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A stablecoin is a type of digital currency that is pegged to a real asset such as gold or a known currency such as the US dollar. This asset class has emerged as a vital component of the evolving financial ecosystem.
Unlike cryptocurrencies such as bitcoin whose prices fluctuate according to market sentiment, stablecoins are designed to maintain a stable value over time. That is because their worth is tied to an underlying asset, mostly a known reserve currency. The price of a stablecoin usually tracks the real-world asset to which it is linked.
Price stability makes stablecoins more suitable for everyday transactions. Read on to learn more about stablecoins, including what makes them so popular among crypto users and traders.
A Look at the Most Popular Stablecoins
BitFinex exchange introduced the world’s first stablecoin, Tether (USDT), in 2014. The coin uses the US dollar as its benchmark currency, enabling it to maintain a stable value of $1 per unit.
Since the onset of USDT, dozens of other stablecoins have entered the market. Most are linked to the US dollar, but some are pegged to other currencies like the Euro.
Although stablecoins rarely receive as much press as other mainstream digital assets, they are slowly making their mark in the crypto space. Some of the top stablecoins currently in circulation include USD Coin (USDC), TerraUSD (UST), Paxos Standard (PAX) and Binance USD (BUSD).
USDT remains the market leader with a market capitalisation of over $68 billion. USDC, a fast-growing coin issued by the Centre Consortium, is the closest rival to USDT, with a market cap of roughly $33 billion.
According to a recent report by crypto data provider Statista, the combined market cap of stablecoins crossed the $100 billion mark this past summer.
What Are the Uses of Stablecoins?
The initial use of stablecoins was to facilitate the purchase of other cryptocurrencies like Bitcoin because crypto exchanges lacked access to traditional banks to offer regular currency withdrawals and deposits. However, this class of cryptocurrencies has evolved over time. It is now more than merely an on- and off-ramp to the digital assets market.
Price-stable cryptos have found new applications over the past few years and have grown substantially in popularity. They now serve as a bridge between the crypto world and traditional finance, offering a reliable means for people to store and exchange value.
Regular people around the globe can leverage stablecoins to circumvent hyper-inflation and poor economic conditions in their countries. They can also leverage these assets to send instant remittances across borders via the blockchain at very low transaction fees.
Further, the asset class has also transformed the utility of crypto for regular transactions. Anyone can use their stablecoins to quickly and cheaply make purchases.
These price-stable digital assets are also popular among traders looking to lock in gains acquired from cryptocurrency trading. Investors can use stablecoins as a safe haven to store their token holdings if they sense a market downturn is coming.
Stablecoin Use Cases in Decentralised Finance (DeFi)
One of the most valuable features of stablecoins is that they are easily programmable into smart contracts. This functionality enables multiple DeFi platforms to integrate price-stable tokens into their protocols to facilitate decentralised lending and borrowing.
DeFi protocols such as MakerDAO and Aave allow users to earn lucrative yields for providing liquidity to the market. They also give millions of people locked out of the banking system a means to access loans by using crypto as collateral. Crypto-savvy investors widely use stablecoins to collateralise their loans on yield farming protocols.
The price stability of these assets makes it possible for them to facilitate smooth trading in DeFi that would not be possible with more volatile cryptocurrencies.
Smart contracts have also ushered in a new era in which stablecoins are used in other aspects of DeFi. These include prediction markets, decentralised autonomous organisations (DAO) and insurance.
Blockchain Ecosystems Integrate Stablecoin Support
Green blockchain networks such as Algorand have integrated stablecoins into their ecosystems. These high-performing chains support plugins that allow corporations and individuals to transact in market-leading coins such as USDT and USDC.
Stablecoins in decentralised, carbon-negative ecosystems also provide users with full custody and round-the-clock access to their funds. Platforms such as Huobi and Coinbase can connect to blockchains that support stablecoins to offer their clients significant gateways into the crypto assets investments space.
Blockchain networks with stablecoin support also enable users worldwide to make micropayments via cryptocurrencies. They also enable crypto enthusiasts and traders to move funds between exchanges instantaneously at near-zero fees.
Algorand, in particular, has emerged as an optimal network for stablecoins because of its settlement layer that empowers traders to complete OTC transactions swiftly at ultra-low costs. Algorand’s high scalability, robust security and transaction finality also contribute to the increasing number of stablecoins in the ecosystem.
Bottom Line
Stablecoins are set up to provide the stability that is lacking in mainstream cryptocurrencies such as Bitcoin. Moreover, they offer a cheaper, faster and safer means to move money and complete day-to-day transactions.
Price-stable assets have also found use cases in the booming DeFi ecosystem because they are quickly programmable into smart contracts and blockchain ecosystems. However, those using the asset class should be aware of counterparty risk.
Essentially, issuers of stablecoins must keep reserves of the underlying asset, which serve as the last backstop to secure the value of the coins in circulation. If the funds backing a stablecoin are insufficient to redeem all units, investor confidence in the issuer could take a hit.
For instance, USDT issuers came under scrutiny about whether they were adequately backing USDT with dollar reserves. Crypto users should always ensure that an issuer maintains a good basket of reserve assets before investing in a particular stablecoin.
