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—products that initially appear to be cheap imitations but ultimately rewrite the rules of an entire industry.

These products typically start in low-end markets or entirely new markets that are overlooked by existing companies, either because they are not profitable enough or seem to lack strategic importance.

But this is a very good starting point: "Disruptive technology is initially favored by the customer segment with the lowest profits in the market," Christensen explained.

These customers often desire to adopt a product that initially performs poorly on 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 focused on larger, faster, and more feature-rich cars, which "created a vacuum underneath them," and Toyota filled this vacuum with the slower, smaller, and less equipped Corona. This car was launched in 1965 with a price of 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 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 inferior version of the 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 the 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 the 100-dollar bill, you don't have to hide them, they won't be torn or soiled, and you don't have to exchange them face-to-face.

This has made the US dollar stablecoin 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 isn't the only place where stablecoins are being used – stablecoins are popular among DeFi traders, people who can't pass KYC checks, immigrants who send money back home, employers who pay cross-border freelancers, and depositors 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 currencies issued by banks.

There was a time when people were so hungry for a digital dollar that they didn't even seem to care if Tether's USDT was fully supported.

Since Circle provided a regulated USDT alternative, Tether itself also seems to be playing by the rules, and the situation has greatly improved for some stablecoins, which 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 US bank deposits (a full US bank account would make them "over-served"), but they do want digital dollars.

Based on historical performance metrics, is this product inferior to the existing products of current suppliers?

Yes - stablecoins have deviated from the peg of 1 dollar, dropping to zero (Luna/UST), the cost of entry and exit is high, and they may be frozen and unrecoverable.

Is this innovation easier to use, more convenient, or more affordable than the existing products from 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 into the high-end market and enable continuous improvement?

Yes - blockchain!

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

Maybe? Tether might 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 in any profit at all.

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

No. Existing suppliers seem to be vigilant about the threats and are aware of the opportunities within them.

"Almost always, when a low-end disruption occurs, industry leaders actually have the motivation to flee rather than compete with you," Christensen wrote. "That's 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 abandoned 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 Bank of America 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 the issuance of stablecoins is very easy.

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

Stablecoins might be the same: 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 "picked off" 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 driven by the adoption of institutional investors.