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Stablecoins are the killer app of blockchain technology so far. 🚀
More than 120 Million Unique wallets have interacted with a stablecoin since their inception. 🤯
As you can see, the growth in this sector has been exponential, and most of it has occurred in just the last 3 years.
In 2019, the stablecoin total supply surpassed $1 Billion. Today, just 4 years later, we’re hovering just over $130 Billion. 💥
That is roughly 10% of the value of the entire crypto market.
But are stablecoins safe? 🤔
After all, $UST (Terra Luna’s stablecoin) went to 0, $USDC broke its peg, and there’s always FUD (fear, uncertainty and doubt) around Binance’s $BUSD and Tether’s $USDT.
Should we really be holding our savings in these financial instruments? Are stablecoins really that great?
Well, I believe that stablecoins are an incredible technological innovation and a really important component of the entire crypto space.
Yet, from my conversations with even those inside the web3 space, stablecoins are not well understood. 😕
If you live in the US, it’s likely that stablecoins don’t make much of an impact on your life. Yet, for billions of people worldwide, this technology is life-changing.
For that reason, in today's PRO Report, I’m going to dive into the importance of stablecoins, explain how stable these coins really are, and help you wrap your head around which ones to use and why.
Let’s dive in 👇
Why Are Stablecoins Such A Big Deal?
Bringing fiat currency to the blockchain? This is not what Satoshi Nakamoto dreamed up when he wrote the Bitcoin whitepaper.
Isn’t the idea of crypto to free ourselves from the traditional monetary system? To move away from inflating currencies, which centralized government institutions control?
Sure, that’s the end goal.
But, after we envision the future, when we come back to reality, we realize that we still live in a fiat-driven world. 🌍💰
We pay our taxes, purchase goods and services, take out loans, use credit cards, and earn income predominantly in fiat currency.
As bullish as I am on crypto, that isn’t changing any time soon.
💡Stablecoins are a technological innovation on fiat currency.
The fiat system is slow and expensive:
👉 It requires banks that charge fees to custody our fiat in a digital manner.
👉 It requires third-party services that charge fees, like Stripe or PayPal, to make payments.
👉 It requires expensive third-party services to exchange from one fiat currency to another.
To put it in context, one of our team members recently faced the inefficiencies of traditional banking when transferring money during the Easter holidays in Romania.
A sizable amount sent from his company account to his personal account took almost a week to process due to the bank's holiday schedule.
Furthermore, when he tried to transfer USD from a Romanian bank to a Lithuanian one, he was charged an exorbitant $20 fee.
These experiences showcase the slow, costly nature of cross-border transactions through conventional banking systems, even in the "developed" world.
Blockchains, and specifically stablecoins, fix this. ⛓️💪
By putting fiat currency on “crypto rails” (aka blockchain), we now have the ability to move fiat digital money peer-to-peer, anywhere in the world, instantly, for next to nothing. ⚡
For those living in the USA, Canada or Europe who use Venmo, PayPal or Wise, this isn’t THAT big of a deal. For billions of others worldwide, especially in places like South America, Africa and Asia, this is life-changing.
Whether it be sending money back to families in their home country, or fleeing hyperinflating currencies, stablecoins provide the perfect solution for many.
Furthermore, stablecoins are crucial for financial inclusion. 🏦
Billions of people globally are unbanked or underbanked, with limited access to traditional financial services.
Stablecoins provide them with an opportunity to store, transfer and even earn interest on their money without needing a traditional bank account.
Moreover, stablecoins act as a bridge between the world of traditional finance and the world of crypto and web3.
They make it easier for people to enter and exit crypto investments, and they serve as a safe haven during periods of high volatility in the crypto market.
In the previous crypto hype cycle, when investors wanted to sell their crypto investments, they actually had to move their value back into the fiat system, effectively exiting the crypto markets entirely.
With stablecoins, investors can now remain in the open and permissionless financial market while benefiting from the “stability” of dollars or other fiat currencies.
Now, let's explore the types of stablecoins and their importance within the crypto ecosystem. 🧐🔍
Types of Stablecoins and Their Importance
1. Fiat-collateralized stablecoins:
Backed by a reserve of fiat currency (e.g., USD, EUR). This means that for every USD stablecoin there is a USD in a bank or a dollar-like financial instrument (treasury bonds, etc.).
Examples: Circle’s $USDC, Tether’s $USDT*, Binance’s $BUSD* (I used * as these two stablecoins do not have complete audits or books to prove they are fully backed, but it is assumed).
Importance: These stablecoins provide stability by maintaining a 1:1 peg with the underlying fiat currency. They are widely used for trading, remittances, and as a stable store of value.
95% of all stablecoins on the market are currently fiat-collateralized stablecoins.
2. Crypto-collateralized stablecoins:
Backed by a reserve of cryptocurrencies, typically overcollateralized (collateral asset value exceeds the issued stablecoin value to allow room for asset’s price volatility)
Example: MakerDAO's $DAI
Importance: These stablecoins offer a decentralized alternative to fiat-backed stablecoins, while still maintaining a stable value. They can be used in various decentralized finance (DeFi) applications, such as lending, borrowing, and yield farming.
While this seems like a “decentralized” solution to stablecoins, the reality is that it is not, at least not yet. The great thing about a crypto-collateralized stablecoin is that we don’t need to rely on a company to share what backs the currency, we can simply 👀🔛⛓️
📊 When we look onchain to see what backs $DAI, we can see that 48.6% is $USDC with another 14% covered by other fiat-collateralized stablecoins. This means that a total of 62.6% of $DAI’s collateral is from centralized, fiat-collateralized stablecoins.
