Variant Partners: The Future of Stablecoins Lies in Moving Towards Yield-Generating Stablecoins

Author: Geoff Hamilton, Investment Partner at Variant Fund

Compiled by: xiaozou, Golden Finance

I have always been fascinated by finance. In fact, that is why I entered the cryptocurrency space: to help the builders who are creating better financial products and infrastructure. As an investor, I am most passionate about diving deep into the core primitives of DeFi and discovering new innovations within each primitive, such as decentralized exchanges, lending markets, and stablecoins.

A lot has been happening in the stablecoin space. When I say "now," I mean the past few weeks. We have encountered some very exciting projects, and such a large amount of activity has prompted us to accelerate our research in establishing a framework.

What I want to do is give you a real-time view of how our thoughts are evolving and try to bring you slightly into our process. To do this, I will outline our emerging framework for thinking about and identifying the most attractive projects in the stablecoin space.

You may be quite familiar with stablecoins and know that they are one of the largest markets in the crypto world; they show signs of product-market fit. However, it may not yet be clear whether some key elements are in place to lay the groundwork for the next phase of market growth. With better scaling solutions, improved key management, and custodial infrastructure, transaction costs have decreased. We hope that, to some extent due to the great work Jake Chervinsky has done in Washington, regulation will become clearer.

All of this lays the foundation. But what truly unlocks the next phase of growth for stablecoins is a new class of products: yield-bearing stablecoins.

So, what are yield-bearing stablecoins?

As the name suggests: a stablecoin that pays yield to its holders, and in some cases, also pays yield to intermediaries holding the stablecoin. I will focus on one specific type of yield-bearing stablecoin: a yield-bearing stablecoin that derives yield from U.S. Treasury bonds.

These stablecoins provide on-chain access to a massive and important asset class—U.S. Treasury bonds. This is an asset class worth trillions of dollars, representing the risk-free rate. This is important because, as the risk-free rate, U.S. Treasury yields become a core part of attractive savings and investment products, and serve as a foundation for developers to create high-yield products.

To get straight to the point, yield-bearing stablecoins are exciting because they offer better product choices for users and developers, and the logic behind why yield-bearing stablecoins are indeed better in many use cases is quite simple: people prefer to receive something rather than nothing. This is exactly what yield-bearing stablecoins can achieve.

We believe there are three things that determine the success of projects in the stablecoin space.

1. User Experience and Compliance

First is the ability to deliver an excellent user experience while maintaining sufficient compliance. User experience has many components. Most importantly, stablecoins must be permissionless and freely transferable. In short, this means allowing any type of user to use the stablecoin, send it wherever they want, and utilize it in DeFi and CeFi.

The second element of a good user experience for stablecoins is that users should be able to earn yield without going through a cumbersome process. So: no staking mechanisms, no dual-token mechanisms, and absolutely no gamified activities.

This is what excellent user experience should look like; it sounds simple and seems easy to achieve. But the key is that you must maintain sufficient compliance while delivering an excellent user experience. This is important because we believe the biggest gains come from solving the global compliance stablecoin market with a single asset that caters to both the U.S. market and the international market. This is crucial because having a single global stablecoin asset can better establish liquidity, universality, and utility.

2. Liquidity and Security Integration

This brings us to the second thing, which we believe will define what makes yield-bearing stablecoin products most attractive: the ability to establish liquidity and security integration. Liquidity and integration are at the core of stablecoins as compelling and useful products. Liquidity allows users to enter and exit with low friction and low cost. Integration enables users to use their assets across centralized and decentralized finance. The most attractive projects will have the capability to ensure both. This means having a compelling and strong go-to-market strategy along with the necessary business development capabilities.

In terms of market entry, it is important for projects to clearly define the most attractive early user groups and compelling value propositions. They also need a suitable skill set to market and get these users across the finish line to use their new stablecoin.

Importantly, projects need to be able to target both institutional (crypto and non-crypto) and retail users. So you need a broad set of business development capabilities to cater to all these different user groups.

3. Trusted Brand

The next key factor for the success of stablecoin projects is the ability to build a trusted brand. This depends on the team but also relates to the structure of the project itself. We believe that mature teams capable of instilling confidence among a wide range of stakeholders will be the ones that perform best in this space. By project structure, I mean the legal entity structure of the stablecoin project and product itself. Here, transparency, reliability, and leveraging trusted third-party service providers to create a brand halo are important.

Over time, this ability to build trust through team and structural characteristics will become a significant component that sets certain projects apart.

Summary:

The above is a framework, and we are now very excited to put this framework into practice. This is a product category that could become the most widely used and largest in the crypto space. Currently, the competitive landscape is undergoing structural changes, led by a group of startups that are defining this new category of yield-bearing stablecoins.

We are actively adopting this framework, discussing new projects every day and every week, and we are excited to share our findings with everyone.