Are Stablecoins An Integral Part of the Crypto Ecosystem, Or Simply a Coin?
Cryptocurrency is a constantly evolving organism. Since Bitcoin’s conception in 2009, the market has grown from strength to strength – albeit with a bit of shakiness along the way – with an ecosystem of altcoins, dApps and NFTs transforming the market into a certified digital universe.
One of the most popular developments in recent years is stablecoin – an aspect of cryptocurrency which is pegged to a traditional financial asset. Made to be a viable alternative to the high volatility which crypto brings, stablecoins have given a number of new investors a door to cryptocurrency without the concern of losing out on their investments if they make the wrong decision.
For many users, stablecoins have been a crucial differential which has helped cryptocurrency to thrive, even when volatility has threatened to bring it down. But are they really so integral, or are they just another alternative in blockchain’s ever-growing ecosystem?
What Are Stablecoins?
To answer the question of stablecoins impact in the crypto market, it is first necessary to know exactly what stablecoins represent. Stablecoins are one of the many altcoins on the market, but unlike other altcoins, they are tied to a traditional reserve – such as the US dollar or gold – and they are designed to reduce volatility and be better suited to day-to-day commerce.
The most popular stablecoins right now involve Tether – which is pegged to the US dollar and known for its security and efficiency within crypto-to-fiat platforms – USD Coin – also pegged to the US dollar – and True USD – which is one of the most liquid stablecoins on the market.
As of September 2022, the market amounted to more than $150 billion, but it is not only fiat-backed stablecoins which are providing an impact. Other stablecoins include commodity-backed stablecoins, which are stabilised with hard assets such as gold and real estate, and crypto-backed stablecoins, which maintain an overcollateralized position amongst the higher volatility of another digital token.
Why Are They Utilised Compared To Other Crypto Coins?
There are many reasons why stablecoins are preferred over other crypto coins. For starters, newcomers in the crypto market might be wary of the increasing volatility that is inherent within its nature. A stablecoin allows buyers and sellers to be confident that the value of their investment will not rise or crash along with the rest of the crypto market.
Stablecoins can also be easily transferred. An investor will not need a bank account to hold stablecoins, and they can be sent to places where the US dollar might be hard to obtain – transfers are also cheap, with some investors having sent millions worth of USDC with fees of less than one dollar.
According to experts, stablecoins also hold an important role in the growing ecosystem of cryptocurrency itself, making them not only a viable alternative for users but a necessary cog inside the metaverse machine.
Why Are Stablecoins Important For Crypto?
Part of the reason stablecoins can be seen as crucial to the market is that they function as a bridge between fiat currency and crypto assets. In 2021, the trading volume of stablecoins managed to surpass unbacked crypto tokens, with an average of $2.9 trillion in trading volumes every quarter – nearly meeting the average US equities on the New York Stock Exchange.
As well as this, coins like Tether were involved in half of all Bitcoin and Ethereum trades throughout 2021 – and this grew to around 65% of all trading in March 2022. This demonstrates their efficiency in battling interoperability. With each network within blockchain having a different token, it is difficult for users to engage with another economy without being met with transferability issues. Stablecoins alleviate this issue by acting as a bridge. Users across the metaverse are capable of easily interacting and trading with a variety of alternative blockchain networks, keeping efficiency and productivity high and exorbitant fees low.
Stablecoins also provide most of the liquidity in crypto trading and DeFi applications. They amounted to around 45% of liquidity in decentralised exchanges in May of this year, with half of this percentage provided by collateralised stablecoins. In terms of the exchanges, liquidity is important, as many users are holding onto their coin in the hope that the value of their portfolio will rise and become the next leading player. Stablecoins alleviate this issue as they are focused more on trading rather than hodling as an investment, which similarly allows more investors to buy metaverse assets and expands the market as a result.
The Growth Of Stablecoins And The Metaverse
For this reason, it is clear that stablecoins are far more than just another coin. They are an integral part of the metaverse ecosystem which offers efficiency, security and – above all – stability. They also represent the growth which cryptocurrency is continuing to achieve. Because they are more secure and stable, they are seen as a more attractive investment for users who are concerned about losing out. With more users getting on board and achieving stability with stablecoins, the more the market can expand, and cryptocurrency becomes a more viable option for investors who have been hesitant to participate.
That is not to say they are perfect. While blockchain technology is predominantly based on a decentralised network, stablecoins are naturally more centralised, as they are backed by traditional assets and would need a centralised team to manage the reserve and keep it leaning towards the structure of this asset. There is also the question of the Terra debacle earlier in 2022, where Terra managed to fall below its peg and cause mayhem and disorientation across the crypto market. This has caused talks of regulation to get louder and investors worldwide to seriously consider the mechanism of their chosen stablecoin and whether they can be exploited.
As a rule, however, stablecoins are a heavily beneficial part of cryptocurrency’s ecosystem. There will naturally – and quite rightly – be questions about their proficiency and reliability, but so far, stablecoins have proved to be a good alternative to volatility and complicated trading structures, helping to bolster the ease of the metaverse and aid it in its growth.