Stablecoins are disruptive. Who will be the disruptor?

Source: Blockworks; Compiled by: Wuzhu, Golden Finance

In The Innovator's Dilemma, Clay Christensen proposed the concept of disruptive innovation - a product that initially looks like a cheap imitation but ends up rewriting the rules of an entire industry.

These products often start in low-end markets or brand new markets that are ignored by existing companies because they are either not profitable enough or do not seem to have strategic importance.

But this is a good starting point: "Disruptive technologies are initially favored by the lowest-profit customer groups in the market,"Christensen explained.

These customers are often eager to adopt a product that is initially inferior in terms of traditional performance indicators, but is cheaper, simpler and more accessible.

Christensen cited the example of Toyota, which started in the US market targeting budget-conscious customer groups that were ignored by the three major US automakers.

The focus of established automakers on bigger, faster, more feature-rich cars “created a vacuum underneath them,” as Christensen puts it, and Toyota filled that vacuum with the slower, smaller, less-equipped Corona, which cost just $2,000 when it launched in 1965.

Today, Toyota is the second-largest automaker in the U.S., with its Lexus LX 600 luxury SUV starting at $115,850.

Toyota elbowed its way into the U.S. market with the Corona and then steadily climbed the value chain, exemplifying Christensen’s thesis that the best way to the top is to start at the bottom.

Stablecoins may follow a similar path.

Christensen’s disruptors started in niche markets; stablecoins start in emerging markets.

For Americans with bank deposits, stablecoins are essentially a poor dollar — they’re not FDIC-insured, they’re not properly audited, they’re not integrated into the ACH or SWIFT systems, and (despite the name) they’re not always redeemable for $1.

For people outside the US, however, they’re a superior dollar — unlike $100 bills, you don’t have to hide them, they can’t be torn or defaced, and you don’t have to exchange them in person.

This has made dollar stablecoins popular in countries like Argentina — where one in five Argentinians are said to use them daily — even though few in the US can tell what they are.

Argentina isn’t the only place where stablecoins are used, of course — they’re popular among DeFi traders, people who can’t pass KYC checks, migrants sending remittances home, employers paying cross-border freelancers, and savers fleeing their own country’s hyperinflationary currency.

None of these stablecoins are profitable enough to attract existing banks as customers, so it didn’t matter that the stablecoins were initially inferior to bank-issued currencies.

There was a time when people were so eager for digital dollars that they didn’t even seem to care if Tether’s USDT was fully backed.

Things have improved a lot since Circle offered a regulated alternative to USDT, Tether itself seems to be playing by the rules, and some stablecoins even offer yields.

But is this innovation truly disruptive?

The Christensen Institute has a six-part test for determining whether an innovation is disruptive:

Is it targeting non-consumers, or those who are overserved in the market by existing products from existing vendors?

Yes — DeFi traders and emerging market savers don’t need FDIC-backed US bank deposits (a full US bank account would make them “overserved”), but they do want digital dollars.

Is the product inferior to existing products from existing vendors, as measured by historical performance?

Yes — stablecoins have deviated from their $1 pegs, fallen to zero (Luna/UST), are expensive to get on and off ramps, and can be frozen without recourse.

Is this innovation easier to use, more convenient, or more affordable than existing products from existing vendors?

Yes — sending stablecoins is easier than sending bank deposits, more convenient for many, and more affordable for some.

Does the product have the technological enablers that can move it upmarket and keep it improving?

Yes — blockchain!

Is this technology combined with business model innovation that makes it sustainable?

Maybe? Tether may be the most profitable company per employee in history, but if US regulators allow stablecoins to pay interest, issuing stablecoins may not generate any profit at all.

Do existing vendors have an incentive to ignore new innovations and not feel threatened in the first place?

No. Incumbent vendors appear to be alert to the threat and aware of the opportunity.

“Almost always, when low-end disruption emerges, the industry leader actually has an incentive to flee rather than compete with you,” Christensen wrote. “This is why low-end disruption is such an important tool for creating new growth businesses: competitors don’t want to compete with you; they walk away.”

Stablecoins may be a rare exception: Rather than abandoning the low-cost innovation of stablecoins, incumbent vendors appear to be racing after them.

In recent weeks, payments giants Visa, Mastercard, and Stripe have all announced new stablecoins; BlackRock’s BUIDL fund (which appears to be a yield-generating stablecoin) is rapidly attracting assets; and Bank of America’s CEO said they are likely to issue a stablecoin once regulators allow it.

That may be because financial executives have read The Innovator’s Dilemma.

It may also be because stablecoins are so easy to launch.

Christensen defines disruptive innovation as company-driven—startups use low-end beachheads to seize mainstream markets before incumbents take them seriously.

The same may be true for stablecoins: The Circle payments network may be to Circle what Lexus is to Toyota.

But Circle’s competitors are not as stodgy and slow as Toyota, so, contrary to Christensen’s theory, it’s entirely possible that early innovators in stablecoins will be “eliminated by the sky.”

Either way, the end result may be the same: A recent Citi report predicts that stablecoin assets under management could reach $3.7 trillion by 2030, driven largely by adoption by institutional investors.