Stablecoins are cryptocurrencies with a perceived fixed price and pegged by 1-1 with the US dollar. The stability is achieved by depositing equivalent fiat of stablecoin minted. In theory, a stablecoin should help things run smoothly on the blockchain. In practice, however, controversy and debate have dogged this subject. Some critics say stablecoins are too speculative and will not stabilize, while others tout their use and potential as game-changers in the cryptocurrency space. Starting with developing the first stablecoin Tether (USDT) in 2014, this segment of stable cryptocurrencies has come a long way. Neverthless, there are many questions still hovers over the future of Stablecoins? Are they the next game-changer in crypto space?
A Brief History of Stablecoins
Cryptocurrency is one of the most revolutionary use cases of blockchain technology. Since bitcoin has risen to prominence, crypto adoption has grown multifold around the globe. Although the crypto supporters claim Bitcoin to be future money that can replace or overtake the existing financial system, the cryptocurrency suffers great volatility, making it unsuitable for storing value.
Stablecoins were born to solve the inherent price fluctuation issues of cryptocurrencies. In contrast to the high fluctuation of Bitcoin, stablecoins were developed to retain a certain value despite ongoing changes in the crypto market and oscillation in demand and supply. Furthermore, these coins were invented to curb the significant issue accompanied by fiat inflation.
As per the whitepaper of 1st and top stablecoins USDT, stablecoins can help eliminate the requirement of a third party, i.e., banks, in case of fiat while ensuring all features a fiat currency can offer mainly its stability.
“Each Tether issued into circulation will be backed in a onetoone ratio with the equivalent amount of corresponding fiat currency held in reserves by Hong Kong-based Tether Limited. As the custodian of the backing asset, we act as a trusted third party responsible for that asset. This risk is mitigated by a simple implementation that collectively reduces the complexity of conducting both fiat and crypto audits while increasing the security, provability, and transparency of these audits. “
Advent of Stablecoins as a Store of Value
Until the arrival of stablecoins, crypto traders had no option except to trade in two cryptocurrencies as a direct trade in fiat currency was scarce. It created a dependency on fiat currency, and users could not use a cryptocurrency as a store of value due to high uncertainty in their price change. Stablecoins have solved this complex problem by bringing a cryptocurrency that mirrors the fiat. Now crypto users can convert their cryptocurrencies to stablecoins and make their investment immune to the fluctuation of the market without taking shelter of fiat.
Soaring Popularity of Stablecoins
Stablecoins were not initially attracted by users as they did not have anything beneficial to add to the crypto space. However, with growing complexities involved with fiat in crypto, stablecoins are becoming a safe haven for crypto users.
The total market cap of stablecoins increased multifold over the course of the year 2021. As per Coinmarketcap data, the total market cap of the top 10 stablecoins was around $30 billion in January 2021. These numbers were raised more than 100% over the course of 1 year and reached an estimated 131 billion US dollars by January 2022. The question is obvious what drove this massive surge in demand for stablecoins? The most appropriate answer is stablecoins distinct feature of retaining value amid wildly fluctuating market and increased crypto adoption throughout the world. Yet, this question is one of the hotly debated topics.
Is Decentralization of Stablecoins a Myth?
Decentralization is another vital facet of stablecoins brought it in scrutiny by the government bodies. New York attorney general and Tether(USDT) case is one popular legal case revolving around the inside working of a stablecoin. According to CNBC New York attorney general office was investigated an alleged cover-up of $850 million of losses by Tether. However, the case was settled without reaching a conclusion by paying an $18.5 million fine to the New York attorney general’s office.
The company Tether was accused of not holding any reserves to back its claimed dollar-tied stablecoin USDT. That sparked a question: Is Tether minting USDT out of thin air, just like another cryptocurrency with no real-world value except its perceived value?
Despite all the claims of maintaining transparency and ongoing third-party audit over the reserve of USD equal to USDT in circulation, this case raises a red flag over the true decentralization and future of Stablecoins.
Future of Stablecoins and How it can disrupt conventional banking?
A massive inclination towards stablecoins has been witnessed recently, specifically in USDT, after the Russia Ukraine military conflict has driven its volume to more than 3X of top cryptocurrency Bitcoin. Also, it has driven it to be one of the trending topics around the globe. Most of the users are perceiving Stablecoins as seemingly a promising investment to avoid the declining value of fiat.
Another important aspect of stablecoins is their lucrative return on staking. While the ROI on staking stablecoins reach up to 7%, they solve a major issue of permanent value in staking other cryptocurrencies whose price are subject to market volatility.
Along with an incredible medium of investment, stablecoins have the potential to create a payment ecosystem that is entirely decentralized, trustless, and immune to the fluctuation of price. In other words, a financial system that mirrors the real world simultaneously maintains an entirely transparent and decentralized approach.
Despite its incredible advantages over a fiat currency, the future of Stablecoins are still uncertain. the lack of a proper regulatory framework is a formidable obstacle in the penetration of Stablecoins in real-world finance systems. Global backlash on Facebook’s own coin Libra demonstrates the fear of centralized entities and the potential of Stablecoins to shake the foundation of the government-owned banking system.
Gargi Sinha is working as Senior Journalist at Confea. She has completed her Masters in Journalism from Delhi University. She has interest in crypto and blockchain technology.