Cryptocurrencies such as Bitcoin and Ethereum are considered a speculative and highly volatile asset class by some. To address the problem of instability, stablecoins were introduced in 2014 and 2015, attempting to bridge this gap between fiat currencies and cryptocurrencies and make it possible to be used as means of transferring money within the crypto world.
In this report, you will have an overview of the whats and hows of stablecoins.
- Stablecoins are a type of cryptocurrency whose value is pegged to the value of other assets such as fiat currencies, precious metals, (e.g. gold or silver), or other crypto assets.
- There are four types of stablecoins and each of them has its own mechanism to maintain its price stability.
- The total market capitalisation of stablecoins has exceeded $110 billion and fiat-backed stablecoins such as USDT, USDC have accounted for more than 90% of the market share.
- Most of the stablecoins in circulation today are pegged to the U.S. dollar, with the Ethereum blockchain being the preferred choice on which to launch stablecoins.
- Lack of transparency due to centralised operation and issuance is the main drawback of fiat-backed stablecoins.
- By providing liquidity in the cryptocurrency market, stablecoins have played an important role in mainstream crypto adoption as a means of transfer and store of value.
- Although USDT dominates the stablecoins market currently, its growth rate has flattened due to trust and transparency problems. This makes trustless, decentralised stablecoins like Dai and TerraUSD more prominent than fiat-backed stablecoins.
To read the full version of the Overview of Stablecoins, read the PDF version here.