Stablecoins are the cornerstone of the cryptocurrency market. Since the start of the bull market in July 2017, Tether’s USDT, the largest and longest-running stablecoin with a market cap of $108 million, has grown by an impressive 170,600% to $184 billion in market cap.
Part of the demand for this stablecoin came from crypto exchanges that needed stable assets to trade without formal access to US dollars by banks. The cries from people living in places without access to dollars were another.
Now, with clear guidance for stablecoins available through the US CLARITY Act, there is a rush to get into this business. This is evident by the sheer number of stablecoins currently available.
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Data aggregator CoinGecko lists a staggering 370 stablecoins. That seems excessive. Why are there so many stablecoins? And what impact will this move have on the broader crypto market?
stable but not equivalent
The majority of stablecoins exist to be pegged to and provide access to the US dollar. But what many people probably don’t know is that many of these stable tokens are built completely differently from each other.
“There are many different types of stablecoins, categorized primarily by the collateral backing them,” Line Sachs, CEO of stablecoin infrastructure provider Eco, told BeInCrypto. “These are so-called ‘algorithmic’ stablecoins that are backed by real-world assets such as fiat currencies or government bonds, backed by crypto assets, or have no other collateral.”
Examples of stablecoins backed by real-world assets include Tether and USDC, which are backed by the US Treasury and fiat currencies, i.e. government-issued cash.
Cryptocurrency stablecoins include Sky, formerly known as MakerDAO, which is backed by blockchain-based assets.
Algorithm types include Ethena’s USDe. It uses a so-called “delta neutral” strategy, with cryptocurrencies hedged against short positions.
There are also commodity-backed stablecoins like Tether Gold, but this is a much smaller subsection of the overall market – most of the stablecoins people use today are backed by real-world assets – Tether’s USDT and USDC market cap is $404 billion.
“The purpose of stablecoins is not to replace the US dollar or any other currency, but to digitize it and bring its benefits to more people,” said Boris Boler-Bilowitzki, CEO of Concordium, a blockchain company that unifies digital identity. “For retailers, these offer an infinitely better user experience; they don’t require extensive financial or transactional knowledge, just buy and hold.”
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chunks of stablecoins
For the average consumer, or what Boler-Bilowitzki calls a “retailer,” there is one problem that could arise in the future. That is, there are too many types of stablecoins. And they are not all the same.
In addition to differing in terms of backing, they are distributed across many different blockchains.
In addition to the 370 stablecoins already listed on CoinGecko, there is an influx of big names getting into the stablecoin game.
US Bank is testing a stablecoin on the Stellar blockchain. Klarna launches stablecoin with Tempo, an entirely new payments-based chain backed by Stripe.
Revolut is also working on testing a stablecoin with Polygon. The cross-chain compatibility required to accommodate this introduces additional risks.
“Stablecoins introduce new dynamics that are different from traditional off-chain digital dollars,” said Rebecca Liao, CEO of Saga, a Web3 and AI protocol. “Because they are digitally programmable and often on public blockchains, they can be exposed to smart contract bugs, liquidity shocks, and execution if confidence is shaken.”
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It’s important to remember events like 2023, when a run on Silicon Valley banks caused panic.
“When Silicon Valley Bank collapsed, $3.3 billion of Circle’s reserves got stuck,” said Konstantins Vasilenko, co-founder of crypto on-off ramp company Pavis. “I recovered within a few days, but that was a confidence-shattering event.”
Algorithmic stablecoins may be the most vulnerable to security risks. In 2022, the Argo stable token contributed to the collapse of the entire crypto market when the Jenga-style algorithmic stablecoin Terra Luna removed too many blocks from its proverbial tower.
“Algorithmic stablecoins are definitely risky, and Terra effectively proved that with $40 billion disappearing almost overnight,” Vasilenko added.
people want money
Amid today’s stablecoin hype, these risks, especially from a security and liquidity perspective, may be being ignored.
Everyone believes that in the future, a global, seamless dollar market will accelerate the movement of money between people and apps.
This is too powerful to ignore for incumbents in the financial industry, many of which have to deal with byzantine infrastructure and compliance just to move funds off-chain around the world.
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The US dollar is the most commonly exchanged currency in the world. It is regularly used as a benchmark in the foreign exchange market. Eleven countries, regions, and municipalities around the world use the US dollar as their official currency.
And stable dollar-denominated companies, with a huge trading volume of $94 billion per day, provide hegemony, or superiority, to American national interests. This is where the implications for trading arise.
You can profit from arbitrage and moving your stable to different DeFi protocols and exchanges.
That’s why DeFi stablecoin trading protocol Curv is doing so well. The market capitalization of its ecosystem is worth around $1 billion, and the CurvDAO token has performed surprisingly well despite the market downturn.
Along with Hollywood, Silicon Valley, and Wall Street, the dollar is a unique and singular phenomenon that the United States exports.
For traders, stablecoins are a godsend for moving funds between exchanges, and the more of them there are, the better for them.
For the average person, different stables can be confusing if they are not aware of the underlying assets they are using.
“To be honest, most people don’t even know they’re using a stablecoin, and that’s the point,” added Paybis’ Vasilenko. “The best payment experiences are invisible. You tap your card, your money moves, but you don’t think about what’s happening in the background.”
