This is Part 2 in a four part series in which we will explore the market for stablecoin issuers, its trend towards fragmentation and how unification can develop to improve mass adoption.
Part 1 dispels the idea that stablecoins are a winner take all model and explain why there is a market gap that will be filled by an Aggregator-Distributor (AD).
Part 2 will describe CENTRE, an attempt to create a centralized Aggregator-Distributor (CAD) and how its emergence mirrors the history of credit card companies.
Part 3 will describe CementDAO a Decentralized Aggregator-Distributor (DAD) and its advantages over the centralized model.
Part 4 will explore the role of issuers in a fragmented market, and how they can carve out defensible, profitable market niches, despite producing a commodity product.
In the 1920s, department stores, and later banks, started offering metal ‘credit cards’ that customers could use to make purchases. These were useful for customers who didn’t want to carry cash or wanted to buy with credit. Issuing these cards was beneficial to merchants and banks who wanted more money circulating within their businesses. However, there was a problem, these cards were only accepted by small groups of merchants and banks based on local relationships. The market was fragmented, and customers had to carry lots of different cards that were useless in most places - inhibiting widespread adoption.
Then, in 1966, Bank of America started licensing their popular card, BankAmericard, to other banks. Suddenly, customers of banks across the country could become BankAmericard holders and banks could add their customer base to a much larger network. BankAmericard became the middleman and network authority to all of those transactions. BankAmericard would eventually change its name to Visa.
Stablecoin Fragmentation and the CENTRE Solution
Much like those original credit cards, stablecoins today have niche use-cases. There are now over 220 projects planning on issuing a stablecoin and that number is growing exponentially. However, there is a problem, fragmentation of the market means they have very limited acceptance among exchanges and Dapps. Like with credit cards - and any form of money - the more fragmented the market, the less useful each stablecoin becomes.
Circle have come up with a brilliant solution, and it is exactly the solution that Visa created to solve the fragmentation of the credit card space. Together with Coinbase and Bitmain, they have created a company called CENTRE. CENTRE will start out by issuing to customers of Circle and Coinbase a stablecoin called USDC. They will then licence the right to issue and redeem USDC to other regulated entities. Instead of having many competing corporations each issue their own coin, CENTRE is trying to make USDC the standard, “de-facto”, stablecoin.
Creating a New Payments Authority
Like Visa, CENTRE will act as the middleman to all of these transactions. CENTRE will be the central authority that manages the six key aspects of the network:
Clearing & Settlement
Deciding on Fees
Blacklisting Users or Addresses
The CENTRE model was wildly successful for Visa and CENTRE hope to replicate that success. In attempting to create ‘de facto stablecoin’ they have given all other stablecoins notice - join or be left behind. For users, having one central stablecoin will undoubtedly be very convenient and significantly less confusing than having many competing brands of USD. Additionally, it would mean exchanges only need to list one type of dollar and Dapps only need to integrate USDC.
Towards a Decentralized Alternative
Do we really want a winner-take all blockchain Visa? Isn’t there a more decentralized alternative to maintain a vibrant, competitive environment? Interestingly enough, on the same week that Circle and Coinbase announced CENTRE, 25 stablecoin projects met in London to discuss decentralized collaboration and interoperability. Perhaps not surprisingly, CENTRE chose not to attend. However, the projects that did attend, agreed to begin work together - even while competing - to create an interoperable ecosystem. In part 3, I will explore what such a decentralized solution to fragmentation might look like.