Exploring Stablecoins: Benefits, Risks and Potential Use-cases

Context Setting?

Critics of the Blockchain industry, particularly cryptocurrencies, assert that the industry as a whole, is a technology in search of a problem/use case to solve for, as opposed to attaining product-market-fit. Additionally, the many ICOs and scams have given the industry a poor image in terms of investors chasing short-term profit gains. The Blockchain/crypto industry is now 15 years old, most notably created with the release of the Bitcoin white paper in 2009, the seminal event which created a whole new industry.??

This article looks to explore Stablecoins, their core properties, benefits and risks as well as potential use cases - we will focus in on Remittences as primary use case. The key out-come in the reader's mind will be; are stablecoins a 10x improvement on what is currently offered? Peter Theil asserts in his book “Zero to One” that to disrupt and capture a market you need to be at least ten times better than the alternatives. This level of differentiation ensures that customers see tremendous value in your product, making them willing to choose you over all others.

Stablescoins as a technology look to disrupt fiat currencies through offering the best of both worlds: the stability and reliability of traditional currencies and the benefits of digital currencies, including faster, cheaper transactions and integration with digital applications and services.

What is a Stablecoin??

Stablecoins are a type of cryptocurrency designed to maintain a stable value relative to a specified asset, typically a fiat currency like the US Dollar or a commodity like gold. They combine the instant processing and security of blockchain-based cryptocurrencies with the price stability of traditional currencies or other stable assets. Here's a detailed breakdown of their characteristics:

1. Value Pegging: Stablecoins are pegged to a stable asset, most commonly a fiat currency such as the US Dollar, Euro, or Yen. The value of one stablecoin unit aims to remain equivalent to the value of one unit of the pegged currency or asset.?
2. Collateralization: To maintain their peg, stablecoins are often backed by reserves of the asset they are pegged to. This can be:- Backed one-to-one by fiat currencies held in reserve- Crypto-Collateralized: Backed by other cryptocurrencies, but these types require over-collateralization due to the volatility of the backing crypto assets.- Commodity-Collateralized: Backed by physical assets like gold, silver, or real estate.- Algorithmic Stablecoins: These are not backed by any physical asset but use algorithms and smart contracts to control the supply of the issued stablecoin, attempting to maintain its value.
3. Redemption Mechanism: Most stablecoins offer a redemption mechanism where holders can convert their stablecoins back into the pegged asset or currency, maintaining a trust in the stablecoin's value.
4. Use in Blockchain Ecosystems: As with other cryptocurrencies, stablecoins leverage blockchain technology, inheriting features like decentralization, transparency, security, and interoperability within various blockchain ecosystems.
5. Reduced Volatility: Unlike traditional cryptocurrencies such as Bitcoin or Ethereum, stablecoins are designed to be less volatile. This stability makes them suitable for everyday transactions, traditional financial services, and as a safe haven in the highly volatile crypto market.
6. Regulatory Compliance: As stablecoins grow in popularity, they increasingly attract regulatory attention. Compliance with financial regulations is crucial, especially for those pegged to fiat currencies, to ensure their legitimacy and stability.
7. Market Presence: Stablecoins have become a significant part of the cryptocurrency market due to their stability and utility. They play a crucial role in trading, hedging, payments, remittances, and decentralized finance (DeFi) platforms.
8. Global Accessibility: They can be accessed and used globally, offering an alternative to traditional banking and financial services, especially in regions with unstable currencies or limited access to banking infrastructure.

The Different Use-cases of Stablecoins

Stablecoins have a wide range of use cases, leveraging their stability and blockchain technology to offer unique advantages in various financial and non-financial sectors. These use cases demonstrate the versatility of stablecoins, not only in the financial sector but also in various other industries, where they add value through stability, efficiency, and global accessibility:

