By Anuj Yadav
The crypto market is renowned for its wild volatility, which often becomes the roadblock to broader adoption of crypto & utilising its virtues. The investors need the best of both worlds i.e agile features of crypto and the stability of traditional finance. The concept of stablecoins forms a bridge between the crypto & fiat world as their value is linked/ pegged to more stable reference assets like other currencies, commodities, etc. Most cryptocurrencies are lucrative for traders & speculators due to their high volatility but they fail to become a risk-averse medium of exchange. Stablecoins are designed to reduce the volatility of crypto and to make them the store of value and digital money to facilitate day-to-day commerce/exchanges.
The first successful stablecoin, Tether launched in 2014 and the idea of stable digital currencies captured global attention. The popularity of stablecoins grew exponentially over the years and 2020 observed a booming growth in the stablecoin market. As per a recent estimate by CoinMarketCap, their market capitalization reached approximately $167 billion in May 2022 viz. approximately 3000% increase since the beginning of 2020. The strong fundamentals & potential innovative use cases of stablecoins made them an integral part of the crypto ecosystem and enhanced the adoption rate globally. Recently, many countries and their respective central banks are engaging in discussions to consider launching their own stablecoins. In Davos at WEF 2022 discussions, CBDC (Central Bank Digital Currencies) was among the main agendas of discussions on the crypto ecosystem.
The year 2022 started on a promising note with a 15% increase in the stablecoin market in the first quarter of the year but the catastrophic meltdown of the Terra Luna decided otherwise. Although the crash of Terra Luna lost billions from the market and raised questions over the stability of stablecoins, its failure pushed the market towards maturity. It helped in weeding out the existing bad actors in the crypto market & educating the investors. It highlighted the shortcomings of algorithmic stablecoins and raised awareness among investors about the fundamentals of stablecoins. Algorithmic stablecoins are not backed by any collaterals, they maintain their value pegged to fiat by using complex algorithms. These are not stable in the true essence as their price derives from the supply and demand of investors. However, all other collateralised stablecoins such as fiat-collateralized (eg. Tether- USDT), crypto-collateralised (eg. Makers DAO’s Dai- DAI), Commodity- collateralised (eg. Tether Gold- XAUT) stablecoins are stable & safe crypto investment options as they are always backed with the stable reference assets. They also conduct regular audits to ensure that their reserves are in line with the stablecoin circulation.
Stablecoins successfully retained the faith of investors and survived the crash due to its strong fundamentals. They are more than just investment instruments. Stablecoins have the potential to bring revolution to the payment industry by facilitating cross-border payments. Traditional methods take up to a few days to process the wire transfer and they also impose a heavy transaction fee on international transactions. Whereas stablecoins can make these payments quick & affordable for users by reducing the transaction time and fee significantly. Due to underlying potential various governments worldwide are exploring ways of integrating & regulating the stablecoins. Japan has recently passed a stablecoin bill for investor protection whereas there are ongoing discussions in regulatory bodies to bring a robust regulatory framework for stablecoins in the EU and countries like the UK and the US etc.
Gradually stablecoins have become an integral part of the crypto ecosystem and they are steadily rising in the market. There are more players entering into the stablecoin space which indicates the increased confidence of institutional investors in the idea of stable digital currencies. Recently Tether announced to launch of a new stablecoin (GBPT) pegged to the British pound and Shytoshi Kusama announced that the Shiba Inu community is also planning to launch their stablecoin.
The future of stablecoins seems promising but it certainly depends on the factors like regulatory policies & legal acceptance worldwide. The stablecoin market is still in the nascent stage, the rate of mass adoption in coming years will be the key factor to determine the fate of stablecoins.
The author is co-founder and CTO, Kassio