🔸 What are stablecoins?
Stablecoins are a type of cryptocurrency whose value is “pegged” to another currency, most often the U.S. dollar. They maintain this peg through reserves of dollars, other cryptos or a mix of both kept in U.S.-controlled bank accounts. Stablecoins are frequently used as a hedge against crypto market volatility, or for generating passive income through staking or lending. Some popular stablecoins include Tether (USDT), USD Coin (USDC), Euro Coin (EUROC) and Binance Dollar (BUSD). They can be purchased or swapped Here
Stablecoins are playing an increasingly important role in the cryptocurrency ecosystem by providing stability and liquidity. This article explores the significance of stablecoins, their benefits, and potential challenges.
🔸 How many stablecoins are there?
There are approximately 200 stablecoins today. Some of the most popular examples include:
🔺 Tether (USDT) is considered the world’s first stablecoin and has the highest market cap of all its peers, sitting at just under $72.5 billion as of June 2022. The breaking of its peg in May of 2022 is considered a watershed moment in the history of stablecoins.
🔺 USD Coin (USDC) is a stablecoin representing tokenized U.S. dollars on the Ethereum (ETH) blockchain. It’s managed through a consortium called Centre formed by Circle and Coinbase. Circle is a peer-to-peer payments company with backers including Goldman Sachs, and Coinbase is one of the most well-known cryptocurrency exchanges.
🔺 Binance Dollar (BUSD) is a stablecoin backed by the U.S. dollar issued on the Ethereum (ETH) blockchain. It was created through a partnership between Binance, the world’s largest cryptocurrency exchange, and Paxos, a leading crypto infrastructure provider. It’s one of the first government-regulated stablecoins to be approved by the New York State Department of Financial Services (NYDFS).
🔺 Dai (DAI) is a cryptocurrency on the Ethereum (ETH) blockchain regulated and maintained by MakerDAO, a decentralized autonomous organization, or DAO. Dai is considered one of the earliest examples of decentralized finance (DeFi) to garner mainstream adoption
🔺 Pax Dollar (USDP) was formerly known as Paxos Standard (PAX). It’s a stablecoin on the Ethereum (ETH) blockchain with a value pegged to the U.S. dollar. It’s the native cryptocurrency of Paxos, a financial institution regulated by the NYDFS.
🔺 Gemini Dollar (GUSD) an ERC-20 stablecoin built on the Ethereum (ETH) blockchain. Its value is pegged 1:1 to the U.S. dollar, and backed by reserves held in FDIC-insured bank accounts. It was created by cryptocurrency exchange Gemini, which touts it as the first regulated stablecoin. Along with USDP and BUSD, GUSD is one of three government regulated stablecoins in existence.
🔺 PayPal USD (PYUSD) is a newly released stablecoin by payments processor, PayPal, in collaboration with Paxos. Paxos Trust Company launched PayPal USD (PYUSD), a stablecoin backed by dollars and other assets, with a 1-1 value ratio to the US dollar. Ensuring transparency, Paxos will release monthly asset reports and undergo third-party audits, with the first proof-of-reserves statement expected in September 2023.
Their stability properties allow them to play the role of a store of value in crypto markets. Stablecoins also fuel the development of Decentralized Finance (DeFi), as collateral locked in smart contracts, or borrowed to build leveraged positions.
🔸 Challenges and Risks
🔺 Regulatory Scrutiny: Stablecoins face increasing regulatory scrutiny as governments and financial authorities seek to ensure transparency and prevent misuse.
🔺 Centralization Risks: Some stablecoins are centralized, relying on a single entity to maintain the reserve assets, which introduces counterparty risk.
🔺 Market Confidence: The stability of stablecoins depends on market confidence in the issuer's ability to maintain the peg.
🔸 How do stablecoins work?
At the most basic level, an exchange offering a fiat-backed stablecoin will deposit a dollar — or whichever currency its coin is pegged to — for every stablecoin it places in circulation. This is what pegs the stablecoin to that currency and theoretically enables holders of stablecoins to exchange their stablecoins for fiat currency at a one-to-one ratio.
While fiat-backed stablecoins make up most of the market capitalization, there are stablecoins in circulation that are pegged to other assets. These include:
🔺 Stablecoins pegged to gold and other precious metals, such as Digix Gold
🔺 Stablecoins pegged to other crypto assets. Dai is the best example
🔺 Algorithmic Stablecoins, also known as Non-Collateralized Stablecoins, such as the Ampleforth or AMPL token
Although there are differences in the mechanics that power different types of stablecoins, the result is the same: offering the stablecoin holder a high degree of certainty in the asset's value.
🔸 Technological Advancements
Advancements in blockchain technology, such as improved scalability and interoperability, will enhance the functionality and efficiency of stablecoins. These improvements will enable seamless integration with various blockchain networks and applications.
🔸 Regulatory Frameworks
Clear and consistent regulatory frameworks will provide a predictable environment for stablecoin issuers and users. Regulatory compliance will enhance market confidence and foster the growth of stablecoins within the global financial system.
🔸 Market Confidence
The stability of stablecoins is contingent on market confidence in the issuer's ability to maintain the peg. Any doubts about the issuer's reserves or operational practices can lead to de-pegging, causing the stablecoin's value to fluctuate.
🔸 The Future of Stablecoins
The future of stablecoins looks promising, with ongoing developments aimed at enhancing their stability, security, and usability.
🔸 Stablecoin use cases
Stablecoin use cases continue to emerge as more people come to understand what the technology has to offer. These use cases range from trading, lending and escrow to financial access and payroll. However, here we explore the main use cases related to payments:
🔺 Stablecoin for payment: Payment presents the leading use case for stablecoins as companies that opt to accept stablecoin as payment benefit from lower transaction fees. For example, accepting stablecoin payment enables businesses to avoid the typical 2% to 3% processing fee that is charged by financial institutions on fiat transactions.
🔺 Stablecoin for settlement: Stablecoin settlements provide a major use case for entities working around the clock as they operate on the blockchain, which runs 24/7 and enables near instant settlements globally. Fiat settlements, on the other hand, are limited to banking hours or a centralized financial insitition's business hours.
🔺 Stablecoin for remittance: Given stablecoins’ inherent price stability, they provide a meaningful use case when it comes to global payments and remittances, especially for people who most need this type of price stability like overseas workers. Off-chain remitters also charge high fees to send money internationally, which presents a hindrance to these workers when sending money back home to loved ones.
🔸 The Future of Stablecoins
Stablecoins have become a popular option for consumers wanting to own cryptocurrencies but who also desire the stability and predictability of fiat currencies. As of writing this article, the stablecoin market is worth nearly 140 billion U.S. dollars. The stablecoin with the highest market capitalization value is Tether, which is pegged to the U.S. dollar as its fiat-backed currency. Tether has a total market value of just over 66 billion U.S. dollars.
That said, some have called for more regulation around stablecoins given their rapid and popular growth. Stablecoins have significant potential to disrupt traditional payment systems and financial infrastructure while also being the clearest cryptocurrency competition to fiat currencies, which are carefully regulated by governmental bodies and central banks. This may mean stablecoin providers come under scrutiny as their cryptocurrencies displace traditional fiat currencies while providing new forms of financial products and platforms.