Stablecoins: The Safe Haven Within Cryptoworld
Crypto investors are well versed with the volatility associated with the private virtual digital assets (VDAs), popularly called as cryptocurrencies. Since the day of Luna debacle, the FTX implosion and to the latest collapse of the crypto focused banks in the U.S., the VDA system that was built on decentralised financing (DeFi) as well as, sans central bank monitoring or the involvement of government authority, is undergoing tectonic changes.
In one such case, investors are seen flocking to the stablecoins, tha are seen as providing a predictable haven within the volatile world of cryptocurrency, but they haven’t always been as stable as the name promises.
This situation was created by the regulatory moves concerning Paxos, the Binance’s dollar-pegged stablecoin BUSD, and the subsequent forcing payment giant PayPal to pause development on its own stablecoin.
Under the recent circumstances of trust deficit in the U.S. bank, the focus once again shifted to stablecoins. The biggest beneficiary this time around is Tether’s USDT stablecoin. The record inflow resulted in driving the token to reach its largest market share in 22 months.
Payment firm Circle’s USDC stablecoin, saw net outflows surpassing $10 billion since March 10 after the regulators shut down the firm’s banking partner Silicon Valley Bank. Many of the investors who fled USDC switched to USDT stablecoin.
Circle did manage to control the damage caused by SVB’s collapse, by re-establishing the dollar price peg it lost in the immediate aftermath. However, the token has lost 23% from its one-time $43 billion market capitalization, according to crypto price tracker CoinGecko. Binance’s BUSD token has also plummeted, among other stablecoins.
USDC’s plunge has come as a shocker for the stablecoinsector. The fate of digital dollar – which is nothing but the stablecoins – is been severely tested by banking sector uncertainties and increasing regulatory scrutiny. Stablecoinscan also be tied to any other fiat currency and other form of physical assets, such as gold.
The existence of stablecoins has made cryptocurrency more predictable. In fact they are designed to counter the volatility experienced by the crypto and, at the same time, provide a convenient way for crypto traders to preserve their fiat value without having to cash out of the market.
Further, the stablecoins also allow its users to pay for everyday goods and services in crypto without all the budgeting drama.
Stablecoins are nothing but cryptocurrencies minted on a blockchain. The users can buy, sell and trade on an exchange just like any other crypto coin.
People can store stablecoins in their hot wallets and/or cold storage devices like they would bitcoin or any altcoin.
The most popular stablecoin in the market are backed by fiat currency. USD coin (USDC), for instance, is fiat-backed and pegged to the U.S. dollar (USD) at a 1:1 ratio.
Other stablecoins are linked to the euro, the British pound, the Japanese yen and the Chinese RMB.
Similarly, cryptocurrencies backed by stablecoins, and without getting into meta, are pegged to the value of another more established cryptocurrency, such as MakerDAO, are very good examples.
It uses a smart contract – a type of self-executing, code-based contract – alongside the Ethereumblockchain to pool enough ether (ETH) to use as collateral for its stablecoin. Then, once the amount of collateral reaches a certain level in the smart contract, users can mint DAI – the MakerDAO stablecoin.
There are other stablecoins as well. The commodity-backed stablecoins, Algorithmic stablecoins etc.
Stablecoins are theoretically built to solve key problems that inhibit the exchange of money. With the use of crypto wallet they can be easily transferred between two different individuals. They can be from same country or some other nation. It basically, facilitates cross-border payment seamlessly.
It can also make peer-to-peer digital transfers possible without the need for third-party intermediaries to facilitate transactions.
Picking a right stablecoin from the group of more than 16,000 cryptocurrencies is a daunting task. Also, there’s a perpetual balance to keep in mind between centralization and decentralization, stability and freedom, regulation and permissionless-ness.
As mentioned earlier, the fiat-backed stablecoins, are the most popular because they are as stable as the U.S. dollar (USD) or other widely accepted currencies.
However, linking crypto to a federal currency makes fiat-backed cryptos a target for governmental regulation and overall more centralized – a certain trade-off when compared with algorithmic stablecoins, the most decentralized option.
There are several stablecoins that can serve the purpose. The USD-backed stablecoins (USDT and BUSD – to name a few) are backed by an exact 1:1 ratio of dollars to crypto.
Tether used to be set up where the dollar amount in reserves was identical to the amount of minted USDT.
USDC remains the second-largest stablecoin with a market capitalization of $33 billion. Circle backs the token’s value with short-term government bonds administered by investment management giant BlackRock and cash reserves at various U.S. banks.
After failures in the banking system, Circle has moved “substantially all” the cash to BNY Mellon, one of the world’s largest custodian bank, keeping “limited funds” at other partners, according to the firm.
Recent, turns of event saw most investors moving to Tether’s USDT, the largest stablecoin in the market, boosting its dominance to its highest level since May 2021.
USDT is a key piece of infrastructure of the crypto ecosystem and widely used for facilitating trading on exchanges.
You need to login in order to Like
