VCs warm to stable cryptocurrency
This week's plunge in bitcoin's value highlights one of the biggest concerns in using the cryptocurrency for payment. Stablecoins, which are pegged to traditional currency such as the U.S. dollar or a precious metal, are seen as a much less risky investment.
Stablecoins are drawing more attention from venture capital firms that want to see cryptocurrency succeed as a payment instrument at mainstream merchants.
“Stablecoins are the most interesting and important subsector being done in crypto,” said Alex Pack, managing partner of Dragonfly Capital Partners’ initial $100 million crypto-exclusive fund. “It’s hard to gain income, do payroll and make payments with pricing going up and down everyday, especially if you are providing access for underbanked people.”
Part of the reluctance of stores or e-commerce merchants to accept cryptocurrency is the volatile value, and bringing in dollars or metals as a backstop is an attempt to create predictability.
Stablecoins are popping up in lots of places. A startup called Basis uses Basecoin, which auctions tokens to manage its supply to keep the value at $1. Another startup, MakarDAO, has partnered with Tradeshift to match stablecoins to small businesses to automate supply chains. Payment technology company Circle has also released its own stablecoin.
The San Francisco-based Dragonfly fund will invest in crypto-native funds, protocols and applications that support decentralized business models and startups that operate between decentralized and centralized business.
Part of that is stablecoins, which Pack sees as offering all benefits of cryptocurrency without the harrowing valuation risk. That will make them a major catalyst for merchant payments and a hot commodity in the VC market as investors seek early stage stablecoin providers.
“Stablecoins can be private, permissionless and global from day one,” he said. “You can take them anywhere, but they’re stable.”
There are about 50 current stablecoin projects, Pack said. DragonFly Capital’s fund's initial portfolio includes Basis. The fund’s U.S. investors include Salil Deshpande from Bain Capital Ventures, Marc Andreessen and Chris Dixon from A16Z. Its Asian investors include Neil Shen from Sequoia China, Eric Xu from Baidu and China Renaissance Bank founder Bao Fan. During his career, Pack managed crypto and fund investing for Bain Capital Ventures. DragonFly’s fund also includes Bo Feng, a venture capital investor who was the founding partner of Ceyuan Ventures.
Pack said the challenge facing stablecoins is maintaining decentralization while pegging it to a specific currency such as the U.S. dollar, which is almost the definition of a top-down centralized currency. The backing currency does not necessarily have to be the U.S. dollar, he said, and that can help push the stablecoin market and make it appealing to merchants and cryptocoin users since it's not an attempt to make cryptocurrencies behave like dollars.
“It can be the price of gold or the euro. The reason the dollar is so interesting is the massive global demand for dollars,” Pack said.
Stablecoins are not widely used to promote cryptocurrency retail payments now, but there is potential for that use case in ensuring “current value” through the life of a transaction, according to Gabriel Wang, an analyst at Aite Group. “It helps in terms of knowing the value when a consumer makes a payment and when the payment to the merchant is processed."
But the main current use for stablecoins is to improve liquidity between cryptocurrency trading partners by mitigating the impact of value fluctuations, Wang said.“The current liquidity landscape is fragmented among different cryptocurrencies.”