Stablecoins are disruptive. Who will be the disruptor?

Source: Blockworks; Compiled by Wuzhu, Golden Finance

In the book "The Innovator's Dilemma", Clayton Christensen introduced the concept of disruptive innovation - a product that initially appears to be a cheap imitation but ultimately rewrites the rules of the entire industry.

These products usually start in the low-end market or entirely new markets that existing businesses overlook because they either lack sufficient profit or seem to lack strategic importance.

But this is a great starting point: "Disruptive technologies are initially embraced by the customer segments with the lowest profits in the market," Christensen explained.

These customers often desire to adopt a product that initially performs poorly in traditional performance metrics but is cheaper, simpler, and more accessible.

Christensen cited Toyota as an example, as the company's initial target in the U.S. market was the budget-conscious customer segment that was overlooked by the Big Three automakers.

In the words of Christensen, traditional automakers focus on bigger, faster, and more feature-rich cars, which "creates a vacuum beneath them," while Toyota filled this vacuum with the slower, smaller, and less equipped Corona. This car was launched in 1965 at a price of just $2,000.

Today, Toyota is the second largest automaker in the United States, with a starting price of $115,850 for its Lexus LX 600 luxury SUV.

Toyota leveraged the Corona to penetrate the U.S. market and then steadily climbed up the value chain, which validates Christensen's argument: the best way to reach the top is to start from the bottom.

Stablecoins may also follow a similar path.

Christensen's disruptors start in niche markets, while stablecoins begin in emerging markets.

For American citizens with bank deposits, stablecoins are essentially a subpar dollar — they lack insurance from the Federal Deposit Insurance Corporation (FDIC), have not undergone proper audits, are not integrated into the ACH or SWIFT systems, and (despite their name) are not always redeemable for 1 dollar.

However, for people outside of the United States, they are a more advanced form of the dollar—unlike a $100 bill, you don’t need to hide them, they won’t be torn or soiled, and you don’t need to exchange them face-to-face.

This has made US dollar stablecoins very popular in countries like Argentina—reportedly, one in five Argentinians uses them daily—although few people in the United States can say what they are.

Of course, Argentina is not the only place where stablecoins are used—stablecoins are popular among DeFi traders, individuals who cannot pass KYC checks, immigrants sending remittances back home, employers paying cross-border freelancers, and savers fleeing their country's hyperinflationary currency.

These stablecoins, as clients of existing banks, do not generate sufficient profits to attract them, so initially, stablecoins are not as important as the currencies issued by banks.

There was a time when people were so eager for the digital dollar that they seemed not to care whether Tether's USDT was fully backed.

Since Circle provided a regulated alternative to USDT, Tether itself also seems to be playing by the rules, and the situation for some stablecoins has greatly improved, even offering yields.

But is this innovation really disruptive?

The Christensen Institute has a test consisting of six parts to determine whether an innovation is disruptive:

Is its target customer non-consumers or those who are over-served by existing products from current suppliers in the market?

Yes - DeFi traders and emerging market depositors do not need FDIC-backed US bank deposits (a complete US bank account would "over-service" them), but they do want digital dollars.

Based on historical performance metrics, is this product not as good as the existing products of current suppliers?

Yes - stablecoins have deviated from their peg of 1 dollar, falling to zero (Luna/UST), the costs of entering and exiting are high, and they may be frozen and irrecoverable.

Is this innovation easier to use, more convenient, or more affordable than the existing products of current suppliers?

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

Does this product have technological driving factors that can push it towards the high-end market and enable continuous improvement?

Yes - blockchain!

Is this technology combined with innovative business models for its sustainable development?

Maybe? Tether might be the most profitable company in history when calculated per employee, but if U.S. regulators allow stablecoins to pay interest, issuing stablecoins might not bring any profits at all.

Do existing suppliers have the incentive to ignore new innovations and have they not felt threatened from the beginning?

No. Existing suppliers seem to be alert to the threats and are aware of the opportunities within.

"Almost always, when low-end disruption occurs, industry leaders actually have the incentive to flee rather than compete with you," Christensen wrote. "That is why low-end disruption is such an important tool for creating new growth businesses: competitors do not want to compete with you; they will walk away."

Stablecoins may be a rare exception: existing providers have not given up on this low-cost innovation, but rather seem to be competing to pursue it.

In recent weeks, payment giants Visa, Mastercard, and Stripe have all announced the launch of new stablecoins; BlackRock's BUIDL fund (seemingly a yield-bearing stablecoin) is rapidly attracting assets; the CEO of a major American bank stated that they are likely to issue stablecoins once regulators allow it.

This may be because financial executives have all read "The Innovator's Dilemma."

It may also be because stablecoin issuance is very easy.

Christensen defines disruptive innovation as company-driven—startups use low-end footholds to capture mainstream markets before existing companies take them seriously.

Stablecoins may be similar: the Circle payment network to Circle may be like Lexus to Toyota.

However, Circle's competitors are not as dull and sluggish as Toyota, so contrary to Christensen's theory, early innovators of stablecoins could very well be "eliminated by the heavens."

Regardless, the final outcome may be the same: A recent report from Citigroup predicts that by 2030, the asset management scale of stablecoins could reach $3.7 trillion, primarily due to the adoption by institutional investors.