Stablecoin Definition

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What are Stablecoins?

Stablecoins are a type of cryptocurrency that is designed to maintain a stable value relative to a traditional currency, such as the US dollar, or an asset. They aim to mitigate the volatility associated with other cryptocurrencies and provide a more stable store of value or medium of exchange.

Stablecoin: a cryptoasset that aims to maintain a stable value relative to a specified asset, or a pool or basket of assets – Bank of International Settlements (BIS)

Key Characteristics:

Fixed peg: Stablecoins are pegged to a specific asset, such as the value of a fiat currency (e.g., USDT is pegged to the US dollar). This means that their value is theoretically fixed to the value of the underlying asset.
Collateralization: Stablecoins are collateralized by assets with intrinsic value, such as cash or other assets. The most common collateral used is a reserve fund consisting of fiat currency or other assets that are pegged to the underlying asset (e.g., USDT is pegged to the US dollar).
Supply and demand: The supply of stablecoins is typically capped to prevent inflationary pressures. The demand for stablecoins is also closely tied to the overall cryptocurrency market sentiment.

History of Stablecoins

BitUSD was the first stablecoin ever introduced, debuting in 2014. It is a BitShares blockchain-based stablecoin with cryptocurrency backing. The pioneering digital asset was the brainchild of two future leading figures in the cryptocurrency industry, Dan Larimer (EOS) and Charles Hoskinson (Cardano)

In 2015 then Tether on Bitfinex brought with USDT the idea of off-chain collateralized stablecoins which were backed by real assets.

As the cryptocurrency market began to gain traction, USDT’s popularity grew exponentially. Its price stability and low volatility made it an attractive choice for traders and investors alike. The stablecoin’s adoption was facilitated by its partnership with several institutions, including cryptocurrency exchanges and traditional financial firms.

By the end of 2019, USDT had become one of the largest stablecoins in circulation, with a market share of over 40%. Its mainstream acceptance was solidified through its continued adoption by institutional investors and traders. The stablecoin’s reputation as a reliable and trustworthy store of value was cemented.

Nowadays there are various version of off-chain collateralized stablecoins in various currencies and assets availalble on the most popular blockchains. As earlier they are mainly used for trading but gain more and more attention within payments. Especially in countries where the local currency suffers from high inflation.

Benefits of Stablecoins

Reduced Volatility: Stablecoins are designed to maintain a stable value relative to a traditional currency or asset, reducing the risks associated with price volatility.
High Liquidity: Stablecoins are highly liquid assets that can be easily bought and sold on online exchanges, enabling quick entry and exit from transactions.
Efficiency: Stablecoins facilitate fast and cheap cross-border transactions, reducing the time and cost associated with international trade.
Improved Regulatory Compliance: By pegging their value to a traditional currency or asset, stablecoins can provide a degree of regulatory compliance that is not available with other types of cryptocurrencies.
Increased Use Cases : Stablecoins have a wide range of potential use cases, including payments, lending, borrowing, trading, and other financial applications, making them an attractive option for businesses and individuals who need to engage with the cryptocurrency market.

Relevance of Stablecoins Around 6% of all cryptocurrencies are stablecoins with 6 of them under the top 50 and one of them under the top 3 (USDT)