The Future of Stablecoins From Safe Assets to Engines of Real World Growth

So, I'm John Oconor. I am the CEO of Reali and I am here today to talk to you very briefly about stable coins, how they've started, what's working in the market currently, and where we're going. So let's start with uh casting our minds back to eight or nine years ago when I first started working in cryptocurrencies. There was one unique and major challenge with the industry. Let's say that you're holding a whole bunch of ETH Ethereum.

You've done well on it. You're looking to take profits and then the market start to tumble. What are your options to get rid of this position? Well, the only pair that would be available to you would be Bitcoin. So, you'd go and you'd sell your Ethereum, but you're selling it for Bitcoin.

And I can tell you at that time, if Ethereum was falling, Bitcoin was certainly falling at the same time. So, stable coins were created to essentially solve this problem. And Tether was the first mover. They had a model that was as simple as it was lucrative. You give me a dollar, I give you back a digital dollar.

I invest that dollar into T bills. I keep the yield, but you now have a pair available to exit your crypto positions. And that model has spiraled into what is now one of the fastest growing segments in finance. There are now $300 billion dollars of stable coins issued globally and that number continues to grow. And in terms of commercial success, I mean there was an article which some of you guys may have seen across the last six months.

uh Tether with fewer than 100 people achieved as much profit as Goldman Sachs last year. So truly a remarkable uh product not in terms of uh just its usage but also its commercial success. But the final point I make on this is stable coins are no longer a purely crypto innovation. Rather than just being used as the other side of these cryptocurrency pairs, stable coins are now used for trade vinance globally. Remittance companies are often on the back end transmitting value all across the world through the usage of stable coins.

And if you were to speak to any emerging market manufacturer, uh there's a 50% chance that they're paying their Chinese suppliers exclusively in stable coins. So, we've really come quite far from eight years ago when we were just trying to get rid of our crypto exposure. Okay. But for all of this success, there are a number of questions still to be asked. And these mostly pertain to the assets that are collateralizing these stable coins.

Namely, for all of those dollars that you give to Tether, who should get the yield from those dollars? What assets should those dollars be invested in? Should it just be T- bills or should we allow a portfolio of other assets maybe with bit with more um with more yield that can be generated on them? So these are the kind of questions which are now coming to the four and it's been driven by three simple factors. One, for eight years retail has earned no yield on the stable coins it's been using and retail has started to wake up to this and particularly with a risk-free rate as high as it is, they're starting to ask why can't I get a share of that yield.

The second factor is institutions have entered the market. Eight years ago, there were no institutions really in crypto. Uh they were mostly being formed. Companies like Circle and Tether. Now, these Bayamoths uh didn't exist in the same capacity back then.

But now we have them and many of the big crypto institutional players plus new entrance like Black Rockck are all interested in getting yield on capital that they provide. The third reason is regulation is now here in the US. we have the genius act and in Europe we have ma. Both of these frameworks have removed the uncertainty over the legal status of stable coins and after you resolve the first question of legal uh character then subsequent questions over what are the assets doing who gets the yield start to emerge. So let's just sort of characterize the different versions of stable coins we've seen in the market and how this is now leading us to a much more interesting in our view new direction era one your tether USDC era this is where the operators of the stable coin take all of the yield from one perspective this is an ideal product it's let us move money frictionlessly across the world uh and even if there was no direct yield incentive to users uh the commercial success we believe shows that it had product market fit.

But as I've said things have changed. There are now new entrance to the market. Era 2 ono and similar companies like it. These companies tokenize the tea bills they purchase and pass the majority of the yield back to the users and ono has grown like a weed as have their competitors. But now we move on to the the newest and latest and greatest which was Athena.

Athena only launched a couple of years ago and it does something quite different from the companies that have come before it. When you give Athena a dollar and it gives you back its stable coin, it doesn't buy tea bills with that dollar. Instead, it goes and places it in an inmarket crypto trade which is based on funding rates. So ultimately, this market neutral trade performs very well when crypto markets are frothy. And I believe uh in the first week, Athena was offering 33% APRs uh based off how frothy this trade was.

But of course, here we are maybe two years later, cryptos on a downtrend. Everyone's talking about bare markets and suddenly this yield disappears. So this new model whilst very scalable for Athena ultimately cannot deliver stable returns which is what I imagine the majority of the investors in this room would be interested in. So each generation has solved a problem whilst introducing a new one. The question is can we design productivity productivity in the assets that stable coins are purchasing without introducing fragility and we believe that you can uh so this is our view on a new crop of stable coins that will be emerging across the next year or two.

The first thing to note is that it looks a lot like traditional finance versus buying a single asset like treasury bills with the incoming funds or deploying it all into a single strategy in market crypto strategy like Athena. We expect portfolios to be built portfolios with a variety of different assets liquidity sleeves all aimed at optimizing towards a more stable longer term return. These portfolios will be made up of real world income generating assets. There are an entire universe of assets which can compose these portfolios. But we believe that private credit will likely see a lot of adoption from the variety of companies playing in this space.

Across the last 15 years, private credit has delivered excellent riskadjusted returns, very low volatility, and ultimately a stable coin collateralized by private credit portfolio would likely be able to offer something quite new to the crypto market. So why does this matter? Well, if we can do all of this, we can do something which has never really existed in crypto up until this point, which is an uncorrelated to Bitcoin, competitive and stable yield. And that is a product that we believe many investors across the space are excited to have. So, what about risk?

It's great. We've gone from T bills to private credit assets. But with that change, we've also introduced a significant amount of risk into the portfolio. So how would you go about managing that risk? Well, we can repurpose a mechanism which Athena has been using.

Athena stable coins exist in two states. State one operates like your checking account. When it's in the checking account, you as a user or a holder don't generate a yield, but you can use it to send to someone else's wallet to pay for services and all of the other things we like to do in crypto. The second state is when it's in the staking contract. Think of this like your savings account.

When it's in the savings account, yield is due to the users for holding the stable coin. But if we look in aggregate, Athena since inception has only ever really had to pay out 50 circa 50% of that yield. The rest of the time we're in checking account mode. So what happens with that yield? It's still being generated by the assets and in reality it occurs on the protocol level.

So what can you do with this retained earnings, this sort of surplus revenue? Well, the thing that we believe we need to be seeing in stable coins entering the market is downside protection. This unstake yield can be used to absorb downside across the portfolio to build in protection buffers and ultimately to engineer stability. If this is done effectively, the result will be a portfolio that has much higher yielding assets in aggregate with built-in de-risking by design and ultimately a stable coin that's capable of providing yield to its users along with long-term capital resilience. So, stable coins v4 are coming.

They're being architected now. We believe we'll see a transformative shift away from stable coins that only hold very safe tea bills that benefit a few towards productive assets that will be engines of growth to benefit the many. My name is John Oconor. Thank you so much for listening.

[music]