Stablecoins, Institutions, and DeFi

To investors,

I have been doing a deep dive on the stablecoin market, which is quickly becoming an important of the crypto industry. Adoption is occurring across various market participants — from individuals to corporations to financial institutions. The technology is drastically more superior than anything else out there, so it feels inevitable that people will begin to leverage stablecoins for a large chunk of transactions.

The folks at Circle have built the fastest growing, regulated stablecoin (USDC). It has increased market cap by more than 50x over the last 12 months or so. Insane. I asked them to put together a guest post about what they are seeing in the market. You can read their response here:

The Growth of DeFi

The emergence of DeFi has been a major catalyst for growth of the entire crypto industry since 2020, attracting media attention and spawning a host of new blockchain-based protocols that are democratizing financial services around the globe.

Total Value Locked (TVL) measures the aggregate value of all digital assets held in DeFi protocol smart contracts, including cryptocurrencies like Bitcoin and Ethereum and dollar digital currencies like USD Coin (USDC). Value locked in DeFi protocols provides liquidity for trading between different tokens, borrowing on-chain, minting derivative assets, and insuring digital and real world products.

At the beginning of July 2021, TVL stood at less than $400 million. In just one year, TVL across DeFi protocols has grown to nearly $50 billion, an increase of more than 100x in that short time.

USDC plays an integral role in some of the largest and most popular DeFi protocols. Dollar digital currencies allow DeFi yields to be denominated in familiar terms, and USDC trading pairs on decentralized exchanges like Uniswap dominate trading volume, with more than $3.2 billion in USDC volume in the last seven days.

USDC is also one of the largest sources of collateral and TVL across the DeFi ecosystem. Of more than $25 billion in circulation, nearly half of all USDC is allocated to DeFi protocol smart contracts, according to data from on-chain analytics provider Glassnode.

Between two of the largest DeFi lending protocols on the market today, Compound and Aave, more than $5.2 billion USDC is locked providing liquidity for borrowers — more than 20% of the 25 billion USDC currently in circulation.

Institutional Investment

Established financial institutions have looked on with great interest; DeFi has the potential to lower fixed costs by reducing centralized technical infrastructure, addresses many pain points of cross-border value transmission, and opens the door to innovative new financial products and services that could unlock additional revenue streams.

In an era of near-zero national interest rates, DeFi yields between 2% and 20% using protocols like Compound Finance are attractive to retail customers and financial institutions alike.

But interacting with DeFi protocols still requires meaningful technical and subject matter expertise, and relies on critical inputs like smart contract addresses and wallet infrastructure with little customization and few guardrails.

Institutions that capture a first-mover advantage when it comes to DeFi will have a distinct edge over those that arrive late to the party. In addition to gaining valuable experience in a fast-paced industry, institutions early to DeFi will benefit from governance token distributions that in most cases are only slated to remain active a few years after launching.

These governance tokens, used in voting on the future direction and decisions of the protocol, can be sold right away like other digital assets — but could prove more valuable for their stake in decentralized applications that could one day coordinate billions or trillions of dollars in value.

Accessing DeFi is a challenging but critical initiative for financial institutions in the coming years. That’s why Circle will soon release DeFi API, the easiest way to deploy capital into DeFi using trusted Circle infrastructure, right from the Circle Account. Create structured, guided DeFi access for your organization or customers using powerful and simple Circle APIs to reap the rewards of DeFi innovations without the challenges of unhosted wallets and complicated UX interactions.

The Circle DeFi API waitlist is open now. Add your business to the list and be a pioneer of Institutions in DeFi.

Pomp’s analysis:

These comments from Circle are fascinating because they really highlight the institutional adoption that is underway. When you start thinking about the yield generation that is available in the market today, it is hard to see a scenario where majority of Wall Street institutions continue to sit on the sidelines.

