Are stablecoins the future of cryptocurrency?

Due to their volatility, Bitcoin and other #cryptocurrencies have been a hot topic lately. However, despite the current market downturn, crypto offers promising utility for real-life and virtual transactions. Bitcoin, for example, is not subject to the same macroeconomic forces as traditional currencies. Instead, Bitcoin’s price is determined by supply and demand. Similarly, stablecoins, another type of cryptocurrency, offer price stability. Stablecoins are backed by major fiat currencies, such as the US dollar. They function to maintain a stable value, making them a good choice for businesses and individuals who want to avoid the unpredictability of the crypto market.?

Cryptocurrencies current downturn?

Cryptocurrencies are the underlying negotiating instruments that DeFi (decentralized finance), metaverses, and Web3 applications bank on. Many of their leading business models incorporate their proprietary cryptocurrencies, often tradeable in crypto exchanges, making these businesses prone to market volatility.??

In mid-May, metaverses were affected when cryptocurrencies fell due to their unstable nature and global inflation. The impact has been so significant that many reporters speculate Elon Musk’s exposure to crypto markets is the reason for his postponed (or possibly canceled) Twitter purchase. Additionally, the stablecoin Terra (UST) and its token pairing Luna, one of the leading cryptocurrencies by market cap serving as an antidote against cryptocurrency instability, crashed completely.? The collapse of UST and Luna has sent shockwaves across the crypto market, putting most retail investors and several crypto institutions underwater. This downward spiral has further caused the collapse of crypto hedge funds and brokerage services overexposed to the Luna ecosystem.?

The antidote: stablecoins?

One might think the world has gotten accustomed to the ups and downs of cryptocurrencies and that #stablecoins have fallen for good, but the latter may not necessarily be true.?Stablecoins are cryptocurrencies secured in value. They have been around for several years yet have recently gained renewed interest due to the tumultuous nature of the cryptocurrency market. In a market with constant price swings, stablecoins offer a sense of balance; this has led many to believe that stablecoins will play a crucial role in the future of cryptocurrency.?

We can identify three types of stablecoin characterized by how their value is maintained: Fiat-collateralized, Crypto-collateralized, and Algorithmic.??

Fiat-collateralized stablecoins are, as the name suggests, backed by sovereign currencies such as the US dollar or the value of commodities like gold. For example, the most common stablecoins, Tether and USDC, are pegged to the US dollar. To issue a certain number of tokens for each cryptocurrency in question, an issuer must offer dollar reserves worth that same amount - which can be maintained independently through custody services and regularly audited. ?

Crypto-collateralized stablecoins are stablecoins backed by other cryptoassets. These stablecoins are often over-secured due to the high instability of the cryptocurrency market, meaning that the reserve value often surpasses the value of the stablecoins circulated (i.e., it can take a substantial number of crypto reserves to issue even a small number of tokens).?

Algorithmic stablecoins, or non-collateralized stablecoins, are managed by algorithms and do not necessarily hold reserve assets. Instead, their stability comes from a working mechanism - such as with central banks and monetary policies they control directly. Usually, their value is maintained by controlling supply through a preset formula or algorithm. E.g., an algorithmic stablecoin uses consensus to determine whether it should increase or decrease token counts based on demand for said currency.??????????????

Price stability performance?

Source: CoinDesk?

Cryptocurrencies have been incredibly volatile over the past few years, making them a risky investment for many people. However, stablecoins may offer up some hope.?

Proof of this is that in the eye of the storm, Tether, USDC, and BUSD, some of the top stablecoins (after USDT fell), remained relatively stable at around 1 USD, showing that stablecoins can be a valuable tool for hedging against volatility in the cryptocurrency markets.?

Collateral Damage?

Another important conclusion is that many #web3 businesses that rely on cryptocurrency are affected by its unpredictability. For example, the assessment of gaming metaverses (see IotaQ Dashboard) depends on their coin valuation. Following October 2021, there was a lot of hype for everything around Meta, whereas now, the valuation of many metaverses has fallen significantly.??

The future of stablecoins?

Regulation?

Stablecoins have been in the spotlight recently as a potential solution to some of the inherent volatility issues associated with cryptocurrencies. The US Securities and Exchange Commission (SEC) is also taking notice. In a recent report, the SEC outlined several recommendations for regulating stablecoins. While it remains to be seen how the SEC will implement these recommendations, it is taking stablecoins seriously as a new financial asset class. This could pave the way for more widespread adoption of stablecoins as a payment mechanism. Only time will tell how this all plays out, but it is undoubtedly an exciting development in cryptocurrency.?

CBDC?

Central bank digital currencies (CBDCs) are like stablecoins because they are digital substitutes for fiat currencies. However, CBDCs are issued and regulated by central banks (like the US Federal Reserve), whereas anyone can issue stablecoins. Because a central bank would back CBDCs, they would theoretically have less volatility than other digital assets, making them attractive to investors looking for more stability in their portfolios.??

Like a central bank liability, this instrument could substitute or complement official currency (i.e., printed money or minted coins). The US Federal Reserve is not the only bank in the world making this analysis; to date, there are 60 central banks globally researching this and 16 making pilots.?

In addition, CBDCs could help facilitate global trade and reduce the costs of cross-border payments. As central banks continue to explore the feasibility of CBDCs, they will likely play an increasingly important role in digital finance (see BIS). ?

Opportunities?

Their stability and utility have gained stablecoins popularity in metaverses and Web 3.0 applications. Consumers can use them to purchase goods and services, trade on exchanges, buy and sell NFTs, or play games. Additionally, stablecoins provide a sturdier transaction environment and better predictability when trading or gaming.?

Stablecoins also have the potential to provide a foundation for new payment infrastructure in the metaverses. For this to happen, analyzing the different business models for the metaverses and all Web 3.0 applications is necessary. Right now, you can select from various cryptocurrency choices and categories; there are numerous apps in Defi, P2P Payments, Gaming, and all types of NFT trades (Crypto Art, Collectibles – Sports, Trading & Games-, Virtual Assets).??

Conclusion?

With the proper regulations in place, stablecoins and CBDCs have the potential to revolutionize the global economy. Stablecoins and CBDCs have many advantages, including price stability and immediate payment. The latter differs from traditional payment networks (e.g., Visa, Master Card, ACH, PayPal), where clearing and settlement can take days. Stablecoins also allow for P2P (peer-to-peer) transactions, meaning they can be sent directly from one person to another without a central authority such as a bank or government. Stablecoins could substitute physical currencies and be applicable in real life or the Metaverse. Web 3.0 provides the infrastructure for this new economy, and NFTs are already available in gaming and other applications.?

Now that we have seen the advantages of stablecoins, it is crucial to understand their limitations. One of the most significant limitations is that they are not yet widely accepted by merchants and businesses, implying you may be unable to use them for everyday purchases such as groceries or gas. Additionally, because they are still relatively new technology, there is no guarantee that their value will remain stable over time. Despite these limitations, stablecoins represent a significant step forward in digital currencies and could one day replace traditional currencies altogether.?

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Disclaimer: This article is provided for informational purposes only and does not constitute a recommendation nor invitation by IotaQ, its parent company, IOTA Impact, or its executives to buy, sell or hold any security, product, or financial instrument mentioned. IotaQ/IOTA Impact is not responsible for any errors, delays in the content, or decisions made based on it. IotaQ/IOTA Impact receives this information from third parties. If any of this is not accurate, this is intended to be directional only.?