Figures of people in row with coins, domino effect. Financial and economic stability.Getty
The crypto fans didn’t care for stablecoins to begin with, but stables have carved out a particular niche in the cryptocurrency markets, primarily as stable hedges against the market’s volatility.
Their practical applications continue to be in demand, expanding to more layers and aptly demonstrated by the flood of stablecoins and their increasing use today.
The different versions of stablecoins range from fiat-collateralized to crypto-collateralized, with the former the most prevalent but the latter also gaining traction with stablecoins like Maker’s Dai. As the crypto ecosystem trends towards more open and decentralized financial tools, stablecoins are poised to play an integral role in the market.
Developments like Bitcoin’s Lightning Network present an innovative method for instant payments, using off-chain channels between users, but the problem of a volatile currency that the payment channels use (BTC) is not ideal for most retailers and enterprises.
Businesses and online merchants want to know their financial runway, which is difficult to accomplish with payments received and held in a volatile asset like Bitcoin or Ethereum.
Similarly, customers don’t want to add overpayment risk to their online spends, leading to the conclusion that widespread retail adoption of cryptocurrencies will not come without more stability.
Stablecoins provide useful mediums of payment and have extended their use cases as decentralized finance (DeFi) continues to blossom with open protocol lending services, prediction markets, and more.
Traders and investors need stable pegs to jump in and out of during active cryptocurrency trading, and the list of stablecoins and the assets pegged to them on exchanges continues to grow — including additions on Binance, Coinbase, and Bitfinex.
Similarly, one of the leading use cases for stablecoins is with remittances, where the enormous global market for remittances is expected to grow at a CAGR of 25.1 percent from 2019 to 2024.
Tether was the first stablecoin to emerge in the cryptocurrency markets, as a pegged asset to the USD that became enormously popular during the meteoric rise of altcoins in the ICO craze. However, a series of struggles by Tether to retain banking services and its tribulations, proving its 1:1 USD peg was fully backed by reserves, led to the stablecoin briefly losing parity with its price peg.
“As more stablecoins enter the market, we will begin to see users gravitating towards projects that they have confidence in across different disciplines, ” says Kory Hoang, CEO of Stably, a stablecoin developed by a team of former Amazon engineers.
“Users of stablecoins will face varying degrees redeemability for each of these stablecoins, as it relates to the process, speed, and fees associated with moving between fiat and crypto.”
The race to replace Tether has coincided with an increasing emphasis on transparency, the main area where Tether fell short. Projects like USDC – backed by Coinbase and Circle – offer auditing of banking reserves for better backing assurances. However, some projects even take transparency a step further.
Decentralized and open lending protocols like Maker and its stablecoin Dai also present some long-term narratives. Maker users receive Dai in return for sending the underlying collateral, Ether, to collateralized debt positions (CDPs), which mints Dai in return.
Maker Dai extends stablecoins applications to the concept of decentralized leverage and Dai’s metrics within the Ethereum ecosystem are indicative of the growing positive sentiment of stablecoins in DeFi.
Collectively, more than $2.5 billion of customer deposits are held by the top five fiat collateralized stablecoins, and that does not include the roughly $80 million in circulating Dai.
It’s interesting to noice that Tether still dominates fiat-collateralized stablecoins with more than $2 billion in customer deposits.
The continued growth of the stablecoin market will also likely correspond with adaptations to demand and competition by similar fiat-collateralized products.
Recent analysis suggests that fiat-collateralized stablecoins may follow the banking competition model for interest rates — rebates paid out to explicit stablecoin users. Such a concept has already abruptly presented itself with Gemini Dollar’s recent 1 percent discount on the stablecoin.
Some of the crypto fans are skeptical, and Stablecoins have their shortcomings in censorship-resistance and custodial risk, but it’s an interesting market to follow indeed.