Stablecoins are digital assets that aim to maintain a stable value relative to a specific asset or basket of assets. They are often pegged to fiat currencies like the US dollar, but can also be backed by commodities like gold or oil. The total market capitalization of all stablecoins currently stands at over $150 billion, making them a crucial part of the rapidly growing world of decentralized finance (DeFi).
There are many different reasons why someone might use a stablecoin instead of traditional fiat currency. For example, they may be looking to avoid currency volatility, or they may want to take advantage of DeFi protocols that require collateral in the form of digital assets. Whatever the reason, stablecoins play a vital role in the DeFi ecosystem. Without them, many of the innovative financial applications that we now take for granted would simply not be possible.
Stablecoins can be backed by a variety of assets, including fiat currency, commodities, or even other cryptocurrencies. As a result, stablecoins offer investors a way to hedge against market movements and protect their assets from price fluctuations. There are many different types of stablecoins available, each with its own benefits and drawbacks.
In this guide, we will cover the most popular types of stablecoins and explore their use cases. Whether you’re looking to add stability to your portfolio or simply wanting to avoid volatile markets, stablecoins may be the right choice for you.
To read out more about passive income and safe investment, you might be interested in this article.
Why Stablecoins?
In a world where we can order a car with the click of a button and stream our favorite movies at the drop of a hat, it’s hard to believe that our money is still working in analog ways. Transactions can take days to process, and there are a host of other frictions that affect consumers and businesses alike. This is where stablecoins come in. Stablecoins are digital assets that are pegged to real-world assets, such as fiat currency or gold. This means that they have all the speed and flexibility of crypto, without the high volatility. As a result, they have the potential to revolutionize the way we think about money. Let’s take a closer look at some of the use cases of stablecoins.
One obvious use case is international payments. Currently, if you want to send money abroad, you have to deal with a ton of red tape and fees. But with stablecoins, you could send money instantly, without any friction. This would be a huge boon for businesses that rely on international trade.
Another potential use case is lending. Because stablecoins are pegged to real-world assets, they could provide collateral for loans. This would reduce the risk for lenders, and make it easier
Lending in DeFi
Stablecoins have become increasingly popular in recent years, as their utility has become more clear. In the case of lending in DeFi platforms, they serve as on-off ramps providing a frictionless flow between fiat (real money) and crypto. The total transacted amount of stablecoins in June amounted to over $590 billion.
In developing countries, stablecoins are often seen as a hedge against hyperinflation. In bear markets, investors sometimes park their funds in stablecoins because they are less volatile than other cryptocurrencies. There are many reasons why stablecoins have become so popular, and it is likely that their use will continue to grow in the future.
Remittances
In countries with hyperinflation like Venezuela or Argentina, stablecoins are a great tool for preserving the actual value of the money that you send to your friends and family members. Having a crypto wallet that supports stablecoins gives you the advantage of lower transaction costs.
For example, if you wanted to send $100 worth of Argentine pesos to your friend, it would cost you around $5 in fees. However, if you sent the same amount using a stablecoin like USDC, the fee would be less than a dollar.
Moreover, you can instantly send money safely and securely. Because stablecoins are pegged to fiat currencies, they are much less volatile than other cryptocurrencies. This means that the value of the money you send will not fluctuate as much as it would if you were using Bitcoin or Ethereum. As a result, stablecoins are a great way to transfer value in countries with unstable economies.
Payroll & Invoicing
When it comes to fees and transaction costs, stablecoins offer a major advantage over traditional fiat currencies. For businesses, this can mean significant savings on operational costs. Small businesses and start-ups, in particular, can benefit from reduced fees as they often don’t have the same level of resources as larger enterprises. This also advantages end consumers as businesses pass on their savings in the form of lower prices. In an increasingly globalized economy, stablecoins have the potential to level the playing field for businesses of all sizes. By reducing fees and transaction costs, they can help businesses compete on a more equal footing with their larger counterparts.
What are the different types of stablecoins?
There are many different types of stablecoins available on the market today, and it is essential to understand how they work in order to choose the right one for your needs. In general, stablecoins are cryptocurrencies that are backed by a reserve asset, such as fiat currency or gold, in order to stabilize their value.
The most common types of stablecoins are those that are backed by fiat currencies, such as the US dollar or the Euro. These types of stablecoins typically have a lower volatility than other cryptocurrencies, making them a more stable investment. However, there are also stablecoins that are backed by other assets, such as gold or commodities. These types of stablecoins can offer more stability than fiat-backed stablecoins, but they may also be more volatile. Ultimately, it is important to choose a stablecoin that is right for your investment goals and risk tolerance.
Fiat-backed
Stablecoins backed by fiat currency are becoming increasingly popular as a way to store value and make payments. These coins are meant to be fully backed by the corresponding fiat asset, so that each coin is worth one dollar (or euro, etc).
The two largest players in this field are Tether USDT and Circle USDC, which respectively have market capitalizations of over $66 billion and $55 billion. For this model to work properly, the stablecoins must be thoroughly backed and transparently audited by trusted third parties. This provides users with a degree of confidence that the coins will retain their value. In addition, the use of stablecoins can help to reduce volatility in the cryptocurrency markets.
Commodity-backed
One type of stablecoin is commodity-backed. This means that the coin is backed by a hard asset, such as gold or silver. The value of the stablecoin is then pegged to the price of the commodity. For example, if one ounce of gold is worth $1,000, then each coin in a gold-backed stablecoin system would be worth $1. This type of stablecoin is seen as more stable than fiat-backed or crypto-backed stablecoins, as the value is less likely to fluctuate. However, there are still risks involved, as the price of the commodity can fluctuate. In addition, if the issuer of the coin goes bankrupt, investors could lose their investment.
Decentralized/algorithmic stablecoins
Decentralized or algorithmic stablecoins are often considered to be the most trustworthy by advanced crypto users. The value of these types of stablecoins is controlled by smart contracts that have algorithmic formulas, which automatically stabilize the value.
Many decentralized or algorithmic stablecoins are also backed by other cryptocurrencies. If the smart contract behind the stablecoin is self-auditable, savvy consumers can look into it and spot potential flaws. Stability is important for cryptocurrencies because it gives them real-world utility and increases adoption. Without stability, cryptocurrencies are more susceptible to huge price swings, which can make them impractical for everyday use and limit their adoption.
Therefore, decentralized or algorithmic stablecoins are often seen as a more trustworthy and useful type of cryptocurrency.
Issues with stablecoins
There are a few primary issues with stablecoins that have caused them to come under fire recently. The first is that they are not always 100% backed, which means that there is a risk that they could collapse if too many people try to redeem them for cash. Secondly, stablecoins can be subject to high levels of volatility, which makes them less than ideal for use as a currency.
Finally, because stablecoins are often used to trade cryptocurrencies, they can amplify the liquidity risks associated with those assets. While stablecoins do have the potential to provide stability in the crypto markets, it is important to be aware of these risks before investing.
Stablecoins and regulations
Stablecoins have been in the news a lot lately, and for good reason. The collapse of Terra wiped off $60 billion in the most dramatic wealth loss in modern history, creating panic across all crypto assets and worsening the bear market. While the approaches vary from country to country and technology is always one step ahead, there seems to be a consensus regarding stricter regulations imposed on stablecoins. In the end, stablecoin issuers could potentially face the same stringent regulatory frames that banks must comply with. This would mean more transparency and accountability, which could help to prevent another meltdown like the one we saw with Terra. So while there are still many unanswered questions about stablecoins, it seems that regulations are inevitable.
Thanks for reading! Follow QWYPTO socials:
