As Ethena’s documentation argues, the protocol’s lack of reliance on the traditional banking system is a form of risk mitigation. While this stance is debatable the important takeaway is that it is simply a different asset profile and should be acknowledged as such. The label of “adjacent” helps communicate this distinction.
Crypto often looks to overhaul the “traditional” financial system, but in the case of stablecoins, the industry can stand to borrow some old terminology. These distinctions exist in TradFi because anyone with financial experience recognizes the similarities and differences in different assets that are referred to as “cash”. That same level of nuance doesn’t currently exist for stablecoins, but it will be needed as the number of projects that fall under the stablecoin equivalent and adjacent categories continues to grow. As a market maker it’s exciting to see the maturation of this sector to the point where we have more than just stablecoins, we have stablecoins, stablecoin equivalents and stablecoin adjacents.
By John Pennington, CFA; Head of Business Development – JST Digital
