#1CASTLE ISLAND VENTURES Regime change in stablecoins Token 2049. 09/15/23 • Nic Carter#2Table of Contents PAST - Historical parallels in the Eurodollar market II. PRESENT - Stables are crypto's killer app III. FUTURE - Yield, crypto-collateralization, and offshoring 2#3Understand Eurodollars, understand Stablecoins Eurodollar A dollar-denominated liability of a bank located outside the U.S. VS. Stablecoin Typically dollar-denominated liability of a (mostly non-US) issuer, circulating on a public blockchain Most stablecoins are tokenized eurodollars (~75%) The emergence of stablecoins closely analogizes to the origins of eurodollars PAST - Lessons from Eurodollars M#4Parallels between Eurodollars and Stablecoins 1. Emerged as a reaction US asset seizure & capital controls 2. Growth powered by search for yield 3. More flexible and suited to a globalized market than onshore banking 4. Opportunity for ex-US jurisdictions to create USD financial hubs 5. Initially peripheral, later backstopped by central banks PAST - Lessons from Eurodollars 4#5Predictable regulatory responses APATHY First they ignore you... FEAR Then they worry about you... ENGAGEMENT Then they accept and integrate you Eurodollars 50s, early 60s 60s, early 70s 1973 onwards Stablecoins 2015-2018 2018-2023 2024? PAST - Lessons from Eurodollars S#6Stablecoins only compose ~10% of crypto market cap 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Data courtesy of Coin Metrics & Allium 0% 2015 2016 2017 2018 Relative market cap Other L1s 2019 BTC ETH 2020 2021 2022 BTC ETH Other L1s Stables Stables 2023 Data sampled: Native tokens: BTC, ETH, LTC, XRP, TRX, Matic, Avax, BSC, SOL, ARB USDT (ETH, Tron, Omni, BSC, Avax, Matic, Arb) USDC (ETH, Tron, BSC) DAI (ETH, BSC, Matic, Avax) TUSD (ETH, Tron) BUSD (ETH, BSC) FRAX, USDP, USDD, GUSD PRESENT - Stables are the killer app ΟΙ#7...but they dominate on-chain transaction volume 100% 90% 80% 70% 60% 50% 40% 30% 20% Relative on-chain transaction value, USD terms ETH Other L1s BTC Stables Data sampled: Native tokens: BTC, ETH, LTC, XRP, TRX, Matic, Avax, BSC, SOL, ARB USDT (ETH, Tron, Omni, BSC, Avax, Matic, Arb) USDC (ETH, Tron, BSC) DAI (ETH, BSC, Matic, Avax) TUSD (ETH, Tron) BUSD (ETH, BSC) FRAX, USDP, USDD, GUSD 10% Data courtesy of Coin Metrics & Allium 0% 2015 2016 2017 2018 2019 2020 2021 2022 BTC ETH Other L1s Stables 2023 PRESENT - Stables are the killer app#835B On-chain 30B stablecoin txn 25B value 20B 15B 10B 5B 0 16M 14M 12M 10M 8M 6M 4M 2M 0 60B 50B 40B 30B 20B 10B On-chain stablecoin MAUS Trusted spot exchange volume, major Lls DAI USDT_eth USDC M USDT_tron Stable volumes and MAUS remain robust despite declines in crypto volume and activity CM Stables today do >5m WAUS and >10m MAUS on chain Coin Metrics 0 PRESENT - Stables are the killer app 8 00 Jan 2019 Jul 2019 Jan 2020 Jul 2020 Jan 2021 Jul 2021 Jan 2022 Jul 2022 Jan 2023 Jul 2023#9Stables are catching up to established settlement networks Billions $1,000,000 Fedwire $100,000 ACH $10,000 Visa $1,000 Remittances $100 Paypal $10 Annual volume of stablecoins vs other financial systems $1 2013 2014 2015 Stablecoins Stablecoins 2016 2017 2018 2019 2020 2021 2022 Paypal Remittances -Visa -ACH Fedwire In the space of 6 years, stables have gone from ~O to near parity with Visa Stablecoin figures are adjusted on- chain transaction value for major stables via Coin Metrics PRESENT - Stables are the killer app 6#10Stables are a global financial backend EM focused stable infra بھی EM fintech apps Yellow Card DolarApp Merchant settlement VISA $ USD Coin P PayPal =Félix worldpay nuvei ✓ checkout.com