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Stablecoins in action

Stablecoins in action

Explainers Cryptocurrencies

21 Sep 2020

Bitcoin is likely the first currency that comes to mind when thinking of crypto, but it is not necessarily the most useful one. What makes crypto particularly powerful is that funds can be transferred easily, securely, privately, fast and at a low cost.

While Bitcoin may have been created with those use cases mind, intense price volatility and speculation have hindered BTC from taking on that role in the global economy. Today, Bitcoin behaves and is treated a lot like gold: it’s not so much spent on things, but traders usually buy it for speculative reasons or as a hedge against global market fluctuations.

Stablecoins on the other hand are the exact opposite, in that they are designed for spending. The price is intended to be stable in relation to the underlying asset, often a currency like USD, and therefore traders don’t buy stablecoins as an investment but rather as a means to achieve something else.

Quick primer on stablecoins

Stablecoins are cryptocurrencies created on a public blockchain with a value tied to another asset, usually currencies like USD but it could also be pegged to the value of gold. Just like any other currency, stablecoins are publicly auditable and are traded on exchanges which support them. They offer the benefit of fiat currency in terms of their relative stability and the benefit of crypto as a digital coin.

There are generally two ways of creating a stablecoin: trusted and trustless.

Trusted stablecoins are backed by an equal amount in fiat currency held in reserves by the issuer. For a company like Gemini, for every 1 GUSD in circulation, there is a fiat 1 USD in their reserves. Trustless stablecoins are collateralized using cryptocurrency using smart contracts to manage reserves instead of a central authority. DAI is an example of a trustless stablecoin backed by ETH, where a smart contract lowers and increases stability fees for taking out loans as a way to stabilize the price.

As of writing, the 3 biggest stablecoins in terms of market cap are USDT, USDC and DAI at $15.2bn, $2.3bn and $811m respectively. Unlike BTC, most of that money is not being HODLed. Stablecoins weren’t created for sitting in your wallet to grow in value over time. They are designed for usage. Let’s take a closer look at what stablecoins can be used for.


At first glance, you might think there isn’t much to fix in the payments space. After all, waving a card or your phone over a POS terminal is easy and the payment is completed in seconds. But all that convenience comes at a cost that merchants carry mostly, and consumers pay for to a degree as well.

For a simple thing such as swiping a credit card to make a purchase, there can be up to 12 entities involved in processing that transaction they all take a cut in form of processing fees. To fix payments, it needs a 10x multiplier to bring both merchants and consumers together to change the way the massive and complex payments system works.

Crypto delivers that 10x multiplier, giving merchants back control over their own operations. Transaction fees can be brought down close to zero which makes a huge difference in revenue as credit card transaction fees are currently a huge cost-center. Using crypto, commerce is conducted directly between merchants and consumers. In a way, crypto is like cash but in a digital way. Transactions are easily verified and irreversible, founded in guaranteed ownership of funds.

As another benefit, paying with crypto reduces fraud which is one of the highest cost-centers in commerce today. Fraud is still possible of course if someone steals your keys and spends your stablecoins, but it’s a lot easier to protect against compared to credit card fraud.

Buying and selling crypto

Stablecoins provide an efficient on- and off-ramp for buying and selling crypto. Without it, most exchanges resort to credit card purchases or bank transfers, but the fees for those types of transactions can often be quite high. Plus, with some exchanges it means your purchase goes straight into a purchase of Bitcoin, while you may want to wait for the perfect time to take your BTC position. Stablecoins address both problems by lowering deposit and withdrawal fees, while at the same time give you more flexibility in terms of the timing of exchanging money into and out of crypto.

Besides complete withdrawals, stablecoins also offer traders a way to move easily between crypto and fiat pairs moving in and out of positions frequently at low costs. Traders do this for a number of reasons such as hedging exposure, seeking shelter in assets that are uncorrelated or turning a profit by finding unique market opportunities between emerging market currencies and cryptocurrencies. During times of intense price volatility, stablecoins are also used to transfer funds between exchanges, minimizing exposure to market fluctuations during the transfer of funds.

Overseas money transfers

Related to payments but in a different context, stablecoins are of particular value in the remittance space. Cross border money transfers are typically quite expensive and slow, especially when it involves exotic currencies such as Nigerian naira, Kenyan shilling, Indian rupee or Burmese kyat for example. You could use Bitcoin to transfer money from Hong Kong to Myanmar, but that may not be practical in absence of liquid off-ramps if the receiver has no intention of holding a volatile currency such as BTC.

This is where trustless stablecoins get their moment to shine. They can be created from anywhere, be pegged to any currency and as such don’t pose the usual currency risks. Anyone with an internet connection is able to receive stablecoins pegged to Burmese kyat at a fraction of what a traditional international money transfer would cost, with much easier options for turning that into cold hard cash compared to BTC or any other crypto asset.

As such, stablecoins are praised for promoting financial inclusion, serving bankless populations, cash-based economies and those who simply can’t rely on the banking infrastructure available to them.

Stablecoins offer protection against hyperinflation

In a similar fashion to the scenario above, stablecoins can be used to preserve wealth - preventing savings from slowly dwindling - or in extreme cases, stop savings from becoming completely worthless due to hyper-inflation.

Bitcoin proved to be a lifesaver for many people living in Venezuela during times of double-digit inflation seen in the past years. Even though BTC went through its own volatile episode, it was still a much better way for Venezuelans to protect their assets as the bolívar continued to drop in value.

But for people more concerned with preserving wealth rather than growing it by investing in high-risk assets, stablecoins offered a way out. In Venezuela, it is relatively easy to obtain Bitcoin through OTCs and Bitcoin ATMs. But instead of holding on to it, Venezuelans would be better off trading into stablecoins backed by currencies much stronger than their own such as USD. This means they don’t need to worry so much about Bitcoin’s volatility. With stablecoins, they can be relatively certain that they can preserve their wealth by leveraging the stability of foreign currencies and they don’t have to worry about capital controls.

Stablecoins in action

Stablecoins are designed for usage. Whether it’s payments, buying and selling crypto, overseas transfers or protecting against weaker currencies, they offer a much better way to park your money, spread risk, and stay financially connected to the world.

While most of the world’s stablecoins in circulation today are pegged to USD, that landscape is slowly branching out to include currencies beyond US dollar. Others already include EURS (euro), BRZ (Brazilian real), IDK (Indonesian Rupiah), PHX (Philippine peso), DGX (gold), XCHF (Swiss franc) BitCNY (Chinese yuan), QCAD (Canadian dollar), and MUFG Coin (Japanese yen).

It’s going to be interesting to see which currencies join the stablecoin market next, and how it will lift more people to do more with their money.

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