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Dragonfly Partner: The Rise of OUSD and the Diverging Paths of the Stablecoin Triumvirate

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The market has shown a significant short-term bearish response to Circle, but its long-term competitiveness may not be weakened, while Paxos faces greater survival pressure.

Original Author: Rob Hadick, Partner at Dragonfly
Original Translation: Luffy, Foresight News

I believe that the key point that can be distilled from the launch of OUSD is actually quite complex. It will not only have a differentiated impact on the stablecoin issuers Circle, Tether, and Paxos, but also, at a more macro level, will change the pace of stablecoin adoption in the industry.

First, let's talk about the issuer of USDC, Circle (stock code: CRCL). At the same time as the official announcement of OUSD, Circle's founder Jeremy was attending the largest and most popular Goldman Sachs digital asset summit in history. It is hard to simply call this a coincidence. Before the stock market opened, Jeremy, Goldman Sachs, and most of the on-site participants were already aware of this announcement and understood that this news would negatively impact the company's stock price. While this fact may seem insignificant, the on-site details are very intriguing: as Jeremy was being interviewed, the attendees were discussing the news about OUSD, and during the interview, the price of CRCL dropped by 6%.

In terms of business impact, it has been clear for some time now: the channel split ratio will continue to rise, and the stablecoin redemption fees in payment scenarios will gradually be eliminated. Circle has long been prepared for these two major trends, on the one hand, reaching stablecoin minting and redemption cooperation agreements with various payment companies, and on the other hand, negotiating revenue-sharing mechanisms with distribution channels.

The signal that Circle and Coinbase may part ways has been released for some time. Once this becomes a reality, it will immediately almost double their net income, which is very advantageous for them. Nevertheless, within a reasonable timeframe, this portion of the revenue is likely to eventually flow to new distribution partners. However, after breaking free from the constraints of the Coinbase partnership, CRCL will have complete autonomy to compete without being restricted by the original terms of the partnership, enabling them to actively and aggressively seize market opportunities. Therefore, even though the net income share retained by the company may continue to be under pressure, as long as both parties adjust or completely terminate their cooperation, the overall outcome will still be more beneficial than harmful. In addition, Circle has built a set of highly liquid underlying systems that are difficult to replicate. This core advantage should not be overlooked or considered a trivial matter.

However, it is equally clear that for many of Stripe's partners, customers, and ecosystem participants, as long as OUSD can generate deep enough liquidity, OUSD is likely to become the default choice, replacing the previously favored USDC. It is also undeniable that Stripe's technical research and product implementation capabilities are overall stronger and will likely introduce more comprehensive derivative tools and ancillary products in the future, significantly reducing the operational barriers to stablecoin access and distribution.

However, looking at it from a different perspective, CRCL has a clear first-mover advantage and an existing integrated foundation, which should not be overlooked. The switching cost may not be high, but if you have already built a product on top of CRCL's API, you need to be incentivized to make the switch, which is more challenging than people imagine, and not solely dependent on revenue sharing. Of course, the incremental white space market not yet covered by existing key players is much larger than the current mature market. At the same time, for non-payment use cases, or for payment companies in competition with Stripe with completely different interests, OUSD does not seem to have any absolute advantage compared to existing stablecoins or newly launched competitors.

Lastly, if OUSD is ultimately issued by a subsidiary of Bridge, the core pain point of USDC's long-standing difficulty in deeply penetrating large enterprise clients remains unsolved. To this day, such stablecoins are essentially equivalent to a credit liability of the issuing entity, and both CRCL and Bridge, as institutions, do not have investment-grade credit ratings. Bridge has not yet completed the compliance transformation under the "GENIUS Stablecoin Act," despite the team working on relevant preparations.

If Stripe's parent company or other cooperating entities can provide a backstop guarantee, the industry landscape will undergo a fundamental transformation; without such a guarantee, large banks and asset management institutions are likely to directly enter the scene, capturing the highest profits and the largest enterprise-level business scenarios. In addition, the application and implementation of regulatory licenses worldwide still require a considerable amount of heavy lifting. Therefore, I do not believe that this OUSD release can eliminate the original industry competition risks.

Overall, before yesterday's announcement, I and others predicted that CRCL's stock price would drop by 15% to 20% on the day of the announcement, and the actual decline eventually fell squarely within that range. I believe the negative feedback from the market is fully justified, but I do not agree with many commentators interpreting this event as the death knell for Circle.

However, CRCL does need to accelerate the R&D iteration speed of its payment and fintech products, and I believe the company needs to fill its business gaps through acquisitions. With the current decline in stock price, perhaps the optimal window for mergers and acquisitions has already been missed, but there are still many acquisition targets with value-added potential to consider in the market. New entrants in the industry will not disappear, so taking the initiative to layout defensive businesses and solidify their own barriers is crucial.

As for Tether, this is not their core market anyway. They will continue to focus on the emerging markets where neither Stripe nor Circle is prioritizing, and their overall business will not be significantly impacted. However, as Tether CEO Paolo publicly expressed a few years ago at the Token 2049 conference: in the long run, Tether's market share is likely to continue to decline, but the overall stablecoin industry will see a significant growth.

Looking at Paxos again, this event will have a much more significant impact on them. The competitive advantage that Paxos's core product, USDG, relies on will be greatly diminished, and its long-held leading position in regulatory compliance will also gradually be lost in the future. Compared to the other two issuers, the launch of OUSD poses a greater survival threat to Paxos, which is why Paxos has shifted its strategic focus entirely to the BaaS business of brokerage service providers in the past year.