The Latest Developments on Stablecoins

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Anyone who is in the crypto space would have heard of ‘stablecoins’. But if you would like an in-depth understanding of what stablecoins are and how they are relevant, this is the article for you. We know that stablecoins are a type of cryptocurrency. In other words, you can consider them a subset of cryptocurrencies. Read along as we explore how they work, and why they can be beneficial in this article.

Despite the ongoing bear market, we have seen cryptocurrencies offer higher ROIs than other asset classes. Maybe this is why many investors are forgoing other traditional investment options. Since the crypto market never stops, it is highly likely that their values rise and fall within a few seconds. Given this high volatility, many crypto investors are considering investing in stablecoins like Tether (USDT), USD Coin (USDC), and others.

What are Stablecoins?

By definition, ‘Stablecoins are cryptocurrencies where the price is designed to be pegged to a cryptocurrency, fiat money, or to exchange-traded commodities (such as precious metals or industrial metals)’, as per Wikipedia.

A majority of the prominent stablecoins are basically tokens based on the Ethereum blockchain. They are safe to invest in since their prices rarely fluctuate. Even their fluctuation is capped at approximately 2%. Hence, investors wanting to explore the crypto market may take advantage of stablecoins.

The Need for Stablecoins

Early crypto investors expressed a need for easy convertibility from fiat to cryptocurrency, which paved the way for a digital currency that would remain stable and provide ease of exchange. This resulted in Tether introducing the first stablecoin – USDT in 2014, which was designed with the intention of utilizing fiat currencies in a digital manner.

Stablecoins are mostly used to buy or sell cryptocurrency easily, thereby avoiding the need to use fiat currencies. Investors may benefit from trading their cryptocurrencies for stablecoins in case of falling prices, thereby maintaining their portfolio without incurring any losses. They are also a trustworthy way for crypto investors to stay put in the crypto market at a lower risk. This makes them a viable option for crypto payments.

How do Stablecoins Work?

Stablecoins work like any other cryptocurrency. They exist on a blockchain and can be traded from one digital wallet to another. But this is why the similarity ends. Unlike other cryptocurrencies, stablecoins are actually backed by a ratio of 1:1 to other assets. These backed assets can be fiat currencies like the US Dollar, the Euro, legal bonds, or even commodities traded on exchanges.

In order to maintain a comparatively stable value, stablecoins employ a number of mechanisms. Pegging the stablecoin to a particular asset or group of assets, like the US dollar, is one of the most popular mechanisms. As an illustration, to guarantee that each stablecoin can be exchanged for its equivalent value in US dollars at any time, the issuer may keep one dollar in a reserve account for each stablecoin it issues. This is also called a collateralized stablecoin.

Algorithmic stability is another mechanism that stablecoins use. It entails using smart contracts and other algorithms to modify the supply of stablecoins in accordance with market demand. The smart contract may create new stablecoins to increase the supply and bring the price back down if the stablecoin’s price exceeds its pegged value. The smart contract may burn existing stablecoins to reduce supply and raise the price if the price drops below its pegged value.

Additionally, stablecoins may be backed by other cryptocurrencies or goods like gold, silver, or oil. The backing asset gives the stablecoin’s value stability because it has a less volatile price than other cryptocurrencies.

Types of Stablecoins

Based on the type of backing, cryptocurrencies can be divided into four broad categories:

  1. Fiat-Backed Stablecoins: These stablecoins have a 1:1 relationship with real-world currencies like the US dollar or the euro. The stablecoin’s issuer keeps the equivalent sum of the fiat money in a reserve account, ensuring that the stablecoin can always be redeemed for the equivalent amount of fiat money.

  2. Commodity-backed Stablecoins: These stablecoins are supported by precious metals, real estate, or other commodities like gold. The stablecoin is backed by a supply of the commodity, and its value is correlated with that of the commodity.

  3. Crypto-Backed Stablecoins: To guarantee their stability, these stablecoins use one or more cryptocurrencies as collateral. In order to issue the stablecoin, a reserve of cryptocurrencies, like Bitcoin or Ethereum, is used as collateral. The collateral is sold in order to keep the stablecoin stable in the event that its value falls below a specific level.

  4. Algorithmic Stablecoins: These stablecoins use algorithms to manage their supply and achieve market stability. To maintain a stable price, the algorithm modifies the stablecoin’s supply based on market demand. The algorithm may create new stablecoins to increase the supply and bring the price back down if the stablecoin price exceeds its pegged value. Existing stablecoins may be burned by the algorithm to reduce supply and raise the price if the price drops below its pegged value.

Advantages of Stablecoins

Using stablecoins has the following advantages:

  1. Low volatility – As mentioned, because its underlying assets are stable and limit price fluctuations, this type of coin is less volatile than other cryptocurrencies.

  2. Increased transparency – Users can more easily track and trace transactions with cryptocurrencies than with traditional currencies, which are decentralized networks bound to particular governmental systems.

  3. Reduced risk – Because there is less reliance on centralized governments or banks to regulate them, there is significantly less chance of losing money as a result of loan defaults or poor financial management.

Latest Developments

Here is a chart for market cap of the five largest stablecoins as compared to others. Tether (USDT) and USD Coin (USDC) lead the stablecoin market by both, capitalization and trading volume.


Figures have been obtained at the time of this writing from CoinGecko.

Binance USD (BUSD) takes the third spot, while Dai (DAI) and TrueUSD (TUSD) round up the top five. It is worth noting that Terra USD (UST), was among the top five before it lost its peg and collapsed immediately after Luna crashed. Various factors contributed to the decline in its value, along with the fact that the stablecoin had not been collateralized.

Between the period February 2nd 2023 to March 3rd, 2023, these are the changes noticed within the top five stablecoins –
BUSD faced regulatory troubles last month after Paxos stopped minting new BUSD. This was followed by a drop in its trading volume.

Below are the other developments in the field of stablecoins:

  1. As stablecoins gain popularity and adoption, regulators are keeping a closer eye on any potential effects they may have on monetary stability and consumer safety. To address these issues, a number of nations, including the US, have suggested or put into effect stablecoin regulations.

  2. Stablecoins are a crucial part of decentralized finance (DeFi) platforms, where they are utilized for everything from liquidity to lending and borrowing capabilities. DeFi platforms are seeing an increase in their adoption. The use and significance of stablecoins are probably going to grow as the DeFi ecosystem develops further.

  3. Several new stablecoins have been introduced recently. With these new services, users now have more options, and stablecoins are finding new applications.

  4. Stablecoins that can function seamlessly across multiple networks are becoming more and more necessary as multi-chain blockchain ecosystems take off. Cross-chain stablecoins, which can be used on different blockchains, are being developed by several projects.

To conclude, stablecoins are a significant advancement in the world of cryptocurrencies and blockchain technology, to sum up. They offer the stability and predictability necessary to build a strong and long-lasting ecosystem for digital assets. According to user demands and market conditions, the various stablecoin types—including fiat-backed, commodity-backed, crypto-backed, and algorithmic stablecoins—offer a variety of advantages and use cases. Stablecoins are gaining importance as a tool for securely and reliably facilitating transactions and investments as more and more organizations and individuals realize the potential of blockchain and cryptocurrencies.

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