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Stablecoin is one of the factors contributing to the increasing adoption of cryptocurrencies around the world. Stablecoins are pegged to fiat currencies at a ratio of 1:1. Stablecoins represent 11% of the crypto market, and the most common stablecoins, which are USDT, USDC, and BUSD, have maintained track records of stability over time despite the failure of several algorithmic stablecoins.
Because stablecoin acts as a very important link between the traditional financial system and the crypto industry, it has been a major factor powering the expansion of the decentralized financial (DeFi) sector.
The Success of Stablecoin Over the Years
The stablecoin boom (together with the DeFi frenzy) occurred from 2020 to 2021, when the aggregate market cap climbed from less than $7 billion to more than $60 billion. Also, in March 2022, it surpassed the $180 billion price mark. This is an equivalent of 2,500% in just 2 years.
One main secret behind the success of stablecoins is their ability to bring the stability and liquidity of fiat currencies into the crypto space. The crypto market is notorious for its volatility. This ability of stablecoins makes them useful in various fields, such as payment, transactions across international borders, and remittances.
Although the dramatic collapse of some algorithmic stablecoins, like the Terra USD or UST, has negatively impacted the cryptocurrency market, stablecoins pegged to traditional currencies have proven themselves resilient in the face of the recent USDC crisis.
Advantages of Stablecoins
It greatly reduces the volatility, which is one major problem of the crypto industry.
It provides easy liquidity in the crypto market.
It bridges the divide between the traditional financial system and the crypto industry.
It offers faster and cheaper cross-border transactions compared to the traditional financial system.
Disadvantages of Stablecoins
Algorithm stablecoins rely on smart contracts to manage their pegged value. They are therefore susceptible to smart contract bugs, hacks, or market manipulations. The crash of Terra USD portrays how dramatically the market can collapse.
Fiat-collateralized stablecoins peg is prone to the control of centralized entities, this contradicts the decentralized principle of the cryptocurrency market.
The Fiat Currencies
Fiat currencies are issued by the government to serve as means of economy and settlement of debts. They are not backed by any valuable commodity. Rather, their value is based on the consensual agreement between the government and the people. Examples of fiat currencies include the US dollar, euro (EUR), Japanese yen, and many others. Fiat currency is the fuel behind the global economy. Governments operate through the central bank to issue and regulate fiat currencies.
In recent years, digital payment has been on the rise because of the ease and efficiency it offers, resulting in the decline of the use of physical cash. This is prompting central banks around the world to begin to shift their focus to the digitalization of fiat currencies. Central banks are exploring the development of Central Bank Digital Currencies (CBDCs). These CBDCs are inspired by stablecoins. So far in the world, 100 countries are exploring the possible benefits and features of CBDCs.
Stablecoins Vs Fiat Currencies
Stablecoins can be used by investors in a variety of ways to benefit from the distinctive opportunities provided by the crypto market.
Stablecoin serves as an entry point to the blockchain and as a link between the established financial system and cryptocurrencies.
They allow investors to alter their exposure to digital currencies like Bitcoin without interacting with the currency. This enables investors to speculate on cryptocurrency prices while taking advantage of stablecoins’ risk management advantages. Stablecoin has become a crucial part of the expanding decentralized finance ecosystem. Through the DeFi platforms, investors can access various financial services, which include lending and borrowing, without going through intermediaries such as banks. On such DeFi platforms that offer these services, investors can get a higher interest rate on the funds they lend out compared to a traditional saving account.
Could Stablecoin Become the Global Reserve Currencies?
The US dollar has enjoyed the status of being the global reserve currency since the Bretton Woods agreement in 1944 when 44 nations decided that foreign exchange should be centered around it. Initially, the US dollar was pegged to the value of gold, but it lost that in 1971 and since then its value has been based on consensus.
However, geopolitical changes around the world increase the possibility of the dethronement of the US dollar. We notice that Russia and
China are working towards that.
What then are the chances that stablecoin will replace the US dollar as the global reserve currency? This idea was popular around the peak of the success of Terra USD, but after its dramatic collapse, such an idea was silenced. Another possibility is that a CBDC will become the next global reserve.
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