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Cryptocurrencies are gaining popularity worldwide. Stablecoins have been positioned as one of the top cryptocurrencies among others. Stablecoins seek to provide the benefits of digital currencies without extreme price fluctuations, in contrast to Bitcoin and Ethereum, which are well-known for their volatility.
Stablecoins have become more and more popular and widely used in the past several years due to several variables, including global economic developments and their application in decentralized finance (DeFi). This article delves into the main drivers of stablecoin adoption and their role in the financial markets, along top five stablecoins.
Stablecoins are virtual currencies that are pegged or connected to the value of another currency, commodity, or financial instrument. Stablecoins act as an alternative to the continuous fluctuations of other cryptocurrencies such as Bitcoin, which has become unsuitable for everyday transactions.
Since 2020, the market capitalization of the top ten fiat-pegged stablecoins has grown significantly. The entire market capitalization of cryptocurrencies increased by more than 3,100% during the bull run of 2020–2021, peaking at $181.7 billion in March 2022.
The market capitalization briefly decreased after Terra and its UST stablecoin crashed, but it eventually increased in November 2023. The whole market capitalization of fiat-pegged stablecoins as of August 2024 is $161.2 billion, a 35.4% rise from the year prior. Some of the reasons behind the increasing demand for stablecoins are mentioned below.
Stablecoins are becoming more and more popular due to their capacity to reduce risk and offer price stability. Conventional cryptocurrencies are not suited for daily transactions or as a store of value due to their significant price swings. A more reliable option is stablecoins, which guarantee that the value of the digital asset stays mostly consistent and reflects the value of the pegged item.
Services for stablecoin development aid in creating a smooth transition between the realm of cryptocurrencies and the traditional financial system. In addition to providing a means of representing fiat money on the blockchain, stablecoins facilitate simple money transfers between conventional banks and cryptocurrency exchanges, eliminating the need for laborious conversion procedures.
It has become a preferred choice for those individuals who want to take part in the cryptocurrency market without being exposed to its volatility.
Comparing stablecoins to traditional banking systems reveals that they have far cheaper transaction fees and faster settlement timeframes. Stablecoin transfers are faster and less expensive than standard remittance services between countries or people. This has led to the adoption of stablecoins in international trade, remittances, and cross-border payments.
The field of decentralized finance, or DeFi, has grown rapidly in the last several years because stablecoin development has made lending, borrowing, and yield farming on DeFi platforms easier. Users can obtain loans without traditional credit checks by utilizing stable coins as collateral, thus increasing financial inclusion and capital access.
For traders and arbitrageurs, stablecoins have emerged as a crucial instrument. Traders can protect their money during market downturns by changing volatile cryptocurrencies into stablecoins, which allows them to reenter the market once it has stabilized. Stablecoins also improve market efficiency by facilitating arbitrage possibilities between several exchanges with price discrepancies.
1. Tether
Tether, often known as USDT, is a cryptocurrency that differs from other digital currencies due to a special feature. It is tied to the US dollar; one dollar is always worth the same amount of it. Overall, Tether is a stablecoin created to stabilize cryptocurrency trade.
Tether operates by tying the value of the cryptocurrency to the value of an actual asset, which is where the US dollar is. To do this, the business has reserves of US dollars equivalent to the whole amount of Tether in use. Tether Limited has one US dollar in reserve for each Tether token that is produced.
2. USD Coin
Stablecoin USD Coin (USDC) has swept the cryptocurrency community. In the unstable world of cryptocurrencies, USDC, a digital currency launched in 2018, offers a solid and dependable method of payment because it is tethered to the US dollar. Anyone with an Ethereum wallet can access USDC, an ERC-20 token that runs on the Ethereum Blockchain.
USDC has emerged due to its accessibility, openness, and stability. It can be a preferable option for traders, investors, and companies searching for a stable virtual currency that is not prone to the volatility of other cryptocurrencies like Bitcoin and Ethereum. After Tether (USDT), USDC is presently the second-largest stablecoin in terms of market capitalization.
3. Binance USD
Binance USD is a stablecoin that has a 1:1 ratio and is based on the US dollar. Accordingly, one BUSD is equivalent to one US dollar. Paxos, a registered financial firm that has the equivalent number of US dollars in reserve, is the entity that issues Binance USD.
To provide traders with a stable and dependable cryptocurrency that is not susceptible to the price fluctuation of other cryptocurrencies, Binance, one of the biggest cryptocurrency exchanges in the world, teamed up with Paxos to launch BUSD in 2019. BUSD can be used for trading, investing, and making purchases of goods and services. It is accessible on the Binance exchange in addition to other well-known exchanges.
4. DAI
MakerDAO, a decentralized autonomous organization (DAO), constructed on the Ethereum Blockchain, is the creator of the stablecoin Dai. Rune Christensen established MakerDAO in 2014 to develop a decentralized stablecoin that would allow anyone, regardless of location or financial situation, to take part in the global economy.
Dai's basic idea is that it is a cryptocurrency backed by other cryptocurrencies acting as collateral. This implies that a specific quantity of Ethereum is used to support each unit of Dai, ensuring the stablecoin's value stability.
5. TrueUSD
TrueUSD was launched in 2018 by TrustToken, a fintech company that specializes in tokenized asset creation. The collateralization concept of TrueUSD is one of its distinguishing characteristics.
TrueUSD is entirely backed by US dollars denominated in escrow accounts, in contrast to other stablecoins that could rely on a mix of assets or algorithms to preserve their worth. This indicates that an equivalent number of US dollars is kept in reserve for each TUSD token in use. To guarantee accountability and transparency, TrustToken additionally offers daily attestations from an impartial accounting firm confirming that US dollars are kept in reserve.
Stablecoins bridge the gap between the unstable world of digital currencies and the stability of conventional financial systems. Their extensive use across a variety of sectors can be attributed to their capacity to offer price stability, lower risk, and enable faster, and more affordable transactions. Stablecoins are now indispensable tools for anyone looking to make use of the advantages of cryptocurrencies without the severe price swings, whether they are being used for trading, cross-border payments, or decentralized financing (DeFi).
The leading stablecoins, such as TrueUSD (TUSD), USD Coin (USDC), Binance USD (BUSD), DAI, and Tether (USDT), all have a significant impact on the stablecoin industry. From Tether's lead in market capitalization to DAI's decentralized support, each has special benefits. Their applications go beyond just replacing money.
