Enterprise payment and transaction network giant Ripple has announced its entry into the stablecoin market. The company plans to launch a stablecoin pegged to the US dollar at a 1:1 ratio on its XRP Ledger and Ethereum. What are the reasons behind this decision?
Although late to the game, why is Ripple entering the stablecoin race?
Can stablecoins save Ripple?
Even though entering the market late, Ripple still wants to grab a share of the stablecoin market.
Blockchain service company and creator of the XRP Ledger, Ripple, has announced the launch of a stablecoin pegged to the US dollar. This move officially enters Ripple into the stablecoin market, which has a market size of over $150 billion.
According to Ripple, the stablecoin is expected to be officially launched later this year. It will be backed 100% by US dollar deposits, short-term US government bonds, and other cash equivalents. Initially, it will be deployed on Ripple’s XRP Ledger and the Ethereum blockchain, following the ERC-20 token standard.
The stablecoin market has been continuously growing. According to data from The Block Pro, the trading volume on stablecoin chains adjusted in March 2024 saw a significant increase, reaching $893.8 billion, a 41.3% increase. The supply of issued stablecoins also increased by 6.2%, reaching $137.4 billion (rising above $150 billion in early April).
Tether and Circle currently dominate the stablecoin market, with Tether holding a market share of 76.3% and USDC holding a market share close to 20%, giving the two companies a combined market dominance of over 96%.
So why is Ripple venturing into this highly monopolized stablecoin market? There are three main reasons:
Firstly, the demand for stablecoins is still growing. In fact, stablecoins are one of the most popular types of digital assets among cryptocurrency traders, theoretically unaffected by the price volatility of major cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH).
According to Ripple’s assessment, the stablecoin market is expected to exceed $2.8 trillion by 2028. The crypto market has a significant demand for stablecoins that provide trust, stability, and utility. This is one of the key reasons why Ripple has decided to enter this field.
Secondly, stablecoins help drive the development of Ripple’s ecosystem. As explained by Ripple’s CTO David Schwartz, exploring the stablecoin market is partly driven by “opportunism.” He says, “After all, stablecoins are a growing market, and launching stablecoins allows you to be a ‘bank that doesn’t pay interest,’ which seems like a good business opportunity.”
If successfully launched, the stablecoin can inject more profitability into the DeFi ecosystem of the XRP Ledger. While Ripple’s supported blockchain also offers services like DEX, it must be acknowledged that the usage rate of the XRP Ledger is still lower compared to other blockchains.
Moreover, transparency will be a focus of Ripple’s stablecoin issuance. The target audience for the stablecoin will primarily be enterprises and banks. David Schwartz stated that Ripple will undergo a monthly public audit conducted by a top-tier accounting firm and will take all necessary measures to achieve complete transparency. In his words, “Ripple doesn’t want to squeeze out a few cents. We don’t need to. Ripple’s balance sheet is rock-solid.”
Additionally, Ripple’s stablecoin targets enterprise customers and banks, which have high compliance requirements. They must prove to shareholders and regulatory bodies that the decision to use stablecoins is reasonable. Therefore, Ripple will choose local banks in the United States to hold reserve funds to ensure a “compliance-first” mindset throughout the stablecoin market.
It is worth noting that Ripple’s business model based on XRP has shown a certain level of “fatigue.” Austen Campbell, a professor at Columbia Business School and former manager of the Paxos stablecoin fund, bluntly stated that no one uses XRP as a payment method, just like no one really uses BTC. Ripple’s collaborations with many international payment solutions using XRP have not been successful. For example, Santander, one of the largest banks in the European Union, decided to end its partnership with Ripple after realizing that XRP did not meet customer needs. The relationship between Ripple and MoneyGram also came to an end due to increasing costs associated with XRP cross-border payments and MoneyGram’s need to establish third-party relationships with decentralized cryptocurrency exchanges.
The question of whether XRP is a security will only be answered after Ripple’s four-year legal battle with the U.S. Securities and Exchange Commission concludes. Facing the potential $2 billion fine from the SEC, Ripple urgently needs to find new and reliable sources of income. From this perspective, stablecoins seem to be a preferred choice.
In the cryptocurrency field, stablecoins are considered one of the most important tools. They are used as a pricing unit in centralized or decentralized trading platforms, both in spot and futures markets. Although the overall market value of stablecoins in the cryptocurrency field may not be prominent, the profits are quite substantial. This seems to be the reason why companies like PayPal, First Digital Trust, and Ripple are rushing to enter this field. After all, this cake is too big to resist.
Andy Bromberg, CEO of stablecoin wallet Beam, analyzed that US dollar stablecoins have become a “profitable business” due to the higher interest rates of US government bonds. According to disclosed US government data, the composite rate of so-called Series I Bonds (US bonds with interest rates adjusted every six months) issued from November 2023 to April 2024 reached 5.27%. This means that if Ripple’s stablecoin reaches a scale of $1 billion, revenue from interest alone would exceed $50 million.
It should be noted that achieving a $1 billion issuance scale in the stablecoin market does not seem difficult. For example, the recently launched stablecoin USDe by Ethena Labs broke through $2 billion in market value in less than four months and entered the top five stablecoins.
Of course, Ripple can also learn from other industry cases, such as PYUSD, which has a very similar design intention to Ripple’s stablecoin. In fact, the PYUSD issued by PayPal is also backed 100% by US dollar deposits, short-term US government bonds, and similar cash equivalents. It is also deployed on the Ethereum blockchain and follows the ERC-20 standard. However, its scale has only reached about $200 million since its launch, with less than 70,000 transactions. One of the main reasons for PYUSD’s stagnation may be the lack of diverse practical applications. Despite being backed by PayPal, it has struggled to interact effectively with DeFi, DEX, and other applications in the cryptocurrency field.
It is fair to say that the stablecoin market has not yet formed a “winner-takes-all” pattern, providing opportunities and room for development for new entrants. Assuming the overall size of the stablecoin market grows 12 times as Ripple predicts, this “cake” will undoubtedly become very attractive. If Ripple manages to secure a place in the top three stablecoins, it will undoubtedly further solidify its position in the cryptocurrency market.
However, whether Ripple can truly succeed in the stablecoin market will likely depend on attracting end-users to use and stay within its ecosystem. Only time will tell.