Tron DAO dives into the growth of stablecoins and how it is used across different blockchains.
According to Chainalysis, Nigeria has one of the highest crypto adoption rates in the world. Restrictive monetary policies and the lack of a stable currency have fueled that growth. Crypto is an unprecedented opportunity for many among the Nigeria population to participate in the global workforce and benefit economically. With cryptocurrency adoption rates continuing to surge and global adoption at around 420 million users, the usage of stablecoins have increased.
What Is a Stablecoin?
Stablecoins are cryptocurrencies that are pegged to a stable asset, such as the offshore Chinese Yuan, the US dollar, the Euro, or gold. These stablecoins are designed to offer the stability of fiat currencies while still leveraging the advantages of cryptocurrencies, such as expeditious cross-border transactions as well as everyday transactional commerce. In countries with restrictive monetary policies or traditionally unstable currencies, stablecoins empower a new world of possibilities. For example, citizens of select countries have looked to digital assets as an alternative for currency in the midst of banking shortages and hyperinflation, and stablecoins have offered viable solutions.
There are several types of stablecoins.
Fiat-Backed Stablecoins
Fiat-backed stablecoins are cryptocurrencies that are backed by fiat currencies, such as the US dollar or the euro. These stablecoins are issued by a central authority that holds the equivalent amount of fiat currency in reserve. This stablecoin is designed to maintain a 1:1 peg with the underlying fiat currency. USDT and USDC are examples.
Crypto-Backed Stablecoins
Crypto-backed stablecoins are cryptocurrencies that are backed by other cryptocurrencies, such as Bitcoin or Ethereum. These stablecoins can be issued by a central authority or a decentralized autonomous organization (DAO) that holds the equivalent amount of cryptocurrency in reserve. This stablecoin is designed to maintain a stable value in relation to the underlying cryptocurrency.
Algorithmic Stablecoins
Algorithmic stablecoins are cryptocurrencies that are designed to maintain a stable value through a complex algorithmic mechanism. These stablecoins are not backed by fiat or cryptocurrencies and do not require a central authority to issue or maintain them. They are therefore difficult to regulate and came under much criticism and scrutiny in 2022.
Do Stablecoins Circulate on Most Blockchain Networks?
The short answer is yes, although there are two that move exponentially more than all the others combined.
As of June 21, 2023, the total market cap for all stablecoins was more than $128.58 billion. According to DeFiLlama, the following five blockchain networks circulate the most stablecoins, with the data reported specific to that blockchain:
- Ethereum | $70.51 billion | 51.11% USDT
- TRON | $43.73 billion | 92.40% USDT
- Binance Smart Chain | $5.69 billion | 59.56% USDT
- Arbitrum | $1.78 billion | 58.74% USDC
- Solana | $1.53 billion | 56.68% USDT
Notice the market share for Ethereum and TRON compared to the others in the top five. Also, Arbitrum’s rapid rise to fourth place on this list may surprise some crypto analysts and enthusiasts. Why and how that has happened might make for a quality separate research article. In this article, though, let’s simply examine how stablecoins are being used on the leading blockchain networks.
How Are Stablecoins Being Used?
Stablecoins are being used for a variety of purposes, including:
Decentralized Finance (DeFi)
Decentralized finance (DeFi) refers to a set of financial applications that enable users to access financial services without the need for “centralized” intermediaries, such as banks or financial institutions. Many DeFi protocols offer liquidity pools where users can deposit cryptocurrencies and stablecoins to earn interest or swap tokens. Stablecoins are a critical component of the DeFi ecosystem.
According to the Q1 2023 quarterly report from BitWise, Stablecoin payments and transfers have accounted for $17 trillion of the DeFi market to date, with more than $2 trillion in stablecoin transactions in Q1 2023 alone. For context, $2 trillion is more than PayPal processed in all of 2022.
Cross-Border Payments
Some stablecoins are being used for fast and cheap cross-border payments. By using stablecoins, users can avoid the high fees and slow transaction times associated with traditional cross-border payment methods. According to a Forbes article from April 2023:
“Stablecoins are poised to become the standard for remittance, payments, and cross-border transactions in the near future. With ISO20022 officially launched, the new global standard for financial messaging that aims to streamline and standardize the communication of financial data between different financial institutions, businesses and governments will be able to tap into compliant cryptocurrencies and stablecoins to build global financial mediums.”
Trading
Stablecoins are being used for trading on cryptocurrency exchanges.In the month of May, volume of trading pairs among stablecoins reached $292 billion. Stablecoin trading enables users to hedge against market fluctuations and maintain liquidity, as they can easily convert their holdings into other cryptocurrencies or fiat currencies. By using stablecoins, traders can hold cryptocurrency on exchanges while waiting for volatility to settle. Traders also use stablecoins to move crypto between different exchanges and different blockchains, normally using a blockchain bridge to do so.
Tokenization
Stablecoins are being used for tokenization of assets, such as real estate or gold. By tokenizing assets using stablecoins, users can invest together into a cause or a company or a brand. Tokenization enables a more incentivized loyalty rewards structure. It also allows for access to fractional ownership of assets without the need for intermediaries, such as investment firms or financial institutions. Tokenization of stocks is an emerging market. One of its positives is that it will enable fractionalized investment in high-value stocks, and stablecoins will likely be used to calm the fears of investors with regard to perceived cryptocurrency volatility.
Borrowing and Lending
Stablecoins are also being used for borrowing and lending purposes. Lending protocols allow users to borrow and lend stablecoins at fixed interest rates. This enables users to access liquidity without selling their cryptocurrencies while also earning interest on their stablecoin holdings. Crypto lending and borrowing on the whole is currently more than a $5.2 billion market, as stablecoins assist with monetary movement and foundational infrastructure. In the future, analysts predict that stablecoins will optimize borrowing and lending in every industry, especially the mortgage industry, enabling faster decisions about loans as well as more expeditious distribution of funds.
Charity and Philanthropy
Finally, stablecoins are being used for charity and philanthropic purposes on multiple blockchains. Many non-profit organizations are beginning to accept stablecoins such as USDT as a means of payment for donations. This is especially true for international charities, because stablecoins enable donors to make quick and secure payments without worrying about the high transaction fees involved in cross-border payments. In disaster relief, stablecoins empower rapid response to crises in real-time. For example, cryptocurrency played a significant role in the immediate responses to the Ukrainian war, on both the Russian and Ukrainian sides, although for different reasons. Crypto also empowered relief responses for the Turkey/Syria earthquake.
What does the data say about stablecoins?
Concisely stated, the data says their use is exponentially on the rise. The market cap for stablecoins has been a steep upward trend since 2021, and their significance in the global economy is cementing. Take a look at USDT’s market cap chart since 2016 along with some others:
USDC:
DAI:
TUSD:
Stablecoins have emerged as an important component of both decentralized finance as well as everyday commerce. They enable users to access stable-value assets in an otherwise volatile market.
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