Stablecoins are disruptive. Who will be the disruptor?

Source: Blockworks; Compiled by Wuzhu, Jinse 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 ultimately rewrites the rules of the entire industry.

These products typically start in low-end markets or entirely new markets that are overlooked by existing companies because they are either unprofitable or seemingly lack strategic importance.

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

These customers typically 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, whose 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 larger, faster, and more feature-rich cars, which "creates a vacuum beneath them," and Toyota filled this vacuum with the slower, smaller, and less equipped Corona. When this car was launched in 1965, it was priced at only $2,000.

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

Toyota entered the U.S. market with the Corona and then steadily climbed the value chain, which confirms 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 start in emerging markets.

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

However, for people outside the United States, they are a more advanced form of the dollar – unlike the $100 bills, you don't need to hide them, they won't get torn or soiled, and you don't have to exchange them face to face with someone.

This has made the US dollar stablecoin very popular in countries like Argentina—reportedly, one in five Argentinians uses them daily—although very few people in the US 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 customers of existing banks, do not generate enough profit to attract them; therefore, stablecoins are initially not as important as the currency issued by banks.

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

Since Circle provided a regulated USDT alternative, Tether itself also seems to be acting according to the rules, and the situation has greatly improved for some stablecoins that even offer 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 overserved by existing products from current suppliers in the market?

Yes—DeFi traders and emerging market savers do not need FDIC-backed U.S. bank deposits (a full U.S. bank account would make them "over-serviced"), but they do want digital dollars.

Based on historical performance, does this product perform worse than the existing products of current suppliers?

Yes - stablecoins have deviated from the peg of 1 dollar, falling to zero (Luna/UST), with high costs for entering and exiting the market, and they may be frozen and unable to be reclaimed.

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 people, and also more affordable for some.

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

Yes—blockchain!

Does this technology combine with innovative business models for its sustainability?

Maybe? Tether may be the most profitable company in history on a per-employee basis, but if U.S. regulators allow stablecoins to pay interest, issuing stablecoins may not bring any profit at all.

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

No. Existing suppliers seem to be vigilant about 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. "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 will walk away."

Stablecoins may be a rare exception: existing providers have not given up on this low-cost innovation, but 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 (which seems to be a yield-bearing stablecoin) is rapidly attracting assets; the CEO of Bank of America has 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 issuing stablecoins is very easy.

Christensen defines disruptive innovation as company-driven—startups using low-end footholds to capture the mainstream market before established companies take them seriously.

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

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

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