In the first five years of Bitcoin existence, many people (especially outside the crypto world) criticized it as being too volatile. They believe a “currency” cannot be used if the price can easily go up or down by 5-10% within just a few days or even less than 24 hours. Obviously, there are counter-arguments against this narrative. Crypto perma-optimists believe price stability will come once we have more liquidity in the crypto exchanges.
However, it cannot be ignored that such liquidity is still a long way to go in the current days. That’s where stablecoins play their part. Unlike cryptocurrencies, stablecoins are always valued 1-to-1 to fiat currencies, with most of them being pegged to the US Dollar (USD). TUSD, USDT, USDC, PAX, DAI, and others actually contribute a lot to the growth of the crypto industry. They also “silenced” the critics who say that crypto is simply too volatile.
How Stablecoins Work
We won’t get into too many details here because I don’t want to repeat myself over and over again in different articles. But, assuming you are on this website for the first time, I will explain the summary of how stablecoins work. So, basically, stablecoins can get a 1-to-1 valuation to the USD, because of how their structures were built.
Take TUSD or PAX or USDC as our examples. With them, you can just deposit a $1 million to their bank account, and you will be issued 1 million of stablecoins to your crypto wallet. On the other hand, if you deposit 1 million of their stablecoins back to their own crypto wallet, you will get $1 million transferred to your own bank account. Due to this reason, crypto traders believe and “trust” the right valuation to these stablecoins are indeed 1-to-1 to the real USD.
And then, there are other stablecoins that work differently. DAI uses Maker’s collateral concept where you will be used DAI tokens when you lock-in your ETH into the Maker smart contract. By using a certain type of algorithm, Maker’s system can protect DAI from inflation or deflation, and the algorithmic calculation can force DAI token to remain at $1.
Another type of stablecoin is USDT (Tether). Unlike TUSD or PAX or USDC or GUSD, it does not have any audit results from third-party auditors. And unlike DAI, it does not use any kind of algorithm. It’s just used based on trust. Enough crypto traders believe USDT is worth 1-to-1, and thus, everybody believes in the same thing. It’s ironic and dangerous. Why ironic? Because USDT is actually the most popular and most used stablecoin in the crypto space.
Stablecoins Have Much Bigger Potential Than Crypto Trading
Unfortunately, stablecoins are still used mostly for crypto trading itself. By crypto traders to speculate and hedge against the volatility of Bitcoin and altcoins. Thing is, the potential for stablecoins are actually much bigger than the world of crypto trading itself.
For you who don’t understand, stablecoins are basically “borderless.” You can easily transfer stablecoins from wallet A to wallet B, doesn’t matter where these wallets are located at. You can easily transfer stablecoins from Nigeria to Colombia or to any other country you can think of. The great thing is that you can withdraw these stablecoins to real fiat currencies even if there’s not enough liquidity in the crypto exchange in your current country.
For example, let’s say in country X, there’s not enough liquidity to exchange TUSD or PAX to the X fiat currency. Nevertheless, people who have enough PAX in country X can still exchange PAX to real USD in his bank account by transferring his PAX tokens directly to the PAX company’s wallet address. As long as he’s KYC-verified and as long as his country is not restricted by the company, he can easily exchange his PAX tokens 1-to-1 to real USD in his bank account in that country X.
This above example teaches us that stablecoins have huge potential because they are borderless. Unlike the transfer of normal cryptocurrencies where you always need fiat on/off-ramp in the recipient country, stablecoins can ignore it by doing transactions directly with the issuers of the stablecoin. Many startups and businesses that utilize stablecoins can take advantage of this if they don’t want to deal with many regulations that have plagued the fiat currencies for a long time.
For example, a new crypto startup that receives millions of dollars through IEO or ICO funding, can actually store their ETH or BTC fundings to stablecoins and keep them safe there. They will only need to exchange some portions of these stablecoins to fiat when they have to, every month or every quarter or even every year. They don’t need to liquidate the whole ETH and BTC that they received from IEO or ICO to fiat currencies at the same time.
Cross-border payments for services and goods can also be made via stablecoins as long as the countries of buyers and merchants already regulate the uses of stablecoin. Here’s where things get complicated, although probably not for long. Many central banks are discussing the possibility of issuing their own CBDCs (Central Bank Digital Currencies), which are technically stablecoins as well.