Stablecoins: The Evolution Beyond Bitcoin

The world has followed the development of cryptocurrencies in the last ten years in a blend of excitement, confusion, and amazement. Bitcoin, the first of its kind, showed us the potential of decentralized money — a money system that operates beyond the control of central banks and institutions. As the price of Bitcoin climbed and plummeted in jaw-dropping fluctuations, one issue became evident: we required something more stable and practical to use in our day-to-day lives.

Enter Stablecoins — a more low-key but perhaps even more groundbreaking innovation in the world of digital currencies. These virtual currencies don't capture the headlines like Bitcoin, but they are quietly reshaping the way we conceptualise money, payments, and international finance.

Understanding the Basics: What is a Stablecoin?

In essence, a Stablecoin is a cryptocurrency that strives to stay stable in value over the long term. Whereas Bitcoin could increase or plummet by double-digit figures in a day, a stablecoin seeks to keep a constant value, typically by being “pegged” to a traditional asset such as the US Dollar, Euro, or even gold.

For instance, if it is a dollar-pegged stablecoin, one coin of this type will always be worth about USD 1, regardless of what is occurring in the market.

Stable Coin Meaning in Simple Terms

Imagine you're doing some online shopping. Would you want to pay in a currency that could double or half in value before your order even ships? That's something that's faced by both Bitcoin and many other cryptocurrencies in day-to-day use.

Now imagine a digital coin that maintains its value — a digital dollar, so to speak. That's the value guarantee of a Stablecoin: the ingenuity of crypto without the roller-coaster price volatility.

                                                                          Fig: What is a stablecoin?
                          Source: https://wallstreetmojo-files.s3.ap-south-1.amazonaws.com/2023/04/Stable-Coin-1.png 

Why Stablecoins were Born: The Problem of Volatility

Bitcoin and other cryptocurrencies were loved for being decentralised and borderless, but the price volatility has made them useless in a practical sense for the average transactional use case. This pizza that's worth 0.001 BTC one day could cost 0.002 tomorrow — or 0.0005, for that matter. Such price volatility excites investors but will frustrate users and merchants.

Stablecoins were developed to address precisely this issue. They introduce trust and predictability to a virtual setting, providing a haven to traders, a practical currency to users, and a useful business tool.

A Peek at the Stablecoin List: Who’s Who in the Stablecoin World

The market today is saturated with different varieties of Stablecoins, each one of them having its own characteristics, use, and backing system. Some of the major stablecoins that control the economy in the cryptocurrency market today include:

• USDT (Tether): It is the world's most popular stablecoin. Pegs to the US Dollar.
• USDC (Circle Stablecoin): It is renowned for being transparent and having regulated reserves, and is offered by Circle and Coinbase.
• BUSD (Binance Stablecoin): Stablecoin launched by Binance, backed by American banks.
• DAI: A Decentralized Stablecoin supported by other cryptocurrencies and not fiat.
• Paxos (PAX): Regulated in the U.S. and pegged to the USD with high transparency.

These are only a couple of examples of the numerous stablecoins, including ones that serve specific use cases and different customers.

How Stablecoins Actually Stay Stable

Stability isn’t automatic — it’s engineered through smart financial design. Here’s how:

• Fiat-backed Stablecoins: These are backed 1:1 by real assets like USD held in bank reserves. For example, the USDC holds one dollar for every coin it issues.
• Crypto-collateralised Stablecoins: These are backed by other cryptocurrencies. For instance, DAI is secured by Ethereum and other crypto assets.
• Algorithmic Stablecoins: These don’t rely on collateral at all. Instead, they use complex algorithms to manage supply and demand, increasing or reducing the number of coins in circulation to keep prices steady. However, as seen with the UST crypto crash, this model is riskier and still evolving.

                                                                            Fig. How stablecoin created
                                                     Source: https://www.solulab.com/how-to-create-a-stablecoin/ 

Why Stablecoins are Transforming Business and Finance?

• Stablecoins are revolutionising business operations and financial access:
  • Faster, Cheaper Payments: Stablecoins act as instant, low-fee transactions without intermediaries. Example: A freelancer in Kenya can receive USDC payments from a company in Germany.
  • Cost Efficiency: Stablecoins help reduce costs in e-commerce, logistics, and payroll by eliminating traditional banking fees.
  • Stability in Unstable Markets: Stablecoins provide a reliable store of value, helping businesses manage inflation and currency fluctuations.
  • Modern Financial Solution: A more efficient, cost-effective alternative to traditional banking systems.
• Stablecoins also play a vital role in financial inclusion:
  • Access Without Banks: Individuals in underbanked areas can use stablecoins through phones and the internet.
  • Inflation Protection: Preservation of value in nations with unstable currencies
  • Freedom From Capital Controls: Permit individuals in controlled economies to conduct their finances unfettered.
• In Decentralized Finance (DeFi), stablecoins are essential:
  • DeFi Infrastructure: Serves as the core currency for lending, borrowing, and trading without banks.
  • Smart Contracts: Power decentralized exchanges and liquidity pools, enabling 24/7 global access.

Governments and Regulation

• Increasing Government Interest: With the increased use of Stablecoins, governments are concerned about consumer protection, reserve disclosure, and systemic risk.
• Impact on National Monetary Policy: Regulators are worried about the potential implications of privately issued stablecoins, such as USDC and Tether, on national currencies and monetary policy.
• Issuer Compliance: Issuers of stablecoins like Circle's USDC and Paxos are striving hard to become more compliant, get audited, and stay in touch with regulators to address concerns in a transparent manner.
• Central Bank Digital Currencies (CBDCs): Various governments are mulling CBDCs (Central Bank Digital Currencies) that borrow the stability of stablecoins, hoping to achieve the same stability but backed by official government support.
• Innovation and Flexibility: Although stablecoins promote governmental guarantees, they propel financial innovation, expanding the frontiers of digital finance, characterized by flexibility and decentralized opportunities.

Future Ahead & Conclusion

Stablecoins will fuel the next generation of finance. We will witness coins associated with more currencies, stringent regulations to increase trust, and wider use in sectors such as e-commerce, salaries, and cross-border payments. Above all, stablecoins can provide millions of individuals lacking banking accounts in developing markets with financial inclusion. Where Bitcoin ignited the crypto revolution, stablecoins are quietly shaping its future. 

By marrying the convenience of the speed of the blockchain and the security of price stability, Stablecoins are making digital currencies usable, available, and practical. As more people adopt it, Stablecoins could serve as the basis of a more inclusive and more efficient global financial system.