- Stablecoins are cryptocurrencies whose value is pegged to another stable/high-performing currency like the Dollar or Pound.
- Stablecoins are sometimes called the fiat of crypto and maintain stability for investors and traders in the highly volatile crypto market.
- There are four types of stablecoins: Fiat-backed stablecoins, Crypto-backed stablecoins, Commodity-backed stablecoins, and Algorithmic stablecoins.
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The world of crypto is plagued with high volatility. This means that the value of a cryptocurrency today might not be the same the next minute, which has been considered a significant barrier to crypto adoption in various parts of the world.
Although the crypto market is very lucrative, with lots of money-making opportunities, most traditional investors are still sceptical about investing or trading with crypto because of its unpredictable nature.
However, this issue has seemed to be mitigated, all thanks to Stablecoins.
Stablecoins are cryptocurrencies that act like fiat in the crypto ecosystem.
They are sometimes called the fiat of crypto and maintain stability for investors and traders in the highly volatile crypto market.
What are Stablecoins?
Stablecoins are digital currencies whose value are pegged or backed by various assets of value like
- Commodities – Gold, Oil, real estate
- High-value Cryptocurrencies – Bitcoin, Ethereum, etc
- Specialised Algorithms.
However, the most common definition of stablecoins is that they are cryptocurrencies whose value is pegged to another stable/high-performing currency like the Dollar or Pound.
- Stablecoins are minted on blockchains, allowing them to maintain a crypto-like nature.
- These types of cryptocurrency help maintain stability in the crypto space by maintaining their price peg. This means that their value is fixed despite the unpredictable movements of the market.
- They also actively hedge against the volatility of the Crypto market, thereby making them highly attractive for investors in the crypto space with lower risk appetite.
Currently, there are hundreds of stablecoins in the crypto market, and most of them are minted on different blockchains and backed differently.
A Little History on Stablecoins
Stablecoins originated from the need to create a digital currency that can be used anywhere in the world. Although cryptocurrencies seemed to fulfil that need, they were highly volatile.
According to history, the first stablecoin launched was BitUSD in 2014. This stablecoin was issued by BitShare blockchain and was designed by. Dan Latimer and Charles Hoskinson.
This stablecoin was not pegged to any fiat currency. Instead, it was pegged or backed by several cryptocurrencies, including BitShares (BTS), the native token or the BitShare blockchain.
However, that same year, Tether Limited (the largest distributor of stablecoins in the world) officially launched the $USDT.
Tether introduced the Fiat-backed stablecoin by pegging each stablecoin minted on its blockchain to a dollar. This means that each USDT has a real-world value of $1, thereby helping the USDT maintain a 1:1 basis with the U.S. dollar.
Tether created the first stablecoin that maintains a stable price despite market volatility.
Today, various blockchains issue USDT that is compatible with their blockchain.
Example: Ethereum issues USDT, which can be transacted on the Ethereum blockchain.
Same applies for the Tron Blockchain, BNB smart chain, etc.
After Tether, DAI, a crypto-backed stablecoin minted on the Ethereum blockchain, was launched in 2017.
Today, the stablecoin market is worth nearly 140 billion U.S. dollars, and is still growing.
How Do They Work?
Given that stablecoins are digital currencies like any other cryptocurrency but with a stable price peg,they can be purchased in any crypto exchange like BitDelta.
Despite market movements, it still maintains its price, popularly at $1.
Also, if a stablecoin’s price is threatened to reduce in value, the organisation responsible for issuing that stablecoin immediately takes action to retain its value back to that $1.
Let’s say you go to a store to buy a dress worth $50, and you’re asked to pay in crypto.
This means you must send the store an equivalent amount of $50 in cryptocurrency, which can be either 50 USDT or 50 USDC.
Also, it is essential to know which blockchain the receiver gets its payment to avoid loss.
Example: If a sender is sending Ethereum USDT to a BNB USDT wallet address, this can potentially lead to loss of the cryptocurrency as crypto is somewhat irreversible, unlike traditional banks. However, if a sender sends Ethereum USDT to an Ethereum USDT wallet address, this would work completely fine.
Key Features of Stablecoins
Stablecoins boast a variety of characteristics:
- They run on blockchain technology.
