Ripple versus Stablecoins...or is it?

Feb 18, 2020

I'm feeling like I have PTSD lately. The onslaught of blatant XRP FUD has exponentially magnified in intensity and I'm locked in a state of hyper-vigilance, just waiting for the next landmine of incredibly asinine misinformation to blight my eyes. It's so ridiculous, that I've had to adopt some mental wellness strategies to try to help keep things in perspective. Overall, I feel I've been very successful in keeping grounded, not letting these maniacs get me all worked up. I choose peace and love.

I absolutely despise the term 'stablecoin'. Despite the first impressions one might have about something branded with the word 'stable' in it, there's nothing about stablecoins that make them more stable or safer than whatever they are supposed to represent, it's just the exchange rate that remains stable, but that's not obvious, particularly to newb investors.

A more accurate designation would be 'pegged-coin', because that's what it is, a coin's value pegged to whatever you might imagine, and I'm not even making this up; Pegging is an established definition for things exactly like what they're calling stablecoins! Augh! Unfortunately, it looks like we're now stuck with this abomination of terminology abuse, so forgive me as I cringe every time I am forced to participate in the ceaseless promulgation of this shit word.

What else that has been really been pissing me off lately is there are lots of fantastically ignorant people out there claiming that stablecoins will be the demise of XRP. I mean, why would anybody need to bridge through XRP if they can just send a stablecoin and be done right? No slippage, no fees, no complexity.. No brainer! See what I did there?

Truth is, for such a simple concept, the explanation is surprisingly quite detailed, so I'm hopefully going to be able to construct in your mind how stablecoins are actually the best thing EVER to happen to XRP, EVER!

A very brief explanation how things work today. There's Domestic Payments, and then there's Cross-border Payments. What's the difference? Great question.

Domestic Payments

Probably the majority of payments you ever make fall into the 'domestic payments' category. For example, you pay bills, you receive a paycheck, you move money in and out of your bank accounts, you use your credit cards, you send people money with account transfers or checks, etc. Pretty much without exception, all of these domestic payments are made with the currency of the country you live in. If you live in Paris, you make domestic payments with Euro. If you live in Japan, you do this with the Yen. If you live in Guam, you do this with the USD.

Important to recognize is that both the sender and recipient of a domestic payment are using the same resident currency. There's no conversion/exchange involved, just one balance being reduced, and another being increased.

Usually domestic/local rails are very quick and cheap, and with a lot of countries now building out domestic RTGSs (Real-time Gross Settlement systems), these domestic payments can move at the speed of light for next to nothing.

Again, stay focused on the fact that I'm only talking about domestic payments right now, which stay within the country.

Some people will try to tell you that XRP has some possible role to play in domestic payments. I'm here to tell you that for Ripple's use case, it does not, in any way, nor has it ever been planned to be. Not as part of ODL, and not standalone as raw XRP. There is zero value-added by imposing a conversion from the local currency to XRP and then back again. The slippage costs of doing so make the exercise inefficient, and for what purpose? Local rails are fast and cheap already, and will soon be as fast or even faster than blockchain (because local rails can be centralized), so there's absolutely no benefit to using XRP inline for a domestic payment.

If you're counterargument is, "but but but, it'll make XRP's liquidity available for domestic payments!". Jesus man, there's no need for ancillary liquidity, the sender is already providing the liquidity with the sum they are trying to send! If I had $20, and I wanted to give it to my buddy, why would I convert it to something else, and then back again, instead of just sending them the fucking $20??

Ok, I'm calm. Big smile. Sorry, Twitter has me on edge lately..

That's not to say that we'll never be able to pay for things in XRP, but that's not 'integrated' into the payments system (which would mean every payment would incorporate XRP, creating a moonshot), rather it's just an 'alternative' payment system (meaning people can choose to use XRP, but it's not imposed, and no moonshot).

You may also hear that the feds might integrate XRP into their RTGS, but as I just explained, there's nothing XRP can offer for domestic payments. The feds don't need liquidity because they just 'create' money when needed, and allocate it to their banks. Feds are literally 'above' the system, and are not limited by liquidity, being able to spontaneously allocate value wherever and whenever they have to, to keep things running. Thus, they have no domestic use for XRP whatsoever.

People also talk about how XRP can somehow resolve a 'liquidity crisis', however, if the feds absolutely needed more liquidity, they'd just print more money. What the hell role can XRP play to 'add liquidity' here? It's senseless dot-connecting: Govt need liquidity, XRP has liquidity, mash together and voila! Clueless. XRP's liquidity is not only a pittance in the big picture, but not in any way transmutable in a manner that could benefit a liquidity crisis. Completely different applications of a basic concept. Stop using the word 'liquidity' like it's a fucking cure-all topical salve you smear on open wounds.

