We stream data. We stream music. We stream video. Thanks to stablecoins, we are on the verge of streaming the entire economy.
Recently, U.S. dollar stablecoins reached a significant milestone, accounting for about 1% of the U.S. money supply (based on the M2 measure). You might think this is inconsequential, but it may indeed become significant soon.
Stablecoins are growing rapidly, at a rate of roughly 55% per year. While this growth rate may not last indefinitely, it’s easy to imagine a future, less than a decade away, where stablecoins make up around 10% of the M1 money supply, which encompasses cash, notes, and readily available digital money like bank accounts.
Designed for accessibility and usability, stablecoins align well with the definition of the money supply. On-chain services are increasingly resembling traditional banking services, only they operate faster and at a lower cost.
Consider the implications if transferring money worldwide were essentially free and instantaneous. Would that change how you manage your finances? It could—global companies are already beginning to contemplate this shift.
Currently, companies hold large sums of money in various locations around the globe, akin to managing physical inventory. Due to the slow and costly nature of cross-border money transfers, businesses must retain sufficient cash locally to meet their obligations. Additionally, since customer payments are often unpredictable, companies need a cash buffer to accommodate the difference between fixed expenses, like salaries, and variable revenues.
The landscape may change dramatically. If moving money globally incurs no cost and happens almost instantly, companies could significantly reduce their local cash reserves. Instead of maintaining funds to cover two weeks’ worth of expenses, including salaries, businesses might only need to keep a day’s worth. A larger amount could be centralized and distributed as necessary. Companies could adjust their global cash reserves every few hours, ultimately reducing their working capital needs significantly.
This initial transformation among large companies could quickly permeate beyond the B2B realm. Why not compensate employees daily for the hours they’ve worked? Payday lenders currently profit from bridging the gap between weekly paychecks. Why not bill customers daily for their electricity usage instead of waiting up to 60 days for payment?
This concept might sound absurd, but the financial logic is sound. At a 5% interest rate, a $10 debt generates about $0.50 in interest over a year, translating to roughly $0.04 monthly. Each week of “float” you can save (or earn) is worth around $0.01. With transaction costs on Ethereum Layer 2 networks often below $0.01, it provides a compelling rationale.
Transaction costs are only heading in one direction, leading to increasingly granular economic efficiencies in money management.
Music has evolved from being purchased to downloaded, and now to streaming. Once, the notion of on-demand music streaming—requiring extensive bandwidth and computation—was seen as absurd. Now, it pales in comparison to video streaming. Payments are poised for similar evolution.
As with other technological revolutions, the initial phase often involves “your mess for less.” Initially, existing processes like monthly billing might simply be run more cheaply. Then it transitions to “your mess, but faster.” Eventually, companies will start to redefine those processes based on new economic realities.
Reducing working capital requirements could reshape the economy in unexpected ways. Many firms maintain enough cash to cover 12 weeks of expenses. U.S. companies collectively hold around $2 trillion in cash and $2.8 trillion in working capital loans. Transitioning to a financial streaming model could potentially unlock trillions in capital for investment.
Moreover, it could influence individual behavior. The longer the delay between an action and a reward, the harder it is to prompt a response. Incentives to use services or consume energy during off-peak times might be much more effective if the reward is immediate. Instant gratification consistently proves to be a winning strategy.
Disclaimer: These views are personal and do not reflect those of RialCenter.
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