- They maintain a stable price despite market shifts.
- They are backed by various assets (either traditional or digital).
- They are globally accepted and deemed less risky.
- They don’t increase in value despite bull runs.
- They maintain low transaction costs on blockchains.
- They can be used as a medium of exchange and as a means of remittance globally.
Importance of Stablecoins
There are multiple reasons stablecoins have grown in popularity among traders and investors in the crypto market.
1.Protection against volatility
Stablecoins pose an excellent means for investors to protect their investments from the volatile nature of cryptocurrencies.
Bitcoin and Ethereum serve as a good example. . Although they are one of the most popular coins to invest in, they are highly volatile.
- In 2009, Bitcoin cost $0.1.
- By 2021, BTC experienced an all-time high of $68,000; but fell deeply after that and is currently priced at $35,000.
During the Bitcoin mooning, early BTC investors made money, but now that the market is more on the bearish side, it is considered somewhat risky to invest in it..
An investor with a low-risk appetite can keep their money in Stablecoins instead, all while investing little in Bitcoin and Ethereum.
2. Hedge over inflation
Stablecoins act as a hedge against inflation in countries with unstable fiat money.
Example: An individual living in a country currently experiencing high inflation and consistent currency devaluation, like Nigeria, can decide to keep their money in Stablecoins to maintain their money’s value, despite the inflation rate.
Now, whenever they need to convert their stablecoin to Fiat, the value of the money is still maintained and has not reduced in value.
3. For payment and remittance
Today, global businesses and banks are using stablecoins as a means for making international payments and paying employees globally.
This is because using stablecoins as a means of payment and remittance is very fast, very cheap and highly efficient, unlike using other global payment methods like Western Union or PayPal.
Companies like MasterCard, Visa, and Paypal have now integrated the ability to make payments with stablecoins on their platform, giving customers access to seamless global transactions.
4. Passive income
Stablecoins are excellent sources for generating passive income in the Crypto space through crypto lending and staking.
By staking or lending stablecoins like USDT, you can make high APY on your crypto daily, monthly, or yearly.
5. Merging DeFi with traditional banking
Stablecoins seamlessly merge traditional financial banks with the fast-evolving decentralised finance (DeFi) space.
Individuals can now opt in for loans in stablecoins. They can also act as a means of storing value and investing without the volatility of traditional cryptocurrencies.
6. Medium of exchange
Stablecoins are highly used because of their ability to act like fiat and as a medium of exchange. Individuals can use stablecoins to buy and sell goods and services globally without any hassle.
Types of Stablecoins
There are four types of stablecoins:
Fiat-backed stablecoins are stablecoins that have their value pegged to a strong fiat currency like the dollar or pound. This means a single stablecoin, e.g. 1 USDT, is equivalent to $1 or £1. This remains the same, no matter the volatility of the market.
It is essential to know that each fiat-backed stablecoin is pegged to a specific fiat currency in a one-to-one ratio. This means that issuers of Fiat-backed stablecoin have the equivalent amount of stablecoins they issue as fiat in their reserves.
For example, if Tether issues 10 million USDT because USDT is Fiat-backed, Tether has $10 Million in its reserves as each USDT is pegged to a dollar in its reserves.
Other examples of Fiat-backed stablecoins are TrueUSD, USDC, etc.
2. Commodity-backed stablecoins
These are stablecoins backed by tangible commodities like gold, oil, real estate, etc. They are also designed to maintain a stable price, no matter the volatility of the crypto market.
These commodities act as collateral for these stablecoins. The most used commodity is Gold, and there are various gold-backed Stablecoins like Tether Gold that allow holders of this stablecoin to participate in the global gold market and enjoy its benefits without physically owning gold.
3. Algorithm stablecoins
Algorithmic stablecoins are not so popular because of how they work, although these stablecoins maintain a stable value.
These stablecoins use an algorithm designed in a smart contract to adjust the stablecoin supply based on market demand to maintain a stable value.
The algorithm will increase or decrease the stablecoin supply to maintain the pegged value. Examples of these stablecoins include Terra, FRAX, Ampleforth, etc.