I personally know of numerous multi-billion dollar asset managers, who fancy themselves as ultra conservative, that are beginning to dip their toes in the water. They are specifically looking for risk-mitigated ways to generate 8-12% yields. This has become harder to accomplish in traditional markets without pushing further out on the risk curve. If they can find a few repeatable and scalable strategies in crypto, we should expect them to pour billions of dollars into the market. Time will tell if it happens or not. Definitely worth keeping an eye on it though.

Hope each of you has a great day. I’ll talk to you tomorrow.

-Pomp

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THE RUNDOWN:

Goldman Sachs Calls Coinbase a ‘Tactical Trade,’ Predicts Q2 Earnings Beat: Coinbase is positioned to beat the street’s Q2 estimates, according to a new Goldman Sachs memo that labels the crypto exchange a top 25 tactical trade. Citing its brokerage analyst’s “buy” rating for COIN, researchers on the investment bank’s derivatives team said in the client note that the recent parade of negative crypto headlines could – paradoxically – help lead to an earnings beat for Coinbase. Read more.

Fidelity Digital Assets to Increase Headcount by 70%: Fidelity Digital Assets plans to increase its headcount by around 70% in anticipation of growing institutional demand for crypto services. The asset manager's president, Tom Jessop, said the firm is looking to add around 100 staff in Dublin, Salt Lake City and Boston, according to a Bloomberg report Monday. The staff will be used to develop new products and expand beyond bitcoin into other cryptocurrencies. Read more.

‘Space Jam’ NFTs Launched by Warner Bros. and Nifty’s: A series of non-fungible tokens marking the release of “Space Jam: A New Legacy” are to be launched on new social platform Niftys.com in partnership with Warner Bros. The collection features LeBron James and eight Looney Tunes characters from the “Space Jam” sequel ahead of its theatrical release on July 16. Niftys.com has been launched by Nifty’s Inc. with the aim of bringing digital collectibles to a wider audience. It has backing of $10 million in seed funding. Coinbase Ventures, Topps and NBA Top Shot developer Dapper Labs are among the investors. Read more.

US Financial Giant Capital Group Buys 12% Stake in Bitcoin-Exposed MicroStrategy: A division of major U.S. asset management firm Capital Group has conducted a 12.2% purchase of business-intelligence software company MicroStrategy’s common stock. According to a filing to the Securities and Exchange Commission on June 30, Capital International Investors bought 953,242 shares of 7,782,568 outstanding. While the filing was made two weeks ago, Senior Vice President Walter Burkley only signed off on Monday, according to the document. Read more.

Argentinian Crypto Exchange Buenbit Raises $11M to Expand in Latin America: Argentina-based cryptocurrency exchange Buenbit raised $11 million in a Series A funding round led by Libertus Capital, the exchange announced Monday. Galaxy Digital, FJ Labs and Amaiya Management also participated in the round, CEO Federico Ogue told CoinDesk, as did angel investors such as Alec Oxenford, founder of e-commerce company OLX. Read more.

LISTEN TO THIS EPISODE OF THE POMP PODCAST HERE

Peter Schiff is the Chief Economist and Global Strategist at Euro Pacific Capital.

In this conversation, Peter and I discuss:

inflation

monetary policy

gold

bitcoin

taxes

becoming a billionaire

I really enjoyed this conversation with Peter. Hopefully you enjoy it too.

LISTEN TO THIS EPISODE OF THE POMP PODCAST HERE

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Circle is a global financial technology firm that enables businesses of all sizes to harness the power of stablecoins and public blockchains for payments, commerce and financial applications worldwide. Circle is also a principal developer of USD Coin (USDC), the fastest growing, fully reserved and regulated dollar stablecoin in the world. The free Circle Account and suite of platform API services bridge the gap between traditional payments and crypto for trading, DeFi, and NFT marketplaces. Create seamless, user-friendly, mainstream customer experiences with crypto-native infrastructure under the hood with Circle. Learn more at circle.com.

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