Deep breaths. Happy place. I'm fine. Really I am.

Repeat after me, There is no role for XRP or ODL in fiat domestic payments

Now, onto:

Cross-Border Payments

Many of you have probably used some form of X-border payment mechanism, like PayPal, bank wire, etc., to send money to another country. These systems just capitalize on a nostro/vostro delayed settlement apparatus, so they are by no definition 'instant', even though the payment aspect may show as instant (try and spend the money right away, and you'll find out instantly that it's not instant).

What should be clear though, is that when you send money to another country, virtually always, the recipient receives it in their country's currency, meaning that an inline exchange occurred between the sender and recipient.

Please don't bring up the tired and old strawman argument that people can choose to receive in whatever funds they want. Sure, in rare circumstances, someone with a USD account in blah blah country can opt to cash out the received payment into their USD account. This is a tiny outlier scenario and isn't relevant to the vast majority of cross-border payments! Virtually all payment recipients cash out into their local currency. Why? Because they obviously have to spend it! If you lived in the US and someone sent you 50 Euro, what the fuck are you going to do with it?

I also hear geniuses talking about how because the USD is the world's reserve currency, then why not just send USD everywhere and to hell with using whatever local currency may exist. These people have never left their mom's basement. You just need to travel ONCE in your life to another country that has their own fiat, and try to tell me how practical it would be for someone in a non-USD denominated country to operate with a fistful of dollar bills.

These same geniuses will then confuse the idea of 'foreign reserves' for some sort of validation of the idea that since most governments around the world stockpile USD as a form of economic hedge, that now it makes sense to be able to make all X-border payments in USD??? What the hell does USD foreign reserves have to do with X-border payments?? The recipient of the payment still needs to conduct their business in the local currency! They can't buy anything with USD, nor pay their taxes with USD, nobody will accept their USD, etc. It's worthless!

And DON'T be the guy that cites some strawman argument about some island nation with their own currency yet all their tourist spots accept USD, to support a fallacious argument that USD is accepted everywhere. I fucking hate you. You ruin my life.

Feeling the waves of stress flow from my core, through my limbs, out my fingers and toes. I feel heavy and relaxed.

In summary, a country that has foreign reserves in USD does NOT make receiving USD a practical thing. At all.

ODL's Use Case

Ripple's ODL is for one purpose only, to move value across borders, and as clearly explained above, it's not for domestic payments. An ODL payment requires conversion from the originating currency (unless it starts with XRP itself), into XRP, the XRP moves from one ledger account to another (moving from one exchange/LP to another exchange/LP), and then that XRP is finally converted to the target currency (unless it ends with XRP itself)

Some scenarios that are not possible:

The same exchange/LP is used on both sides of an ODL payment

This would mean that the XRP didn't cross any borders, meaning there was not even movement on the ledger, thus, it would be classified as a domestic payment, and we've already said 50 times this isn't what ODL is for, nor would it make any economic sense to do so. Don't be fooled by the fact that an exchange may have a presence in multiple countries, in no way does that commingle their respective funds in custody. They only share a name, but are as independent as two different companies can be.

ODL doesn't need to use XRP

It does. That's what ODL is, using XRP for value transfer. Ripple embedded XRP into ODL specifically to serve this function. If they didn't use XRP, then there'd be no value added to XRP, and XRP wouldn't benefit, and Ripple would lose billions of dollars in value from the declining XRP price. Why would they do this to themselves?? Because a customer asked them to?? I just called PayPal and asked them to refund all my fees for life or I'll leave them. Ticket's still open. Must be stuck.

ODL takes over all corridors

It can't, and not even just because of technical limitations. This is where we start getting complicated..

Types of Corridors

Not all X-border corridors are created equally. Let's start by defining a few types:

Highly-liquid corridors

Easy examples: USD/EUR, or USD/JPY, etc. An incomprehensible amount of money flows in these corridors. The mechanisms in place to facilitate these payments are well-oiled, highly liquid, cost-effective, and fast as fuck. Direct pairs, lots with USD as the base or quote, create the FX market, with lots of popular direct pairs that mostly eliminate need for any bridging liquidity. Because of these highly-liquid direct pairings, ODL has ZERO chance of penetrating this market with XRP bridging, and was never intended to do so. In other words, ODL does not compete with this market of X-Border payments.

