Wednesday W.O.W - Stablecoins ⚖️🪙💱
[5 min read] Your mid-week bite sized treat on emerging tech on our journey to the Metaverse. Learn about how stablecoins differ from CBDCs, and the role they play in the future of money
A nibble of knowledge in your inbox every Wednesday with a simple format:
🇼 What the technology is
🇴 Objective(s) - what is it trying to achieve, with some examples
🇼 Why it is important to users as well as businesses & brands.
This is week 27 of the 520 weeks of writing I have committed to, a decade of documenting our physical and digital lives converge.
🇼 What are Stablecoins?
Stablecoins are a particular type of cryptocurrency that aims to solve the problem of price volatility. Unlike traditional cryptocurrencies such as Bitcoin and Ether, whose prices can fluctuate wildly, stablecoins are designed to maintain a stable value by pegging them to an underlying asset, typically a fiat currency like the U.S. dollar or gold.
Cryptocurrencies offer numerous advantages, including fast and borderless transactions without the need for intermediaries. However, their unpredictable price movements make them less practical for everyday use. People want to know how much their money will be worth in the future, both for their financial security and day-to-day livelihood. Stablecoins address this issue by tying their value to more stable assets like fiat currencies, there have been experiments in how to do this but the only tried and true way is having the stablecoin backed by something of value.
The most common example involves the entity behind a stablecoin establishing a reserve where it securely stores the assets backing the stablecoin. For example, $1 million in a traditional bank can back up one million units of a stablecoin. When stablecoin holders wish to cash out their tokens, an equal amount of the underlying asset is taken from the reserve. This used to be what happened with cash, it was back by gold! (More about this if you are interested)
Warning: It's important to note that stablecoins differ from Central Bank Digital Currencies (you can read about CBDCs in a previous post here). CBDCs are digital representations of a country's fiat currency issued by its central bank. While both stablecoins and CBDCs aim to provide stability, CBDCs are controlled and regulated by central banks, whereas stablecoins are typically issued by private entities or decentralized protocols. See below:
🇴 What objectives are Stablecoins trying to achieve?
Stablecoins serve several objectives in the cryptocurrency ecosystem. Here are some examples of stablecoins and the purposes they serve:
1. Tether (USDT): With a market cap of $83b USD, Tether is one of the oldest and most popular stablecoins, pegged to the U.S. dollar. It facilitates quick movement of funds between exchanges to take advantage of price discrepancies. It has also been used for cross-border transactions to bypass capital controls. While at points of time there has been some controversy about the assets that back it, everything seems above board now.
2. USD Coin (USDC): Second in market cap ($29b USD) is also stablecoin pegged to the U.S. dollar. It offers transparency and open-source protocols, allowing developers to build products on top of it. Circle is regulated as a licensed money transmitter under U.S. state law just like PayPal, Stripe, and Apple Pay. Circle’s financial statements are audited annually.
3. Dai: A decentralised stablecoin ($4b USD market cap) running on the Ethereum blockchain. It is created and governed by the MakerDAO protocol, which ensures its stability. Dai is backed by collateral, primarily Ethereum, and is designed to maintain a value of approximately one U.S. dollar. It achieves stability through an algorithmic process that adjusts the supply based on market demand. Users can generate Dai by depositing collateral and locking it in a smart contract. Dai offers decentralization, transparency, and the potential for financial inclusion, allowing users to access a stable digital currency that is not subject to the volatility of traditional cryptocurrencies.
🇼 Why are Stablecoins so important to DeFi and the future of money?
Stablecoins are playing a role to revolutionize the future of decentralized finance (DeFi) and the broader financial system. Here's why stablecoins are having a significant impact:
1. Financial Inclusion: Stablecoins enable people in regions with unstable currencies or limited access to banking services to transact securely and efficiently. They provide a stable store of value and an alternative to traditional banking systems, empowering individuals and businesses worldwide. Note that DAI is the most censorship resistant due to its decentralised nature.
2. Efficient Cross-Border Payments: Stablecoins eliminate the need for intermediaries in cross-border transactions, reducing costs and settlement times. They enable seamless global transfers without the need for multiple bank accounts, making international trade more accessible and efficient. CBDCs want to do this too.
3. Decentralized Finance (DeFi): Stablecoins serve as a cornerstone of the DeFi ecosystem, providing a stable unit of account for various decentralized applications. They enable users to borrow, lend, and earn interest on their crypto assets, creating new opportunities for financial growth and innovation.
4. Reduced Counterparty Risk: While traditional banking systems rely on trust in intermediaries, stablecoins operate on transparent blockchain networks. Users have direct control over their funds, reducing counterparty risk and enhancing financial security
That’s all for this week! If you have any organisations in mind that could benefit from learning about emerging technology, be sure to reach out. Educational workshops are one of many consulting services I offer.
