The Growing Role and Massive Potential of Stablecoins in the Global Economy
The mainstream adoption of blockchain technology is increasing steadily, with the global market cap of cryptocurrencies today reaching close to $250 billion.
One of the major use cases of the blockchain is in transforming global payment systems to be faster, more secure, more transparent, and more decentralized. Popular cryptocurrencies like Bitcoin and Ethereum are already being used as payment methods today — but there’s one problem:
Cryptocurrency prices are volatile — they fluctuate in value too much on a daily basis to be considered usable currencies. Prices may shoot up and crash down dramatically in rapid succession, sometimes within minutes, making it hard for consumers and retailers to make reliable transfers of value.
The solution to this problem? Stablecoins.
What Are Stablecoins?
Stablecoins are digital currencies that are pegged to historically non-volatile assets.
Many stablecoins are linked to fiat currencies like the US dollar on a 1:1 ratio. They can also be pegged to stable assets like gold, with some opting to peg themselves to other cryptocurrencies instead (e.g. DAI). This brings stability to fluctuating crypto markets, which makes reputable stablecoins viable options for payments or as stores of value.
Four basic types of stablecoins exist:
- Fiat-backed stablecoins
- Commodity-backed stablecoins
- Crypto-backed stablecoins
- Non-collateralized stablecoins
The Increasingly Vital Role of Stablecoins in Global Economies
Before stablecoins, businesses were skeptical of the utility cryptocurrencies could have for handling transactions. Major doubts were cast over their value at a given moment, not to mention the ever-changing regulations surrounding them.
For a time, the future looked bright for cryptocurrency retail adoption. Microsoft was one of the earliest enterprises to accept cryptocurrencies when it offered bitcoins as a payment option in 2014. This ended within a few years due to the ongoing unpredictability of bitcoin prices.
Stablecoins aim to put an end to this challenge, however, taking advantage of the best aspects of cryptocurrencies — namely transparency, ultra-quick, global payments, low transaction fees, and privacy — while also seeking price stability.
The average international transfer today can cost up to $50 for large deposits — steep in comparison to cryptocurrencies, which usually cost less than a dollar regardless of the transfer amount.
Stablecoins also ease payments in underdeveloped and underbanked communities. Decentralization overcomes many of the constraints related to local financial laws and regulations, giving people an “uncensored” form of money to buy goods and services.
This advantage is a huge boon in areas where there is financial uncertainty, like in Venezuela where citizens are using bitcoin as a solution to the country’s ravaged economy.
Another benefit of decentralized payment systems is in enabling P2P lending services, a practical alternative to traditional loans. Stablecoins give P2P platforms a reliable digital currency for international and microloans. The positive effects can be seen in the skyrocketing popularity of crypto-based lending platforms like Genesis Capital, which processed a record $2 billion in volume this year.
Stablecoins also transform how stakeholders in the crypto space trade and interact with cryptocurrencies. Investors, for instance, can use stablecoins to trade quickly and store profits without having to convert to fiat. This saves tons of time and money since most exchanges take several days to process fiat transactions and take a significant portion in fees.
The Outlook for Stablecoins
Various studies have proven that stablecoins are the biggest contributor to the increase in the mainstream adoption of cryptocurrencies. Over the past year, stablecoin trading volumes have risen to all-time highs, with several market records being broken along the way. The current combined market capitalization of the top six stablecoins is over $5 billion and growing according to figures at CoinMarketCap.com.
We’re also seeing more and more enterprises and large corporations adopting stablecoins as a response to this financial paradigm shift.
The most notable stablecoin development of 2019 is Facebook’s Libra, a stablecoin that will peg itself to a basket of assets including the U.S. dollar, the pound, and the euro. In the whitepaper, the Libra team explains how they aim to establish Libra as the digital payment system for billions of users across an extensive list of countries.
While the project has encountered several hiccups due to a series of regulatory questions surrounding the coin itself and the company, it does show that businesses are starting to realize the economic potential of stablecoins.
Walmart has followed Facebook’s lead by developing its own stablecoin, according to a patent it filed earlier this year. The retail giant is looking into developing a digital currency to provide financial services to underbanked citizens, while also creating a payment option within the Walmart ecosystem and at other select retailers.
This could shape up to be an interesting alternative to credit and debit card companies, considering users could even earn interest for holding “Walmart Coins”. Walmart is already using the blockchain to empower its internal processes, so its foray into the field is not uncharted territory for the corporation.
Other organizations working on or exploring stablecoins include JP Morgan, Goldman Sachs, Binance, and Arizona’s ALTA.
These stablecoin projects are dramatically increasing public awareness of stablecoins, while at the same time educating people on what cryptocurrencies are and how they can truly benefit financial systems.
Aside from organizations, several countries have revealed plans to launch their own stablecoins, most notably China with its blockchain-based DCEP (digital currency electronic payment) technology.
These developments will continue to drive the adoption of stablecoins and it’s not far-fetched to think they may rise to the level of fiat currencies usage-wise in the coming years.
The Top Stablecoins to Look Out for Today
USDT (USD Tether): The first digital asset to demonstrate the capabilities of a stablecoin in global economies. Tether is pegged to the US dollar and is the stablecoin with the biggest market cap, making it the most popular stablecoin today.
TUSD (TrueUSD): TrueUSD is a new stablecoin built to overcome the limitations of Tether. Unlike Tether, the US dollars pegged to TUSD are managed by multiple trust funds rather than one financial institution. TUSD publishes its bank account audits regularly to maintain transparency.
PAX (Paxos Standard): Another USD-collateralized stablecoin, PAX are issued by the Paxos Trust Company and are approved and regulated by the New York State Department of Financial Services (NYSDFS).
GUSD (Gemini USD): GUSD is the official stablecoin of Gemini, a leading crypto exchange led by the Winklevoss brothers. GUSD launched its USD-collateralized stablecoin on the same day as PAX (September 10, 2018), and is also regulated by the NYSDFS.
USDC (USD Coin): USDC is similar to GUSD in the sense that it was also developed by a top crypto exchange (CoinBase). It’s also backed by USD. USDC is a core component of Circle, a platform for individuals and organizations to deploy financial services and products with the help of the blockchain.
DAI: A non-fiat-backed stablecoin built by MakerDAO, also acting as a payment vehicle for its collateralized debt position (CDP) platform.
How to Keep Up with the Latest Stablecoin Insights
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