Stablecoins: A Guide to Crypto Stability
Cryptocurrencies have gotten a reputation for being the most volatile asset class. Even ‘blue chip’ coins like Bitcoin and Ethereum are not exempt from fast-acting price changes.
Is it possible to enjoy the benefits of crypto without the rollercoaster ride? Enter stablecoins. These digital assets offer a haven of stability in the often-turbulent crypto seas, and they’re rapidly changing how we think about digital finance.
What Are Stablecoins?
Imagine a cryptocurrency that’s pegged to a stable asset, like the US dollar, the Euro, or even gold. That’s a stablecoin in a nutshell. Unlike Bitcoin, Ethereum, or other altcoins, which can fluctuate in value, stablecoins aim to maintain a consistent price. This makes them ideal for everyday transactions, cross-border payments, and accessing decentralised finance (DeFi) applications.
Types of Stablecoins
Stablecoins maintain their stability through different mechanisms. These are the different types of stablecoins, and what they do:
Fiat-collateralised
These stablecoins maintain their peg by holding an equivalent amount of fiat currency in reserve. For example, every Tether (USDT) in circulation is supposedly backed by one US dollar held by Tether Limited.
Crypto-collateralised
These stablecoins are backed by reserves of other cryptocurrencies. To account for the volatility of crypto, they are often over-collateralised. For instance, DAI is backed by a mix of cryptocurrencies like Ethereum, which are held in smart contracts.
Algorithmic
These stablecoins rely on algorithms and smart contracts to manage their supply and maintain price stability. They don’t rely on collateral but use mechanisms like minting and burning tokens to adjust to market demand.
How These Stablecoin Types Work, Explained
Fiat-collateralised
These stablecoins maintain their peg by holding an equivalent amount of fiat currency in reserve. For example, every Tether (USDT) in circulation is supposedly backed by one US dollar held by Tether Limited.
Crypto-collateralised
These stablecoins are backed by reserves of other cryptocurrencies. To account for the volatility of crypto, they are often over-collateralised. For instance, DAI is backed by a mix of cryptocurrencies like Ethereum, which are held in smart contracts.
Algorithmic
These stablecoins rely on algorithms and smart contracts to manage their supply and maintain price stability. They don’t rely on collateral but use mechanisms like minting and burning tokens to adjust to market demand.
What’s the Difference Between Stablecoins and Bitcoin?
Unlike stablecoins, Bitcoin isn’t pegged to an underlying asset like the US dollar or gold. They serve different purposes.
- Purpose: Bitcoin was designed as a decentralised digital currency, a store of value, and a medium of exchange. Stablecoins primarily focus on facilitating transactions, providing access to DeFi services, and offering a stable alternative to volatile cryptocurrencies.
- Volatility: Bitcoin and other non-stablecoins are known for their price volatility, which can make it a risky investment and less suitable for everyday transactions. Stablecoins, on the other hand, attempt to maintain price stability, making them more practical for real-world payments and other use cases.
- Underlying asset: Bitcoin’s value is determined by the Web3 and crypto market’s supply and demand. Stablecoins derive their value from an underlying asset, such as a fiat currency or another cryptocurrency.
Advantages of Stablecoins
Stablecoin users would be hard-pressed to find all-time highs, but they do enjoy certain advantages in both the Web2 and Web3 spaces.
- Relative stability: Price fluctuations or sudden price dips as seen with non-stablecoins and meme coins would no longer be top of mind, as stablecoins offer a predictable store of value
- Faster and cheaper transactions: Compared to traditional banking systems, stablecoin transactions are often faster and have lower fees
- Increased accessibility: Stablecoins can provide access to financial services for people who are unbanked or underbanked
- DeFi applications: Stablecoins are essential for participating in decentralised finance, allowing users to unlock more value with their digital assets rather than just HODLing them
How Stablecoins Are Bringing Web3 to Finance and Payments
Stablecoins are quickly moving beyond the realm of theory and into real-world applications.
Payment Integration
Major players like Visa and PayPal have already embraced stablecoins. Visa, for example, has partnered with Crypto.com to settle transactions using USDC, demonstrating the growing acceptance of stablecoins in traditional finance.
Cross-Border Transactions
Stablecoins are streamlining cross-border payments, offering a faster and more cost-effective alternative to traditional remittance services. Companies like Stellar and Ripple are leveraging blockchain technology and stablecoins to facilitate seamless international transfers.
Real-World Purchases
You can increasingly use stablecoins to buy everyday goods and services. Platforms like BitPay and Flexa enable merchants to accept stablecoin payments, and Southeast Asia’s ride-hailing giant Grab has also enabled users to top up their wallets with USDT and UDSC, among other crypto choices.
Decentralised Finance (DeFi)
Stablecoins are the backbone of the DeFi ecosystem, powering lending platforms like Aave and Compound, where users can earn interest or borrow against their crypto holdings.
Conclusion
Mega corporations in the finance and tech industries are signaling their readiness with stablecoin payments. This leaves the option on the table for mass public consumers to ease into the world of Web3, beyond just crypto trading or staking.
With that said, stablecoins are not perfect. Under the hood of flashy profits and the temptation of borderless convenience, the history books have spelled stablecoins’ controversies—USDT was notoriously depegged from the dollar in 2022, and lawmakers have bemoaned that stablecoins’ peg to stable assets is not always convincing.
If stablecoins can continue to win over trust, this time from the regular Joes and Janes on the street, it could prove to leave traditional financial systems in the dust.
While stablecoins offer a myriad of use cases, their role in decentralised finance (DeFi) is particularly noteworthy. DeFi platforms allow users to lend, borrow, and swap crypto assets without intermediaries, and stablecoins are often the preferred currency for these transactions due to their stability.
One such platform is AwakenSwap, a decentralised exchange (DEX) built on the aelf blockchain. aelf is a high-performance, multi-chain network designed to support a wide range of decentralised applications. By leveraging aelf’s robust infrastructure, AwakenSwap provides an efficient environment for users to swap between supported cryptocurrencies, including stablecoins like USDC and USDT.
*Disclaimer: The information provided on this blog does not constitute investment advice, financial advice, trading advice, or any other form of professional advice. aelf makes no guarantees or warranties about the accuracy, completeness, or timeliness of the information on this blog. You should not make any investment decisions based solely on the information provided on this blog. You should always consult with a qualified financial or legal advisor before making any investment decisions.
About aelf
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aelf facilitates the building, integrating, and deploying of smart contracts and decentralised apps (dApps) on its Layer 1 blockchain with its native C# software development kit (SDK) and SDKs in other languages, including Java, JS, Python, and Go. aelf’s ecosystem also houses a range of dApps to support a flourishing blockchain network. aelf is committed to fostering innovation within its ecosystem and remains dedicated to driving the development of Web3, blockchain and the adoption of AI technology.
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