Consortium corridors

These would be closer to private FX trading between entities that have trust-based relationships (with the requisite counterparty risk) to further optimize value exchange, possibly to overcome lack of liquidity in the world markets for the pairs in question, to sidestep SWIFT, or even just to cut costs and/or create efficiencies on normally liquid pairs. Bilateral agreements between banks in different countries are an example. ODL has little chance of penetrating this market because these markets are so efficient already, and it was never intended to do so. In other words, ODL does not compete with this private market of X-Border payments.

Illiquid/Encumbered corridors

Now we're talking. These corridors (e.g., pairs based on MXN, PHP, INR, etc.) suffer from low liquidity, technological bottlenecks, high fees, high counterparty risk, etc. This is what ODL is intended for. Enabling leapfrog technology to very inefficient corridors, bringing these economies front and center into the global economy. It's easy to say, "well shit, there's hardly any money flowing in these corridors compared to the big picture!", and yes, today that is true. And why is that? Because today these corridors SUCK! Make no mistake though, there's billions of people being sequestered from the global economy, and once they are liberated by ODL tech, watch Jevons paradox kick some ass.

Oppressed/Unimagined corridors

Here's the hidden jewel that nobody ever speaks of, but is going to be the real butternut. A corridor is just simply a currency pair that conversion can occur between. Right now the United Nations recognizes 180 currencies. That means in order to be able to trade directly from each currency to each other currency, you'd need a total of lots of pairs.. and I mean lots. :) Ok ok...180 choose 2..factorial..prime..bite of ham sandwich..Aha! 16,110 unique pairs!! Boom! Just look at that number.

Now try to imagine FX traders trying to contend with all these pairs. Not even so much about the large number, but what that number does...to liquidity... That's right, every time you create a new pair, the overall global-FX liquidity becomes further diluted. Try pairing the Indian Rupee with 179 other currencies; market makers will be incredibly spread out, WHICH MEANS, a majority of these pairs won't have enough liquidity to even trade! No market maker is going to park a pile of cash into a highly illiquid corridor, just waiting for DAYS, WEEKS, for some random person that needs to convert Timbuktu currency to Land of Oz currency.

In other words, the impracticality of low-liquidity pairings, makes them infeasible to sustain, and as such, they don't exist because they're oppressed by illiquidity. So what is the poor guy in Timbuktu going to do to be able to send his money to the Land of Oz? You guessed it! A bridge currency!! woohoo!! Wait wait wait.... No, I'm talking about the global reserve currency of course, the USD, which today acts as the bridge to create virtual pairings that are too illiquid to exist on their own. It works like this, Timbuktu has to convert to USD, which is liquid enough, and then from USD to Land of Oz bucks, which is also liquid enough.

So why wouldn't they continue to use USD as the bridge currency instead of using XRP? The answer to that is the Triffin Dilemma. Essentially, the dependency on the USD to act as a bridge to enable much of global X-border payments for oppressed pairs, exposes the entire world to the economic whims of the American money-printing press, and no sir, the world doesn't like it. Until recently, there literally was no choice, the markets simply force you through USD, but the world is tired of getting banged around by the reverberations generated by the US's economic policy. The world wants something else.

Oh, and about unimagined corridors, what I mean by that is every time a new currency is created, for any number of yet-to-be-imagined reasons, and people want to trade it, that generates even more demand for a bridge currency, simply because having direct pairings becomes so untenable. For example, there's roughly 3000 active cryptocurrencies at this time, and the number of direct pairs, including joining to fiat pairings, would amount to....LOTS!! Wow!... Ok ok..3180 choose 2..exponent..natural log..pickle fell on the goddam floor...3-second rule... Aha! 5,054,610 pairs!! And that's just today's coins! Imagine how many pairs we'd have in the near future when we hit millions of coins...and yes, that day is coming.

I hope it's obvious, that the more currencies we have, the more impossible it becomes to have each pair listed, and the more indisputable the use-case for a bridge currency becomes, particularly in burgeoning crypto markets where USD hasn't found a foothold. Who fucking cares that ODL doesn't bite into the lion's share of today's cross-border transfers, ODL will CREATE the NEW LION'S SHARE, and will OWN IT!!

Instead of a cobweb of millions of pairs, bridge currencies will serve as the hub connecting all the spokes so it's always possible to move from one currency to any other currency with a single hop through the bridge. With the USD falling out of favor as the world's bridge currency, and XRP being primed for this role by Ripple, all it will take is getting the global crypto exchange infrastructure in place and attrition will take care of the rest.

Oh, right, stablecoins.. let's talk about that.

Stablecoins

The first thing I want to mention is that stablecoins can be centralized or decentralized. I know the tendency is to associate stablecoins with blockchain, but blockchain stablecoins are just one kind of stablecoin, and really just a technical detail. A centralized stablecoin can work exactly the same in commerce, just with different risk profiles depending on who the issuer is.

