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Stablecoins are a class of cryptocurrencies that have a constant value over time. They represent a market cap of $154 billion as of today which is ~7% of the total ecosystem. Curiously though, they contribute more than 80% of all crypto transactional volume on a daily basis. In this article we do a brief introduction to stablecoins and why they are becoming an integral part of the cryptocurrency world everyday.
Stablecoins: an introduction
Stablecoins are cryptocurrencies that are essentially pegged to fiat currencies, especially the US dollar. Its issuers maintain their value constant through either of the two mechanisms: 1) collateralization (asset backing in real world) and/or 2) algorithmic (through the use of smart contracts). Stablecoins play an important role in bridging the gap between traditional finance and decentralized finance as they represent the closest counterpart to a legacy currency like USD, EUR, INR etc.
Understanding their use cases
The primary use case of stablecoins is during transactions. Crypto investors have faced hassle in repeatedly converting their countryâ€™s currency into the blockchain ecosystem. Transactional delays, conversion fees etc have plagued them over the years. Hence, slowly, they have started preferring a bulk conversion to stablecoins to circumvent the issue.
Some traders convert their profits into stablecoins and wait for a dip in the market to buy more crypto. So, the non-volatile nature of stablecoins in a volatile crypto market have made them a key instrument for investors and traders alike. Another feature that favours usage of stablecoins is the ability to transfer them between crypto exchanges. Stablecoins also represent an easy way to transfer value in cross-border transactions with minimal blockchain fees.
Controversies and regulation
Although stablecoins are on the blockchain, there are concerns about what is actually backing them. If they are not fully backed by assets such as dollars, gold etc, they can lead to systemic risk given no Government can control their supply which is theoretically unlimited. For example, Tether, a US dollar pegged coin with more than $78 billion market cap, is under investigation in the US on how it is backed by assets.
Given the enormous growth in market cap of stablecoins, their supply dynamics often impact the price of cryptocurrencies directly. More stablecoins in the system leads to higher transactional volumes and higher prices. Also, the untrackable nature of cross-border transactions lead to issues around terror financing and money laundering.
One way to sidestep this issue is through issuance of Central Bank Digital Currencies (CBDCs) that are controlled by individual Governments. RBI in India is reportedly planning to introduce a digital rupee that can be considered as a stablecoin.
The growth of stablecoins over the years have been phenomenal - from a value of around $1 billion in 2018 to more than $160 billion today. Overall, stablecoins have addressed a large need gap in the crypto transactional market and are set to grow further as adoption and demand surges. However, their issuers may be subject to regulatory oversight in the near future which will pave the way for a more robust issuance and usage of these stablecoins.
The author is CEO & co-founder of Giottus Cryptocurrency Exchange
This article was authored by Giottus Cryptocurrency Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.