What are the implications of the growth of stablecoins on the cryptocurrency market

By Anuj Yadav

The crypto market is notorious for its wild volatility, which often becomes an obstacle to wider adoption of crypto and the use of its virtues. Investors need the best of both worlds, namely the nimble functionality of crypto and the stability of traditional finance. The concept of stablecoins forms a bridge between the world of crypto and fiat as their value is tied/pegged to more stable reference assets like other currencies, commodities, etc. Most cryptocurrencies are lucrative for traders and speculators due to their high volatility, but they do become a risk-averse medium of exchange. Stablecoins are designed to reduce the volatility of crypto and make it the store of value and digital currency to facilitate day-to-day commerce/trading.

The first successful stablecoin, Tether was launched in 2014 and the idea of ​​stable digital currencies caught the attention of the world. The popularity of stablecoins has grown exponentially over the years and 2020 has witnessed tremendous growth in the stablecoin market. According to a recent estimate by CoinMarketCap, their market capitalization reached around $167 billion in May 2022, viz. increase of approximately 3000% since the start of 2020. The strong fundamentals and potential innovative use cases of stablecoins have made them an integral part of the crypto ecosystem and improved the rate of adoption globally. Recently, many countries and their respective central banks have started discussions to consider launching their own stablecoins. In Davos during the WEF 2022 discussions, the CBDC (Central Bank Digital Currencies) was among the main agendas of the discussions on the crypto ecosystem.

The year 2022 started on a promising note with a 15% increase in the stablecoin market in the first quarter of the year, but the catastrophic collapse of Terra Luna decided otherwise. Although the Terra Luna crash cost the market billions and raised questions about the stability of stablecoins, its failure pushed the market towards maturity. This has helped weed out existing bad actors in the crypto market and educate investors. He highlighted the shortcomings of algorithmic stablecoins and made investors aware of the fundamentals of stablecoins. Algorithmic stablecoins are not backed by any collateral, they maintain their fiat-linked value using complex algorithms. These are not stable in their true essence as their price is driven by supply and demand from investors. However, all other secured stablecoins such as fiat-collateralized (e.g. Tether-USDT), crypto-collateralized (e.g. Makers DAO’s Dai-DAI), Commodity-collateralized (e.g. Tether Gold-XAUT) are investments stable and secure cryptographics. options because they are always backed by stable reference assets. They also perform regular audits to ensure that their reserves are in line with stablecoin circulation.

Stablecoins managed to maintain investor confidence and survived the crash thanks to their strong fundamentals. They are more than just investment instruments. Stablecoins have the potential to revolutionize the payments industry by facilitating cross-border payments. Traditional methods take up to a few days to process the wire transfer and they also impose high transaction fees on international transactions. While stablecoins can make these payments fast and affordable for users by dramatically reducing transaction time and costs. Due to the underlying potential, various governments around the world are exploring ways to integrate and regulate stablecoins. Japan recently passed a stablecoin bill for investor protection, as discussions are ongoing among regulators to establish a robust regulatory framework for stablecoins in the EU and across the country. countries like UK and USA etc.

Gradually, stablecoins have become an integral part of the crypto ecosystem and they are steadily increasing in the market. There are more players entering the stablecoin space, indicating the increased confidence of institutional investors in the idea of ​​stablecoin digital currencies. Recently, Tether announced the launch of a new sterling-pegged stablecoin (GBPT) and Shytoshi Kusama announced that the Shiba Inu community is also planning to launch their stablecoin.

The future of stablecoins looks bright, but it certainly depends on factors such as regulatory policies and legal acceptance around the world. The stablecoin market is still in its infancy, the rate of mass adoption in the coming years will be the key factor in determining the fate of stablecoins.

The author is co-founder and CTO, Kassio

Also read: Crypto fraud: Man detained for duping Meerut bizman out of Rs 1.84 crore

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