Stablecoins come in a few flavors:

Backed

Some (hopefully trustworthy) entity (the issuer) has decided to create a coin and will guarantee (via active market making) to "PEG" the coin's value to...something. The most familiar example would be to peg to the US dollar. So every coin is worth exactly one dollar, and will always be worth that. Can be anything though, or a combination of anything; e.g. one coin might represent a specific balance of multiple currencies, or maybe a specific weight of gold. A coin can be pegged to anything imaginable.

The backed stablecoin issuer sells their coins for real money, and then the issuer can either safely custodian the money, or more likely, they'll invest the real money for profit (called rehypothecation). That's right, they create millions of dollars worth of stablecoins out of thin air, sell it all for a pile of REAL cash, and then make money rehypothecating that cash. What a gimmick! I mean product! Very very VERY profitable.

Hopefully purchasers are aware of the counterparty risk should the issuer lose some of that cash that's supposed to back the value of the stablecoins. One huge panic selling streak can expose pretty quickly if the issuer actually has enough real money to cover all the redemptions..

Vouched

Here, the issuer is implicitly trustworthy, like the government (stop laughing), or is more of a promise to pay if things work out. CBDCs (Central Bank Digital Currencies) are stablecoins that fall into this category (most likely will be centralized for performance and scalability). Tether also appears to be this category because of the lack of transparency.

Walled Garden

These types of stablecoins are limited to use only within their private network of entities, and don't trade in the global marketplace.

Algorithmic

This type of stablecoin has its value programmatically controlled, ideally in a trustless manner like with smart contracts, or with bot-traded hedging strategies. This can be a very complex animal, with endless variations on implementation, but these are potentially the most transparent and trustworthy type of stablecoins, assuming you're allowed to see the algorithm in action.

Stablecoins Versus ODL

Let's get into the meat here. It's been suggested that stablecoins can be used for X-border transfers and that XRP is no longer needed.

Let's review the different categories of corridors we talked about earlier:

Highly-liquid corridors

Ok, sure, stablecoins are going to revolutionize this category, enabling instant settlement; BUT, if you recall, ODL was never targeting this category. The common misconception is that stablecoins are going to eliminate all of the problems related to X-border payments, but stablecoins are merely just faster versions of the underlying fiat. They don't inherently generate liquidity, they don't create new pairings/corridors, but most importantly, they don't eliminate nostro/vostro. Sure, stablecoins could eliminate the need for Country A to have foreign assets in a bank account in Country B, but that just means Country A would need to hold those foreign funds themselves, and would need to do so for each country. Not much of an advantage. Many countries begrudgingly use USD to bridge for this exact reason, but even less likely is countries directly holding highly speculative assets like XRP to bridge, or using a relatively less-efficient XRP-based ODL in these highly-liquid corridors.

Consortium corridors

Ok, again, sure, walled-garden coins like JPMCoin will dominate their little fiefdom, but the interesting thing about this category is that these corridors are already very very efficient. Having instant settlement will only be an incremental performance gain. Most importantly of all though, ODL was never targeting this category either.. ohhh

So YES, for the love of God YESSSSS, stablecoins will absolutely DOMINATE the above two corridor categories, THAT XRP WAS NEVER GOING TO COMPETE IN ANYWAYS!!! This point is exactly where ALL these bastard XRP-doomsday critics go wrong when that say stablecoins eliminates the need for XRP.

Breathe in through the left nostril, out with the right nostril. In, left nostril. Out, right nostril.

Illiquid/Encumbered/Oppressed/Unimagined corridors

Here we go now, finally. ODL's entry point. Can it be said that stablecoins wreck XRP's use case in this corridor category? What does that mean exactly? If I wanted to send money from Mexico to India, am I sending a Mexican Peso stablecoin directly to my Indian friend then? No? Ok, am I going to a Mexican exchange to convert my Peso to Rupees? No, that won't work, why the fuck would the Mexican exchange have Rupees to sell? It's not like there's a bunch of Mexicans that come across Rupees every day. Oh I know, do I send my Mexican Peso stablecoin to an Indian exchange (India will eventually join the crypto paradigm, you can count on that) to convert to Rupees? Hmm, they don't seem to have a listing for Mexican peso stablecoins there, for the same reason they don't have all 180 currencies listed either. Hmm.. Oh I know, I'll just send my friend the Mexican stablecoin and let them deal with it!

