Stablecoins — the digital contenders to physical dollars — has grown more than 20x since the start of 2020. Now, the company behind the second largest stablecoin is going public.

ELI5: What are stablecoins?

Stablecoins are a type of digital currency backed by another asset (typically US dollar). Tether and USDC are the 2 largest stablecoins — making up over 77% of the $115b stablecoin market.

Here’s what you need to know about Tether/USDC:

• Backed by the US dollar — i.e. when someone buys a stablecoin for $1 in USD, that dollar is stored somewhere (often invested in safer investments).
• Meaning: Your stablecoin should retain its value and can be cashed out at any time — 1 tether/USDC should always be worth ~$1 USD.

Cryptos like Bitcoin are not backed by anything which makes them fluctuate wildly — making them impractical as an everyday form of payment.

Since stable coins rarely fluctuate, they are a more practical choice for replacing physical money.

The Moonshot: The Paypal of digital currencies

Circle, the creator of USD Coin (USDC), is going public via SPAC, Concord Acquisition Corp (NASDAQ:CND) — becoming one of the most direct ways to invest in  stablecoins. But how does Circle make money?

• Interest Income: Circle earns interest by investing the US dollars it holds. Similar to banks, which invest their bank deposits, Circle’s sales rise if interest rates rise.
• Transaction fees: Companies use Circle to send/manage payments — i.e. how Dapper Labs (creator of NFTgiant, NBA Top Shot) pays out its users.

As a company, Circle has a long way to go. In the first quarter of 2021, Circle only generated $17.3m — a tiny amount compared to its massive $5.4b valuation.

But forget the past, the future is where Circle wants you to focus — forecasting 253% and 118% growth in the next 2 years.

Investors: Walks like a bank, operates like a bank…

…Then it should be regulated like a bank — is how regulators want to treat stablecoin companies— which currently operate with little regulations.

As more money flows into stablecoins, the asset is more likely to impact the financial system. And regulators don’t want a repeat of the 2008 financial crisis — digital edition.

• Banks have lots of restrictions and reporting requirements i.e. ensuring enough cash is available — a lack of which contributed to Lehman’s bankruptcy in 2008.

The Joe’s take: With limited financial data and current sales which doesn’t justify its valuation, Circle should remain on the watchlist. But its potential to transform the financial industry makes it an interesting one to follow.