Stablecoins, by definition, are meant to be stable. But the growth of their total supply in the past year has shown anything but stability, which some market participants believe signals a long-term path for more success and innovation of existing stablecoins.
“I think we’re seeing this Cambrian moment for stablecoins,” Marco Santori, chief legal officer at Kraken Digital Asset Exchange, said to TechCrunch. “They’ve really come into their own, in terms of finding a foothold in the market.”
Stablecoins circulating on public blockchains have seen massive demand and scale, with the supply of fiat-backed, crypto-backed and algorithmic stablecoins totaling more than $180 billion as of April 26, up 112% from $85 billion on the year-ago date, according to data compiled by The Block.
There have been discussions among government bodies, the private sector and institutional players on how this asset subclass can continue to expand inside its current use cases — and perhaps unlock more in time.
Despite increasing focus on stablecoins, a range of issues has also been raised by skeptics concerned with the stability of their pegs and consumer protection, among other elements, according to a January 2022 report from the U.S. Federal Reserve.
Through a 1:1 ratio, the value of a stablecoin is fixed to an external peg like the U.S. dollar but can also be tied to other assets, as stablecoin contender US Terra (UST) is to bitcoin and Avalanche (AVAX). Simply, every stablecoin in circulation is backed up by $1 equivalent of its relative reserve, whether it be a U.S. dollar or another asset.
While the majority of stablecoins are backed by the U.S. dollar, crypto-backed and algorithmic stablecoin supplies have skyrocketed 255% from $9.6 billion to $34.09 billion over the past year, data from The Block showed.
Algorithmic stablecoins have been getting more attention recently because, unlike stablecoins backed by fiat currencies or another cryptocurrency, they are backed by computer code, or algorithms, that give traders incentives to maintain their price by burning or creating tokens to keep the token stable. UST is the largest crypto-backed and algorithmic stablecoin by market capitalization, and the third-largest stablecoin overall, according to CoinMarketCap data.
“Algorithmic stablecoins are fast becoming the norm — protocol-issued dollars coming to every blockchain,” Do Kwon, the founder of Terraform Labs, which created the crypto tokens LUNA and UST, said in a tweet on April 21. “Detractors cannot see — currencies are ultimately backed by the economies that use them, and the future is clearly opting to use decentralized and self-sovereign stablecoin.”
But not everyone is a fan of stablecoins because they are a relatively new innovation that has the potential to boom — in two very different ways.
“Stablecoins will be the first to get regulated,” Mark Cuban, a billionaire entrepreneur and television personality on “Shark Tank,” said in a tweet in September 2021. “Why? The variance in the definition by product. What is a peg? What is an algorithmic stablecoin ? Is it stable? Do buyers understand what the risks are? It needs standards.”
Where to go from here
As it stands, the potential is for stablecoins to expand beyond their current use cases of facilitating trade between digital assets, supporting decentralized finance protocols (by allowing market-making, collateralized lending, derivatives and other services), and creating peer-to-peer and cross-border payments.
“I think by 2030, all major global economies will tokenize their currencies,” William Quigley, co-founder of WAX and previous co-founder of the stablecoin USD Tether, said to TechCrunch.
In 2020, China was the world’s first major economy to pilot a digital currency, the e-CNY, or digital yuan, according to the Atlantic Council’s Central Bank Digital Currency (CBDC) tracker. About one-fifth of China’s population, roughly 261 million users, opened e-CNY wallets and made over $13.78 billion worth of transactions with its digital fiat currency, TechCrunch reported.
Although Quigley in July 2014 helped create the first stablecoin, USD Tether (USDT) — then known as Realcoin — he left the project in 2015 before it became known for what it is today: the world’s largest stablecoin by trading volume. Yet, he still believes in the stablecoin ecosystem and what’s to come. To date, eight Caribbean countries and Nigeria have officially launched CBDCs, Atlantic Council’s tracker showed.
But what does it mean for governments or global economies to truly tokenize money?
Cryptocurrencies, or, more specifically, stablecoins, can move at the speed of light, Quigley said, but digital money, like a U.S. dollar being transferred from one bank to another, doesn’t move that way because it isn’t tokenized.
“Today there is no way to send money cross-border [without fees] on the same day except with a stablecoin,” Quigley said. “It can look like you got it when a bank credits you, but you can’t withdraw the funds for a few days.”
Tokenization provides a permissionless open blockchain where the person who has control over the cryptocurrency truly owns it, as opposed to digital money in one’s bank account that is owned by others, Quigley said.
“I think you’re going to see stablecoins find a foothold on the ever-expanding periphery of the markets,” Santori said. “Existing products and services in finance have succeeded because government currencies serve them well, but new products and services that are only now possible because of the existence of stablecoins are going to drive adoption as they grow.”
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