I'm perplexed. How is the fact that I have a Mexican stablecoin going to help me bypass the need for a bridge currency to get my money to my Indian friend in their local currency so they can actually use it? Sure I can stick them with the Mexican coin, but then they have to go through the effort of trying to exchange it somewhere, maybe at the airport?? That's not what a cross-border payment is supposed to be. It's supposed to be me pressing a single button, my Mexican Pesos are instantly transformed into Indian Rupee in my Indian friend's wallet. Kapow!

So yes, even stablecoins still need to be bridged in a X-border payment.

"But but but, why can't people send CBDCs X-border instead of using ODL?"

Huh? What exactly does that mean? First off, CBDCs are no different than any other stablecoin in the context of value transfer. The fact that the Mexican government may issue the CBDC stablecoin, doesn't make it any more likely that my Indian friend wants it, in India. What good is having other countries' CBDC's in bank accounts in India, if it can't be spent in India! I still need to exchange it first, and for that I'd need an exchange with both Pesos and Rupees trading in a pair, which simply will not happen anywhere in the world. Thus, the ONLY solution is to bridge it through a bridge currency. Even the existing nostro-vostro system doesn't have bank accounts denominated in every single other currency. Why? Because nobody wants to hold a fucking foreign currency if they can't spend it!

"But but but you can bridge with a USD CBDC instead of using ODL, right?"

Yes, I could, but why would I? I've already explained the main pain point of using USD as the global reserve currency is the double-edged sword of the Triffin Dilemma that it creates. At the first opportunity for the world to escape the evil clutches of the American hegemony, or ANY other country's dominance, every single country will run to a politically-neutral bridge currency. Nobody wants to bridge with USD, and that's a fact.

"But but but will ODL eventually stop using XRP and use stablecoins instead?"

...Well damn, that's actually a good question! (I'm not apologizing)

Stablecoins in ODL

Yes, it is possible that ODL evolves to use a stablecoin instead of XRP in many cases. There, I said it. I know that possibility must send shivers down your spine; leaving you feeling cold and shitty, like an abandoned baby. But don't worry, your XRP investment is perfectly safe, because it won't use just any stablecoin, nor will Ripple be TOLD by their customers what stablecoin they must now use (can you imagine vendors demanding Coke put Pepsi in their cans?).

What will NEVER happen is that ODL uses a non-XRP based bridge asset. Not CBDCs, not other stablecoins, not other crypto. Why? For the same reasons Coke doesn't make any money selling Pepsi! I will never understand why people worry about technically possible scenarios that no person or company in their right mind has any logical motivation to attempt. It's a fact that you can purposely stab yourself in the eye; do you lay awake at night wondering if you just might do it?

What am I talking about then? Well, as we all know, David Schwartz has proposed to add a stablecoin feature to the ledger! In a nutshell, it means the XRPL will support algorithmic stablecoins that programmatically allocate enough XRP to collateralize the coins. So if I wanted to create a million dollars worth of a USD stablecoin, I would define the stablecoin to peg to the USD, and lock up $1.5 million in collateral worth of XRP to back the USD stablecoins with. What all this gibberish adds up to is that XRP-backed stablecoins are STILL GOOD for XRP demand and appreciation, since it's really all about the XRP behind the XRPL stablecoins.

This is the holy grail for ODL, because with the ability to create literally any type of stablecoin on the ledger, it makes it possible to now compete in the illustrious highly-liquid corridors that ODL currently isn't considering. We will soon be able to create any XRP-backed stablecoin pair we want, allowing popular pair direct-conversion payments to happen without having to go through XRP as a bridge! It's conceivable that the performance/savings edge that the ledger affords, will consistently draw volume away from the contemporary X-border highly-liquid corridors.

ODL using XRPL stablecoins is nuclear, because all points of resistance to ODL adoption have been eliminated:

no more volatility risk
no counterparty risk
no double-conversions

leaving potential customers with only one question: do I want to save money today?

And finally, I've saved the best for last. Remember how hard we wished and hoped that some day, some how, banks and other FIs would find it in their heart of hearts to buy up globs and globs of XRP and stockpile it? But, then our tears would flow when the banks would say that they'll never hold an asset as volatile as XRP? Too risky?

They'll hold XRP-backed stablecoins all day long.

There you have it. Stablecoins are the next plateau in the evolution of digital currencies, and probably will be the breakover technology that finally brings the full-on wave of FI adoption. That said, like I said, stablecoins are VERY profitable, and there will be tons and tons and TONS more coins coming out, all aiming to compete in the value-transfer market. If Ripple continues its tight focus, XRP can be optimally-positioned to take a good piece of the value-transfer bounty, and maybe someday we'll finally be able to have that Lambo meetup we've all been talking about. Well, I have been talking about.

Now to crank up my meditative gong greatest hits. Ohmmm..

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