The use of stablecoins has increased significantly over the last five years. Much of this growth can be attributed to the market expansion and the introduction of new projects. Today, the stablecoin market operates as a vital component of the crypto sphere. Notably, there are currently over 70 active stablecoins in the market.
What are Stablecoins?
Stablecoins play a vital role in providing a safe haven from volatility. These non-speculative assets reduce volatility by pegging their value to an underlying asset. Pegged assets can range from fiat currencies, all the way to other cryptos, and everything in between.
Many investors are surprised to learn that the concept of a stablecoin has been around since 2014. It was first introduced by crypto legends Dan Larimer (EOS) and Charles Hoskinson (Cardano). It was at that time that the first stablecoin, BitUSD, was issued as a token on the BitShares blockchain.
Interestingly, these early stablecoins were pegged to other cryptocurrencies rather than to fiat currencies. Notably, BitUSD is still in operation today. However, it’s no longer a premier stablecoin project.
Benefits of Stablecoins
There are many reasons why investors prefer to deal with stablecoins. For one, they eliminate volatility. Market fluctuations are great for day traders but can be horrible for merchants and regular users. Stablecoins provide users exposure to the benefits of blockchain technology such as transparency and efficiency without exposing them to the volatility associated with many projects such as Bitcoin. Consequently, stablecoins help to promote blockchain adoption in new ways.
The introduction of stablecoins has improved the remittance sector considerably. For many regions of the world, remittance payments can make up a large portion of a country’s GDP. By sending funding internationally utilizing a stablecoin, these users can save on fees.
Stablecoins also play a vital role in corporate accounting procedures. For businesses seeking to conduct crypto transactions, stablecoins provide an easy way to accomplish this task. In comparison, the volatility of cryptocurrencies like Bitcoin could make it difficult to determine the overall value of a transaction.
Types of Stablecoins
As you could imagine, a lot has changed since the introduction of stablecoin in 2014. Today, there are all types of stablecoin in use in the market. You can find stablecoins pegged to fiat currency, a combination (basket) of currencies, gold, diamonds, cryptos, and more. Here are the three types of stablecoins most prevalent in the market today.
Collateralized off-chain stablecoins are by far the most popular of these token types. These coins are usually backed by fiat currency such as the USD. Notably, Tether (USDT) was the first collateralized stablecoin to gain traction in the market. When this token arrived on Bitfinex in 2015, it changed everything.
Tether was unique in that it was backed by the USD on a 1:1 basis. To ensure there backing, the platform conducted third-party audits. By April 2021, Tether had topped a market cap of $50 billion. It also started a fiat-stablecoin revolution. Today, projects like Facebook’s Libra and the Gemini Dollar borrow heavily from the original Tether concept.
In the same category are commodity-collateralized stablecoins. These are stablecoins that are pegged to commodities such as gold, diamonds, oil, and more. In many instances, these coins are backed by more than just physical gold. These coins can also be backed by the gold mine and all of the equipment used to extract the precious metal from the earth.
Some top-performing commodity-collateralized stablecoins include Digix Gold (DGD) and TetherGold. Both of these projects keep a corresponding amount of gold and assets to support the value of their token. Notably, over the last few years, some more advanced gold-backed stablecoins have entered the market.
One such project is the META 1 Coin. This coin combines the security of gold-backing with a self-appreciation mechanism. Through the use of an elastic monetary supply and advanced algorithms, the META 1 Coin is able to provide users with more ROIs when compared to earlier projects.
Uniquely, the coin integrates a value control system that prevents token holders from selling their tokens for under the current asset value. Additionally, the transparent nature of the project ensures that users are always in the loop regarding the project’s backing ratio and more.
The second type of stablecoin commonly found in the market today is collateralized on-chain projects. These are stablecoins that are backed by other cryptocurrencies. In most cases, Ethereum is used as the pegged asset. This style of stablecoin brings some advantages in that everything is handled on the blockchain.
Primarily, you don’t need to store an asset physically, which reduced the overhead for the project. Also, there is no centralization in this stablecoin. In comparison, projects like Tether have run into issues regarding a lack of transparency. One of the most popular collateralized on-chain stablecoins today is Dao’s DAI token.
The final stablecoin is what’s known as a non-collateralized stablecoin. These tokens leverage complex algorithms and smart contracts to retain value. This concept was first introduced way back in 2014 by Robert Sams. He proposed this style of token via his Seigniorage Shares papers. This approach was unique because the system would automatically monitor an asset such as USD and then adjust the token’s supply until it met the value required.
This style of stablecoin has some major advantages. For one, the entire stabilization process is conducted on-chain. This approach provides full transparency for network users. As such, this stablecoin is the most decentralized option available. Notably, the META 1 Coin combines this strategy with commodity-backed systems to create a more advanced alternative in the market.
Stablecoins – A Core Component of the Decentralized Economy
It would be hard to imagine the cryptomarket without stablecoins today. These tokens are vital for traders and businesses seeking a more streamlined entrance into the market. Additionally, the introduction of new and exciting hybrid coins like META1 continues to drive more users to these unique digital assets. As such, you can expect stablecoins to remain a vital part of the crypto ecosystem for the foreseeable future.