As stablecoins proliferate, so will efficiency in the marketplace

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Choice is good. It ensures better value for consumers, and it strengthens market efficiency.

Only, too much choice can lead to confusion and bottlenecks. This is especially relevant in a digital world unconstrained by shelf space or storage capacity. For digital items that are supposed to be fungible, even more so.

Does this apply to stablecoins?

Last week, Stripe announced the launch of its Open Issuance platform, with the aim of streamlining the issuance of stablecoins. Powered by Bridge, the stablecoin platform Stripe bought earlier this year for $1.1 billion, Open Issuance will handle reserve management, compliance, liquidity facilities, and token minting with full customization as to supported chains, smart contract functionality and backing composition. It can also offer plug-and-play features such as wallets, on- and off-ramps, cards and more, making spinning up a new stablecoin a question of a few days.

Stripe is not the only platform to tap the stablecoin issuance market. Last year, Visa unveiled its Tokenized Asset Platform, or VTAP, focused on banks. In July, crypto custodian Anchorage Digital launched a stablecoin issuance platform for institutions. Others include crypto custodian BitGo and tokenization platform Paxos — the stablecoin-as-a-service market is expanding and will continue to do so, given the likely demand. (Since SaaS is taken as an acronym, we're going with SCaaS.)

Why is demand for new stablecoins expected to be high? Why wouldn't enterprises wanting to harness the efficiencies choose one of the existing liquid and widely accepted options?

A key reason is that many businesses, given the choice, will prefer to control the design and implementation of products they offer their market. In opting to use leading stablecoins USDT or USDC, for example, they tie their business to external networks whose development road map and compatibility features are decided by others. They also sacrifice any revenue from the backing assets.

By issuing their own stablecoin, businesses keep the reserve yield. They also have greater influence over the user experience, and can craft creative engagement strategies, linking use of their stablecoins to rewards such as points, access, discounts and more.

Compelling as that may sound, there is a downside: a fragmented market, with overwhelmed users perhaps rejecting the convenience in favor of the familiar. The threat of "too many stablecoins" becomes more real the easier issuance gets.

What most overlook, though, is that chaos of any type is a design issue. Put differently, the resulting usage barriers can be lowered via application of appropriate technology and design solutions.

The technology side tackles "interoperability," or the ability to easily switch between one asset and another. For example, a user may want to easily convert USDC into Cloudflare's NET dollar, or swap her hypothetical Walmart dollar token into a hypothetical American Airlines dollar token without having to switch out into fiat or its token equivalent.

If both tokens in a conversion run on the same blockchain, the exchange can be easily executed via a decentralized application on that network, with a user depositing one token and extracting another.

If they don't, the steps are more complex, usually involving a cross-chain "bridge." This is a protocol that accepts tokens from blockchain A and locks them up while issuing duplicate tokens on blockchain B. For instance, a bridge could accept ETH, lock it in a smart contract and issue an equivalent amount of wETH tokens compatible with the Solana blockchain.

This brings flexibility as well as additional risk — in early 2022, for example, hackers exploited a vulnerability in the code of token bridge Wormhole, stealing roughly $320 million worth of converted ETH.

Beyond external services, the SCaaS platforms themselves can act as connectivity networks — a "base layer" for stablecoins of all types. Stripe's Open Issuance, for instance, sees itself as both an issuance and an interoperability service, with stablecoins issued on its platform easily convertible into each other.

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That in itself becomes a selling point, as easy conversion broadens utility and liquidity. For stablecoins to be active participants in the evolving ecosystem, they will need easy switching.

Only, what would that look like?

This is where the other leg of the solution to stablecoin chaos comes in. The technical side is one part of the puzzle; user experience is the other.

Interconnectivity is good, but it has to be easy. Most stablecoin users will not want to deal with smart contracts or learn how bridges work.

Here's where user experience design, or UX, comes in. How can layout and user flow help?

I'm not a professional designer, but one way to envision what a solution could look like is to pose the following question: Imagine we're in a world of hundreds of stablecoins and users seamlessly switch between the ones they need. What does that look like? Put differently, assume it works — why is that?

The wallet is obviously a key component, with color codes, icons, swiping and maybe some soft and responsive animation helping to drive instinctive choice and action. AI could also play a part, automatically selecting an appropriate stablecoin for a given circumstance or based on a recent text chat. Location sensors could trigger the automatic opening of a retailer token wallet when you are in one of its physical stores. And so on.

In sum, a multi-stablecoin world brings choice and flexibility to an emerging and potentially vast market. The resulting chaos has solutions, and selection will streamline the available options even further as users end up favoring the tokens with the greatest utility for their particular needs.

A bigger question is what this means for our understanding of "money," which in its new form is essentially being designed by private enterprises. Until now, consumers have not had a choice as to what type of money they use beyond fiat.

Going forward, a broad range of stablecoins are most likely going to siphon off at least a chunk of transactions typically done with traditional money.

Given the coming diversity and the resulting design considerations, this is a much deeper change to our concept of payments than many realize.