What’s the role of stablecoins in cryptocurrency adoption?

Stablecoins are an alternative to regular cryptocurrencies, as their value is pegged to fiat money, offering an additional level of security. BitUSD was the first stablecoin in the market, created in 2014 when the crypto ecosystem just started to gain traction following Bitcoin’s introduction in 2009. Since then, more than 150 stablecoins have been released, establishing a stable and profitable investment market for individuals and institutional investors. 

Stablecoins serve as a middle ground between the real world and digital assets in crypto markets. While they offer functionalities like worldwide accessibility and decentralization, stablecoins offer more price stability than cryptocurrencies. Based on their underlying technology, stablecoins work differently, offering investors and traders more variety in diversifying their portfolios. 

So, let’s see what stablecoins are and how they contribute to a closer adoption of cryptocurrencies. 

What are the main types of stablecoins? 

Stablecoins are usually tied to a real-world asset, which allows them to mirror their prices. This is why users turn to stablecoins in times of high market volatility, as their value barely changes in the short term. 

There are currently four distinct types of stablecoins: 

- Fiat-backed stablecoins match the value of traditional currencies like the US dollar. Popular coins include USDT, USDC, and BUSD. Companies keep $1 in a special bank account for every stablecoin in circulation, with issuers minting new tokens for users;

- Crypto-backed stablecoins rely on crypto to secure their value. Users deposit them into a smart contract for collateral, which automatically mints the stablecoin at a ratio. Examples include DAI and sUSD; 

- Algorithmic stablecoins adjust their supply by code, and they automatically mint more coins when prices rise or burn them when prices decrease. FRAX is one of these coins and is part of a self-sufficient DeFi technology; 

- Commodity-backed stablecoins are supported by assets like gold, oil, or silver. Issuers keep these commodities and offer a certificate of proof of ownership for every coin issued. PAXG and XAUT are such examples;

What are the use cases of stablecoins?

Stablecoins are considerably advantageous for our economy, especially with the rising demand for digital payments. Merchants accept them due to fast settlement times and no intermediaries. In addition, stablecoins are efficient in trading as they don’t experience massive price swings, regardless of market conditions. Users also leverage them to lock in gains when volatility increases by swapping their money for stablecoins. 

Stablecoins are as efficient for remittances as sending them from one place in the world to another, which is fast and cheap. The recipients can also swap tokens for their local currency. However, stablecoins are helpful not only in the centralized financial system but also in the form of users depositing their tokens as collateral to borrow other assets or lend them to earn interest. This pushed the DeFi lending and borrowing sector into the mainstream by offering an alternative to regular loans and borrowing. 

Finally, stablecoins are essential tools in yield farming and liquidity provision. For example, yield farmers send their stablecoins to liquidity pools to receive trading fees without risking sudden losses. 

How can stablecoins change real-world finance? 

Stablecoins could help the financial industry navigate current challenges in terms of lack of transparency, cybersecurity, and helping the unbanked. With proper regulatory compliance, stablecoins can push the FinTech industry towards innovation, offer top-notch privacy, and increase competition among brands. 

Stablecoins matter because they provide:

- Price stability, reducing panic selling, and supporting market confidence; 

- Financial bridging in countries with unstable currencies, encouraging financial inclusion; 

- Liquidity through exchanges that offer trading pairs, reducing reliance on banking rails; 

Stablecoins already offer global reach, fast settlements, and cost-effective transfers, which could help cryptocurrencies be better received by institutional investors and governments. Luckily, we’re already seeing progress in the most crucial part of the world regarding regulating stablecoins. 

What does current stablecoin regulation look like? 

Although most countries are approaching stablecoin regulation, the US and EU are the closest to properly shaping it. For example, in the US, a new Act called the Guiding and Establishing National Innovation for US Stablecoins (“GENIUS”) has recently been established. It offers a clear idea of how institutions can take advantage of procedures as long as they have licenses to issue stablecoins and also implement reserve requirements. 

On the other hand, the EU uses the Market in Crypto-Assets Regulation (MiCA) to provide guidelines for companies, such as requiring fiat-backed tokens to have a liquid reserve of 1:1 ratio to contribute to financial market stability. Businesses that can issue EMTs (e-money tokens) or ARTs (asset-references tokens) must seek authorization from the issuer. 

Other stablecoin regulations include the Abu Dhabi Global Market (ADGM) through which fiat-references tokens (FRT) were approved, but only those backed by the local currency, the dirham. In Singapore, the Monetary Authority of Singapore (MAS) allows three categories of stablecoins, but only if companies in the country issue them. 

What are some of the most popular stablecoins? 

Although stablecoins might not provide the same high returns as some cryptocurrencies do, they’re increasingly popular among all investors for their stability, especially when it comes to established projects:

- Tether (USDT) is known as the Internet’s Digital Dollar. Users leverage it for liquidity and as a hedge against market volatility. It has large reserves, making it an efficient option for vendors; 

- USDC is a stablecoin redeemable 1:1 for US dollars, providing near-instant settlements, high liquidity, and worldwide support from communities; 

- Dai is a stablecoin on the Ethereum blockchain created by MakerDAO, a decentralized autonomous organization, and it’s been integrated into hundreds of apps and services; 

- Pax Gold is a stablecoin backed by gold stored in the LBMA vaults in London. The coin is cost-efficient, secure, and has no settlement risk; 

Final considerations 

Stablecoins are digital assets backed by fiat money, making them among the most stable and secure coins on the market. Long-term investors leverage them to navigate volatility, while regular users take advantage of their diversification to allocate them to their portfolios. Stablecoins are considerably important for pushing towards innovation in the crypto sector, especially since worldwide economies try to regulate them.