Raynor de Best
Content expert covering payments and (crypto)currencies
Stablecoin - statistics & facts
Whilst cryptocurrencies can have dramatic price swings, the likes of Tether (USDT) and USD Coin (USDC) actively seek to avoid that. This group of crypto – of which some ranked among the top 120 cryptocurrencies - are called stablecoin, named after their desired price stability. Stablecoins tie the price development of another asset to their own. The price of Tether (USDT) is consistently around $1, as its reserves contain real-world U.S. dollar assets. MakerDao’s DAI has multiple other cryptocurrencies as collateral – like Ethereum (ETH). The idea of a crypto without price swings is appealing for two reasons. First, decentralized financial applications - crypto lending and its interest rates or NFT marketplaces – require price stability to function. Second, investors may see stablecoin as a relatively safe entry into the volatile world of crypto investments. The collapse of algorithmic stablecoin TerraUSD in May 2022 cast several doubts on this idea.
TerraUSD and LUNA: The collapse of an algorithmic stablecoin
Stablecoins can be backed by a real-world asset – often tied to one of the world’s most used foreign exchange currencies – or a crypto asset, like a popular cryptocurrency. Some stablecoin, however, do things differently. TerraUSD (UST), for instance, had little to no backing but used a sister cryptocurrency, Terra (LUNA), to keep its price stable. Unlike Bitcoin, of which there can be a fixed maximum of 21 million tokens, UST had an algorithm that could "burn" (permanently destroy) LUNA to create more UST instead. Put simply: The system allowed one asset – UST - to be kept stable by people showing faith in the other - LUNA. In May 2022, this trust collapsed as many investors started selling their coins in favor of safer investments. Consequently, the prices of both LUNA and TerraUSD fell. This had a severe impact on the market size of Decentralized Finance (DeFi), losing billions of its value in only a few days.The future of digital payments?
In April 2022, the HM Treasury of the United Kingdom (UK) announced plans to regulate stablecoin in the future, so that it could become part of retail payments. Such a move would turn stablecoins into something like – but still different from – Central Bank Digital Currencies (CBDC), digital versions of real-world fiat currencies that are issued by a national authority. Up until 2020, several countries were researching such CBDC options. Advocates of this trend observe that it may lower the bar in several countries to start using financial services. Opponents, however, note that stablecoins are not designed for day-to-day payments, especially given the lengthy transaction times of cryptocurrencies. Consumers did reply in early 2022 they had certain segments in mind where they would like to see cryptocurrency payments in the future.