1. Remittances: Stablecoins can be used for international money transfers, providing a cheaper and faster alternative to traditional remittance services.
2. Trading and Hedging in Cryptocurrency Markets: Traders use stablecoins to hedge against volatility in cryptocurrency markets. They offer a way to park assets in a stable medium without converting back to fiat currency.
3. Decentralized Finance (DeFi): In the DeFi ecosystem, stablecoins are used for lending, borrowing, yield farming, and liquidity provisioning. Their stability is crucial for these activities in an otherwise volatile market.
4. Payment Processing and Merchant Services: Businesses can use stablecoins for processing payments, reducing fees associated with traditional banking and credit card networks, and mitigating chargeback fraud.
5. Programmable Money for Smart Contracts: Stablecoins can be integrated into smart contracts for automated transactions, escrows, and other programmable financial operations, benefiting industries like real estate and legal services.
6. Wages and Salaries Payment: Some companies offer employees the option to receive their salaries in stablecoins, particularly in international or remote working arrangements, simplifying the payroll process.
7. E-commerce and Online Marketplaces: Stablecoins provide a viable payment option for e-commerce, enabling global transactions without the complexities of currency conversion and high transaction fees
8. Cross-Border Transactions for Businesses: Companies engaging in international trade can use stablecoins to streamline payments, avoid fluctuating exchange rates, and reduce transaction costs.
9. Access to Financial Services for the Unbanked: In regions with limited banking infrastructure, stablecoins can offer an entry point into financial services, enabling savings, loans, and insurance products.
10. Gaming and Virtual Goods: In the gaming industry and virtual marketplaces, stablecoins can be used to buy, sell, or trade in-game items and services.
11. Digital Identity and Governance: Some projects are exploring the use of stablecoins in conjunction with digital identities for voting systems, governance mechanisms, or proof of ownership.
12. Charity and Donations: Stablecoins provide a transparent and efficient way to donate to charities and NGOs, especially for international aid, where currency stability and low transaction fees are crucial.
13. Art and Collectibles: In the world of digital art and collectibles, including NFTs (Non-Fungible Tokens), stablecoins can be used as a medium of exchange for buying and selling these digital assets.
14. Insurance and Derivatives: Stablecoins can facilitate the payment of premiums and claims in the insurance industry and are also being used in creating cryptocurrency-based derivatives.

In the table below, we explore the Remittances use case -? as discussed earlier, stablecoins can be used for international money transfers, providing a cheaper and faster alternative to traditional remittance services.

The successful adoption of stablecoins for remittances will likely depend on how effectively these challenges are addressed. This will require collaborative efforts from technology providers, regulatory bodies, financial institutions, and educational organizations. As the infrastructure around stablecoins continues to mature and as regulatory clarity improves, it's likely that more people will start to embrace this technology for various applications, including remittances.

Hurdles to the Adoption of Stablecoins

As with most crypto use-cases, regulation and user education are among the most significant hurdles for the widespread adoption of stablecoins, particularly for the remittances use-case. Here's a closer look at each of these challenges:

Regulation:

• Varying Global Standards: The regulatory environment for cryptocurrencies and stablecoins varies significantly across different countries and regions. Some governments have embraced these technologies, while others have imposed strict regulations or outright bans.
• Consumer Protection: Regulators are concerned about protecting consumers from the risks associated with stablecoins, such as volatility (for non-fiat pegged coins), fraud, and operational risks of the issuing entities.
• Financial Stability Concerns: Authorities worry about the potential impact of stablecoins on the broader financial system, including issues related to money laundering and the integrity of financial transactions
• Evolving Landscape: The regulatory landscape is constantly evolving, which can create uncertainty for both users and service providers. There's a need for clear, consistent, and fair regulatory frameworks to foster trust and stability in the use of stablecoins.

User Education:

• Understanding of Cryptocurrencies: Many people still have a limited understanding of cryptocurrencies and blockchain technology. The complexity of these concepts can be a significant barrier to adoption.
• Trust and Confidence: Building trust in a new form of currency takes time, especially in regions with less exposure to digital currencies. Overcoming skepticism and developing confidence in the security and stability of stablecoins is crucial.
• Digital Literacy: The use of stablecoins for remittances requires a certain level of digital literacy, including how to securely store and transact in these digital assets.
• Awareness of Risks: Users need to be educated about the potential risks, including security issues (like hacking) and the importance of private key management.

Conclusion?

The article outlined and explored what Stablecoins are, their benefits, challenges and risks to adoption and a number of use-cases, reviewing remittances in greater detail. Regulation and User education present two headwinds for the adoption and success of this technology. Using the remittance use-case we have demonstrated for cross-border payments, Stablescoins do meet the 10x criteria, yielding a far superior service than what is offered, thus satisfying Thiel’s criteria that Stablescoins have the potential to be a disruptive new technology versus what is currently offered.