What is a Stablecoin?

 

What is a Stablecoin?

Stablecoins are a type of cryptocurrency designed to maintain a stable value. They typically peg their value 1:1 to fiat currencies like the US Dollar, which helps them maintain price stability. They were created to solve the major problem of price volatility seen in traditional cryptocurrencies like Bitcoin or Ethereum.

Why are Stablecoins Necessary?

What kind of problems would arise if we used regular cryptocurrencies for everyday transactions? Let's take an example:

Imagine you buy a USD 5 coffee latte every day. If you paid with Bitcoin:

• When Bitcoin is USD 50,000: you pay 0.001 BTC
• When Bitcoin is USD 100,000: you pay 0.0005 BTC

Such price volatility is very inconvenient for daily transactions and can cause significant issues for businesses and individuals trying to plan their finances. Stablecoins solve these problems.

Types of Stablecoins

1. Fiat-Collateralized

• USDT (Tether): It's the market leader in stablecoins, though its market share has recently been declining to around 75.5%.
• USDC (USD Coin): Fully backed by US Dollars and generally considered quite transparent.

2. Crypto-Collateralized

• These are issued by collateralizing other cryptocurrencies and maintain value stability through over-collateralization.
• Example: DAI

3. Algorithmic

• This method maintains price stability by adjusting the supply through algorithms.
• Since they operate solely on algorithms without collateral, they generally carry higher risks.

4. Treasury-Backed (Latest Trend)

• Ondo USDY, Usual USD0++: These are backed by US Treasury bonds, offering real yields of 4-6% annually.
• Their key feature is providing returns competitive with traditional bank interest rates.

How to Utilize Stablecoins

1. Hedging Crypto Volatility

• In an unstable market, you can temporarily convert your assets into stablecoins to preserve their value.

2. Generating Passive Income

• Using DeFi Platforms: You can earn 4-6% annually with USDC/DAI on Aave, 6-8% on Curve Finance, and up to 12% on Pendle.
• Flexible Savings: There are also services that allow you to earn interest while maintaining 100% liquidity without lock-ups.

3. International Remittance

• When sending money across borders, stablecoins allow for faster and cheaper transfers compared to traditional banking systems.

Stablecoin Outlook for 2025

Stablecoin investments are expected to increase tenfold in 2025 compared to 2024. The institutionalization of stablecoins for payment settlements will be a crucial turning point. As regulatory frameworks are established in different countries, institutional investor participation is also expected to grow.

Pros and Cons of Stablecoins

Pros

• Price stability
• Fast transaction speeds
• Low fees
• Opportunities for passive income

Cons

• Centralization risk (especially for centralized stablecoins like USDT)
• Regulatory uncertainty
• Issues with collateral transparency
• De-pegging risk for algorithmic stablecoins

"Have you gained a better understanding of stablecoins with the information

 provided here?"