May 28th 2020
The problem that is “government money”
While there is generally now legal requirement for private market participants to chose government-created money – such as the US Dollar – as unit of account, most transactions default to the national currency.
Due to the burdens associated with the exchange from the money of one country to that of another, consumers will turn to foreign fiat, only during times of significant debasements of their national currency.
Thus far competition between fiat currencies is mostly limited to large international transactions and/or to the dealings of professional FX-traders. Setting aside the ability of commercial banks to create money via the creation of collateralized notes (i.e. mortgages), governments have enjoyed a monopoly on the creation of money.
Total Addressable Market
A fast growing vertical within the blockchain space is peer-to-peer banking, without the need of fiat money. These decentralized financial services, or “DeFi” for short, for the most part make use of smart-contract platforms, such as Ethereum and EOSIO, to allow anybody with a digital wallet to lend or borrow blockchain-based assets. Some custodial exchanges also started to offer interest payments on widely traded “cryptocurrencies,” such as ether, bitcoin and USDC. (Full disclosure: Author owns or has owned the digital assets mentioned throughout, as well as other stablecoins.) The latter is especially remarkable, as USDC is a digital token pegged one-to-one to the U.S. dollar. Several other examples of these so-called “stablecoins” are present on most crypto exchanges where they are used as a refuge from more volatile cryptocurrencies, without the need to revert to fiat money. While the settlement of digital tokens can take place within minutes or even instantly, the latter conversion of cryptocurrencies to fiat is often plagued with friction in the form of fees and time delays.
Product Market Fit
While the use case of these particular instruments is still mostly limited to crypto-exchanges, stable-coins have extended their reach to most decentralized finance solutions, including digital wallets. From here, it might be a small step for other applications to accept these tokens as an alternative to fiat currencies.
The inflationary nature of fiat systems provides a potential large market opportunity for blockchain-based solutions that mitigate or even solve for the erosion in purchasing power. These systems may take on the form of simple fiat pegs immediately available for credit markets, or more sophisticated products that avoid inflationary products entirely, swapping one asset presentation for another — similar to commodity-backed currencies of the past. While current applications still require users to initiate the transfer and/or conversion of fiat to suitable alternatives, it is easy to see how extending the benefits of these solutions to employers can lead to network effects that greatly increase their accessibility. The latter provides additional (saving) opportunities for merchants adopting these new paradigms.
Further reading: Understanding Cryptocurrency