stripe airtm mercado libre belo ✓ Vita Wallet buenbit littio Num Alcancía Corporate finance MAPLE jia Goldfinch CRE LEMON DIX 9 SAPLING kravata buda.com TS. + tether Stellar H $ USD Coin Hedera Mountain PAXOS Remittances A afriex Bitso rípio CINKO MoneyGram. zulu Shinhan Bank Standard Bank PRESENT - Stables are the killer app 10#11Hostility in the US means opportunity elsewhere Nigeria affirms commitment to create legal framework for stablecoins Spain approves Monei to issue test euro- pegged stable Rest of World First Digital to issue Hong Kong compliant USD-pegged stable UK passes legislation for clearer future regulation of crypto/stablecoins Japan lifts ban on EU adopts foreign-issued "MICA" regulation stablecoins Singapore finalizes regulatory framework for stablecoins Jan Feb Mar Apr May Jun July Aug Sep 2023 Custodia master account application denied Signet, SEN shut down Fed, OCC, and FDIC de facto prohibit banks from issuing public blockchain stablecoins Banking crisis; USDC depegs; significant investor flow USDC => USDT SEC orders Paxos to cease platform BUSD minting USA Fed requires nonobjection letter from banks transacting in stablecoins Clarity for Payment Stablecoins Act approved by House Financial Services Committee Visa begins settling interbank txns via USDC Paypal launches PYUSD FUTURE - Yield & crypto collateral#1290B 80B 70B 60B 50B 40B 30B 20B 10B U.S. policy choices have led to stable offshoring Coin Metrics Jan 2021 Jul 2021 Offshore/crypto-backed stables Jan 2022 Onshore Stables I Pre-FTX, near Operation Chokepoint 2.0 parity between onshore/offshore CM SVB Collapse Loss of faith in US regulation and hostile environment for stables has driven holders into crypto- eurodollars Jul 2022 Jan 2023 Jul 2023 FUTURE - Yield & crypto collateral 12#13Vibrant offshore market emerging for USD stables and tokenized treasuries Unknown Offshore Swarm US-issued for offshore investors Midas Ondo's USDY Tether USDD Ratio Backed First Digital Open Eden Mountain True USD Matrixdock Maple Cash ~75 percent of USD stablecoins are offshore crypto-eurodollars* * Includes stables issued against crypto collateral FUTURE - Yield & crypto collateral 13#14Native crypto yields enable capital efficient crypto-backed stables • • Example model: Long spot staked ETH + short ETH futs = synthetic USD Crypto-backed USD stablecoins have long been considered a 'holy grail' The emergence of positive. carry on ETH makes this possible 2021 stETH Yield Accrued 2022 6.5% 5.0% 2021 2022 Synthetic stETH-backed 2023 5.7% < Ethena + 2023 Ol Weighted Average Rate +/(-) 16% (-0.3%) 8.3% Overcollat stETH-backed • Benefits include greater decentralization and native 2021 yields Excess Spread 2022 2023 22.5% 4.7% 14% Data from Ethena * sDAI is backed by RWA as well as wstETH prisma Liquity Raft * Lybra Finance SDAI FUTURE - Yield & crypto collateral 14#15The future of stablecoins Trend Prediction Dollar dominance as stable UoA Rise of interest-bearing stables Rise of crypto-collateralized stables Dollarization of public blockchains Crypto-Eurodollar-ization USD continues to dominate stable UoA with >95% market share Within 2y, >30% of stables bear interest (<1% today) Within 2y, >25% of USD stables are issued against crypto collateral (<5% today) >70% of on chain tx volume remains stables Singapore, HK, UAE, Bermuda become major USD-denominated issuer jurisdictions FUTURE - Yield & crypto collateral 15#16Thank You Acknowledgements: . Coin Metrics (data) Allium (data) · • Omid Malekan · Matt Walsh . Wyatt Khosrowshahi Ethena Labs • . Martin Carrica · Quinn Thompson Austin Campbell 16