Introduction: Why Stablecoins Matter

Crypto is exciting, don’t get me wrong but come on, it is also exhausting. Today your portfolio is untouched, tomorrow you’ve got a loss that never would’ve come your way. That’s the nature of the beast: volatility.

 

They exist to offer some relief from all that volatility. They’re the stabilizing middle ground in a market built on frantic swings. Billions of dollars daily transact over them. Not because they’re flashy, they’re pragmatic. They’re the “cash” of crypto which is omnipresent, there to trade, send, or just do nothing as everything else goes south.

 

In order to be even remotely capable of comprehension around crypto on the most basic level, you need to understand stablecoins. They’re broken, they’re baseline that this whole market is working off.

What is Stablecoin?

Essentially, a stablecoin is a type of digital currency that is anchored to something stable, most reliably the United States dollar. It is the premise that 1 USDC = $1 USD.

 

That is the promise that stablecoins draw their strength. Instead of being regularly tossed back and forth between risky crypto and slow, expensive banks, investors can keep their money in USDT, YSDC, or DAI and move on.

 

Bland stablecoins, yes, but needed. Without them, the crypto environment would be no kinder than a chipless casino which is a frantic and inhospitable environment.

Why Do We Have Stablecoins?

It was created because volatility would make crypto almost unusable as money. Bitcoin is great as digital gold, but would your pay or your rent increasing 15% tomorrow be very desirable? Not very.

 

They also solved some practical problems:

 

  • Trading Pairs: No longer do they trade all their commodities in Bitcoin, instead they now trade all their commodities in USDT or USDC as base currency.
  • Cross -border payments: Cross-border payments are faster and more affordable when payments are processed using stablecoins than banks.
  • Market Shelter: At the time the market crashes, stablecoins provide a storm shelter. Traders shift assets into them to wait for the storm to pass.

 

It wasn’t exactly that the stablecoins themselves were a bright idea, so much as they were needed. Entire exchanges, as well as DeFi protocols, use them daily. Liquidity within the crypto market would cease to be very quickly without stablecoins.

Types of Stablecoins

Fiat-Backed Stablecoins

These are the ones that firms that purpose to have dollars in reserve issue. USDT and USDC are the biggest players here. They’re easy and very liquid, but centralized and you’re trusting some company not to skimp.

Crypto-Backed Stablecoins

DAI is the most well-known. Rather than banks, users send their crypto such as ETH to create DAI. It's open, decentralized, but also dangerous. If ETH takes a nosedive too quickly, liquidations spin out of control.

Algorithmic Stablecoins

In theory, they use code and incentives to stay at $1 without collateral. In practice, the vast majority have lost. Terra’s UST was the most flashy instance and it looked wonderful until trust broke, whereupon it plummeted in days.

 

Each has a varying flaw. Fiat supported ones rely on human integrity. Crypto supported ones rely on fluctuating assets. Algorithmic ones rely on trust in a mechanism that may come undone quickly.

How Do Stablecoins Remain Pegged?

The peg is the magic trick but how it’s pulled off varies.

 

They are reserve-based currencies, reliant on audits. Decentralized ones like DAI employ overcollateralization, you put up $150 in ETH to create $100 in DAI, leaving room for a buffer.


Algorithmic ones employ arbitrage, making money for traders who purchase low or sell high until the price balances.

But the truth is that they only exist as long as all think they do. UST’s failure indicated that after the trust is lost, no mechanism holds the peg. Stablecoins are stable until they’re unstable.

Commonly Used Stablecoins and Application Scenarios

There are no two similar stablecoins:

 

  • USDT (Tether): World’s cryptocurrency trading workhorse. Staggering liquidity, although also plagued by issues about transparency. Despite this, people still do use it because it’s ubiquitous.
  • USDC (USD Coin): Controlled, regularly audited, and backed by Circle. It is the clean option used among institutions.
  • DAI (MakerDAO): Decentralized alternative, collateralized with crypto. A DeFi staple.
  • BUSD (Binance USD): Previously popular, regulators pushed it to phase itself out.

 

Your stablecoin is a reflection of your priorities. Do you care most about regulation, decentralization, or convenience? There is no perfect, only compromises.

Use Case of Stablecoins in DeFi

DeFi runs on stablecoins. Liquidity pools, borrowing platforms and even yield farming protocols. They provide the trader with a base currency that does not fluctuate like the rest of the market.

 

Want to borrow ETH without the need to sell your BTC? That will be through a stablecoin loan. Want to earn yield without sleeping on risky assets? You’ll stake stablecoins into a loan pool.

 

Without stablecoins, DeFi would not only slow down, it would likely implode.

Risks of Stablecoins

Here’s where human imperfection shows. Stablecoins sound solid, but cracks appear fast.

 

Tether has never been that fast to respond to reserve inquiries. Audits are scheduled, then delayed, yet the most traded coin is the USDT as a reflection of the importance that traders attribute to liquidity over safety.

 

DAI shuns back but depends on fluctuant collateral. As markets fall too fast, cascading liquidations erode stability. It’s not that the code fails, it’s that panic spreads.

 

And algorithmic coins? We already recall the end to that tale. Terra’s UST shifted overnight from stable to valueless, destroying billions.

 

Another threat is regulation. No country is pleased to see money leaving their shores. Rules would protect investors but would kill innovation. Too much regulation, and stablecoins would lose the very flexibility that had value in their existence.

 

Takeaway: Stablecoins minimize volatility, they don’t remove risk. They simply repackage it.

Legacy Fiat Currencies vs Stablecoins

Compared to traditional money, stablecoins feel almost too easy. Transfers that cost banks $30 settle for pennies. Payments that take days, clear in minutes. And while banks close on weekends, stablecoins move 24/7.

 

To the people of banking underdeveloped nations, they are something more than a convenience, they are a lifeline. In most places, stablecoins are already being used as parallel dollars, so citizens have access to savings in a currency that is stronger than their own.

 

Here too, there is the specter of human fallibility. Banks are slow and costly, yes, but they come with protection. Stablecoins are quick and cheap but if something goes wrong, you’re adrift.

Stablecoins and Regulation

We’re debating whether issuers like Circle must be licensed like banks. Then the EU’s MiCA regulation will impose strict standards. Others are experimenting with their own central bank digital currencies (CBDCs) to compete directly.

 

It’s an irony that cannot be avoided. Stablecoins were introduced as the alternative to banks, yet regulators would want to make them something that looks very much like banks. It’s freedom versus safety, and no one knows where the pendulum will swing.

The Stablecoins of the Future 

There are devs building cross chain stablecoins that slide seamlessly between chains. Others are tying them to tokenized off chain assets like U.S. Treasuries. As the adoption continues, stablecoins may be the catalyst that gets the next group of people into crypto. As much as optimism wavers or regulation stifles innovation and they may just as likely cause a catastrophe. Stablecoins are the market’s biggest blessing and biggest burden.

Conclusion: Stability in a Volatile World

Stablecoins make crypto work. They reduce volatility, energize DeFi, and offer traders a breath of fresh air. But do not mistake stability for safety. All the models come with flaws, be it centralization, collateral, or market rust.

 

It’s about knowing what you’re holding, who is behind it, and what exactly you’re taking a risk on. Stablecoins are the lifesaver in the storm, yet they’re also the trap if you don’t forget that human fallibility is always part of the deal. Rules of survival first. Stablecoins assist here, provided they’re used judiciously.

 

This article is contributed by an external writer: Razel Jade Hijastro.

 

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