Are stablecoins simply rebranded, onchain money market funds?

A stablecoin: an asset pegged to the price of one unit of fiat currency. There are several ways to go about attempting this, namely fractional, algorithmic, fully backed. When you buy a stablecoin, you’re receiving one token of fixed value, backed by a reserve that can meet the redemption of this token for the underlying asset it aims to track. We are referring to the most common (and successful) approach to stablecoins in this piece: fully and partially collateralized, not algorithmic or seigniorage.

A money market fund (MMF): a mutual fund that invests solely in cash and cash-like instruments (US treasuries, repo agreements, CDs, etc.). These are generally highly liquid securities with stable values and a weighted average maturity of up to 60 days. They issue redeemable, stable shares, that are backed by a reserve of these cash-like assets held by the mutual fund.

You’re probably starting to see the connection.

Much of what's being built in DeFi isn't completely reinventing financial concepts, but rather iterating and improving on existing ones. Stablecoins are an interesting one that are mostly rebranded MMF shares that trades onchain.

People often go into MMFs for safety or as a way to sit in cash, which is mostly why crypto users hold stables. But no one takes payment for things in MMFs. No one considers it digitized currency. Maybe MMFs were considered disruptive when they first debuted in the 1970s, but no one is saying “hey, if we put these MMF shares on the blockchain and call them tokens this will completely change how currency is used.” But in a way, that's kind of what we're doing with the stablecoin; branding and framing can really recalibrate how you interpret something.

Perhaps the correct way to view this is that MMFs were being structurally underutilized due to technological and regulatory constraints regarding how they’re custodied. You must hold MMF shares in a brokerage account, and cannot readily move them around for any economic use besides investing. Stablecoins have no such limits; they're MMFs that can be traded, transferred, and spent at will. Redeemed for fiat if you’d like, or kept digitized and in DeFi for self-custody and sovereignty.

A quick addendum to the “sovereign” moniker: I’m aware that USDC and USDT exist via centralized entity and control, and their issuers can freeze user funds onchain at will. Not good. Not truly sovereign. But crypto is working on it. Protocols like MakerDAO, who overcollaterailze with ETH and are actively reducing dependence on USDC are moving in the right direction. I have little doubt that stablecoins will eventually evolve away from centralized dictate and be able to operate without the specter of random seizure.

Crypto is speed running financial history and rebranding preexisting primitives while inventing brand-new ones of its own. The stablecoin is an excellent example of this.

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