What this means is that $DAI has similar risks to fiat-backed stablecoins, which we saw play out with the $USDC depeg during the recent banking collapse in the US.
When Silicon Valley Bank (SVB) collapsed and it was thought that billions of dollars that Circle was storing in SVB were lost, which in turn backed a % of the $USDC supply, $USDC depegged from the dollar.
At the same time, while $DAI does not hold any assets in a bank, as it only holds crypto assets, because the bulk of its collateral is a crypto asset (which is backed by fiat assets), it also lost its peg to the dollar.
While crypto-collateralized stablecoins are in theory a great idea, the problem currently is that crypto assets are too volatile, making it extremely difficult to fully collateralize the stablecoin, hence the reason why $DAI relies so heavily on $USDC and other stablecoins.
In time this will hopefully shift, and ideally, $ETH and other crypto native assets will be the dominant collateral of $DAI, effectively removing the risk of the banking sector on the stablecoin.
However, it’s also important to note that $DAI is overcollateralized with a collateral ratio of 193%, meaning that it has $1.93 worth of crypto assets per $1 of $DAI, whereas fiat-collateralized stablecoins have a 1:1 ratio. This is to support the volatility of crypto assets backing $DAI. 📈📉
3. Algorithmic stablecoins:
These are not backed by any collateral. Instead, they rely on smart contract algorithms to maintain stability.
Examples: Terra ($UST), Frax ($FRAX).
Importance: These stablecoins aim to create a fully decentralized and scalable stablecoin solution, reducing reliance on collateral. While these may prove to be extremely innovative, we have yet to create an algorithmic stablecoin that has maintained its peg and remained stable.
Many are aware of the spectacular crash of Terra Luna and its stablecoin $UST which once had a marketcap of over $18 Billion. In a matter of days, it dropped to $0. 👎
Other algorithmic stablecoins have done the same, however, none with the incredible size that $UST did.
❗ You should be very careful in putting any capital into algorithmic or under-collateralized stablecoins.
It’s not to say that they will never work, it’s just that we don’t know how to make them work YET, so there is a high risk of losing your money.
On the other hand, it’s very unlikely that a fiat-collateralized or crypto-collateralized stablecoin will go to 0, as they have underlying assets to pay those who want to redeem their stablecoins for other assets. 👍
Next Steps For Stablecoins
Stablecoins are growing at an incredible rate right now, reaching all-time highs in unique users every month for the last 4 months. 🚀
This is surprising, considering the collapse we had with $UST last year, the constant FUD around Tether, the recent SEC action of going after $BUSD, and the depeg of $USDC and $DAI.
With so much negativity going around, it’s incredible to see this application continuing to grow month after month. It makes me wonder, who are the net new individuals using stablecoins during these times? 🤔
When we look onchain, we can organize the users by blockchain, and we can see that the bulk of the growth is from users on the BNB Chain (Binance blockchain).
Once we organize the chart by monthly market share, the picture becomes even more clear.
From this, we can assume that the new users interacting with stablecoins are mainly from South America and Asia, as they are the dominant users across the BNB Chain.
This makes complete sense, as stablecoins solve a significant problem for people living in these areas. 🙌
❗ It’s important to add that these charts don’t include the TRON blockchain, which secures approx 50% of $USDT, and is also commonly used by users across Asia and South America. With this in mind, I would assume these numbers are even larger than what we are showing here.
My expectation is that stablecoins will continue to grow in adoption and become a normalized method of using USD (and likely other currencies) in the coming years. 📈
Know Your Stablecoins and Use With Caution
Stablecoins play a critical role in the crypto ecosystem by providing a stable store of value, facilitating cross-border transactions, and promoting financial inclusion.
While there have been some concerns about the stability of certain stablecoins, it is essential to understand the different types and their underlying mechanisms to make informed decisions. 🤓
My recommendation for stablecoin use is as follows:
1 - $DAI is the longest-standing crypto-collateralized stablecoin and the least risky stablecoin currently available. Though it does have similar risks to fiat-collateralized stablecoins, it’s not 100% the same risk, and the community is working towards relying less on fiat-collateralized stablecoins over time. The main issue in using $DAI, however, is that it exists predominantly on Ethereum, which can be expensive to use at times.
2 - Although $USDC had its issues recently, it is still the most transparent and regulation-compliant (in the USA) stablecoin. If you’re going to use fiat-collateralized stablecoins, I would recommend using $USDC on the Ethereum or L2 blockchains.
3 - Although $USDT has had constant FUD for years, it has continued to survive regardless. It's important to understand the risks associated with a non-transparent stablecoin. However, it’s widely available and used across most blockchains, so this can also be a solid solution for those in need (though I would be hesitant to store significant amounts of your capital here).
By choosing the right stablecoin for your needs, you can harness the benefits of this groundbreaking innovation and contribute to the growth of the crypto and web3 space. 💪
As the crypto ecosystem continues to evolve, it is crucial to stay informed, consider the available options, and make educated decisions that align with your personal requirements and risk tolerance. 👌
Hope you enjoyed this one, and I’ll see you all next week! 🎉
ABOUT THE AUTHOR
Kyle Reidhead
Founder of Web3 Academy and Impact3
Find him on Twitter
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