4. Cryptocurrency-backed Stablecoins
Cryptocurrency-backed stablecoins are known for their over-collateralised nature.
They are over-collateralised to mitigate the price fluctuations in their cryptocurrency collateral assets.
For example, DAI is a crypto backed stablecoin:
- This means that 1 DAI is over-collateralised by 2 or 2.5 ETH.
- This means a 200 or 250% collateralised ratio.
By doing this, whenever the price of ETH drops but remains above a set price, the excess collateral mitigates DAI’s price to maintain stability. However, if the ETH price drops below the fixed price, collateral is paid back into the smart contract to liquidate the CDP.
Note: Of the Four major types of stablecoins, Fiat-backed stablecoins are the safest and most used globally.
Today, hundreds of stablecoins are available and distributed globally in the crypto market. Among these stablecoins, the best-performing stablecoins are:
The USDT stablecoin is the most widely distributed and ranks #3 in the global crypto market.
Today, the USDT stablecoin is compatible with multiple blockchains and can easily be transferred to any crypto wallet.
Tether ensures each USDT release maintains a value of $1, no matter the market’s volatility.
Tether has a market cap of $86 Billion and a daily trading volume of $65.4 billion.
2. USD Coin (USDC)
This is the second most popular stablecoin after USDT. It is fiat-backed, and each USDC is pegged/ backed by the US dollar.
This means 1 USDC = 1 USD. The USD coin ranks number 6 in the global crypto market.
This stablecoin is popularly known as the tokenised dollar, and it’s issued by a consortium called the Centre.
For context, Centre is an organisation that Coinbase and Circle founded.
Today USDC has a market cap of $24.2 billion and a daily trading volume of 7.33 billion USDC.
Created in 2017, DAI is the third most popular stablecoin in the world.
- It is sometimes classified as an algorithmic stablecoin.
- This stablecoin is an ERC-20 token over-collateralised against Ethereum to maintain a 1:1 ratio with the dollar.
The DAI stablecoin currently ranks #16 in the global crypto market. It has a market cap of $5.3 billion, with a circulating supply of 5.3 million DAI.
4. Binance USD (BUSD)
The BUSD stablecoin is a fiat-backed stablecoin launched in September 2019 and issued by Binance in conjunction with Paxos.
The BUSD is an ERC-20 token which maintains a 1:1 ratio with the US dollar.
Today, it ranks number 33 in the global crypto market, with a market cap of $1.885 billion and a circulating supply of 1.884 billion BUSD.
5. TrueUSD (TUSD)
The TUSD is a fiat-backed stablecoin that is pegged to the US dollar. It is an ERC-20 token which was created in 2018 and is currently issued by ArchBlock (a cryptocurrency firm)
Today, the TUSD stablecoin is the fifth largest stablecoin and ranks 24 in the global cryptocurrency market. It has a market cap of $3 billion.
Stablecoins: The Future of Money?
Over the years, Stablecoins have become accessible gateways into the global cryptocurrency ecosystem. They have expanded to play a vital cryptocurrency market as they provide stability, a crucial requirement for investors and traders.
Stablecoins are now globally accepted for consumers to buy financial products, goods and services and as a means of remittance in any part of the world.
Cryptocurrencies are indeed much more volatile than traditional assets like stocks, commodities or currencies, but stablecoins create a hedge against this high volatility.
Today, stablecoins are popular among individuals who want to own cryptocurrencies but also desire the stability and predictability of fiat currencies.
However, some critics have called for more regulation around stablecoins because of how fast they have grown and how popular they have become.
Stablecoins have disrupted the traditional banking system as they pose an excellent competition to fiat currencies. Today, most countries are creating stablecoins, which fall under the umbrella of CBDCs (Central Bank Digital Currency).
Governmental bodies and central banks entirely regulate these Stablecoins. Countries like China, Brazil, Nigeria, India, Ghana, Norway, Russia, etc. have issued CBDCs within their territories.
Furthermore, global financial companies like Visa, MasterCard, PayPal, and FedWire have adopted stablecoins to allow their audience to leverage cryptocurrency benefits within their platform.
In summary, although a stablecoin seems to displace traditional fiat currencies, it provides innovative ways for individuals to connect and trade globally without barriers.