Stablecoin usage will continue to rise in 2023, with hundreds of thousands of users relying on these US dollar-pegged cryptocurrencies every day. The most popular stablecoins are Bitfinex’s Tether USDT, Circle and Coinbase’s joint initiative USDC, and the Paxos plus Binance joint initiative BUSD. These three stablecoins represent more than 90% of the stablecoin market, according to DeFiLlama.com. All are supposedly backed by the equivalent value of US dollar-denominated assets held as reserves, although their composition and management varies.
Stablecoins are quite popular in developing countries, where people use them to hold onto value and hedge against inflation. They are also popular among crypto traders. They are generally not viewed as investments because they are designed to hold relatively stable value. Not all stablecoins are created equal, so here are some facts you need to know if you want to use stablecoins in 2023.
Not all Stablecoins are created equal
While dollar-pegged stablecoins are supposedly backed by traditional assets, that is not always the case. Reserves related to both USDT and BUSD have been questioned in the past. As such,
Tether started reporting quarterly insurance in 2021, and daily balance snapshots can also be accessed through their website. Tether does not disclose which banks hold their cash reserves in their reports. Sometimes crypto exchanges only accept their own stablecoin, as is the case with Binance and BUSD, so keep in mind that the redemption may vary depending on the exchange.
In addition to the top three stablecoin players, there are many emerging stablecoin contenders that are algorithmic and backed by crypto assets, not US dollars. The stablecoin industry is full of failed experiments, most notably Terra USD (TUSD), which is estimated to have lost users over $80 billion to its demise. While some stablecoin versions are issued natively on other chains, more than 70% of “crypto dollars” run on the Ethereum network, including both algorithmic and fiat pegged options.
When it comes to algorithmic stablecoins, MakerDAO’s DAI is the leading crypto-backed stablecoin as measured by market cap and name recognition. Since its inception in 2017, the MakerDAO project has been set up as a Decentralized Autonomous Organization (DAO) to (ideally) run operations globally without a central point of failure. A new concept at the time, it’s still unclear how DAOs are regulated, so earlier this month the Maker Foundation launched a $5 million legal defense fund. DeFi’s flight to safety has seen total circulation drop by more than half since last year, and half of the DAI currently in circulation has fiat-backed stablecoins as collateral.
Yet another algorithmic example: Liquity’s LUSD is a highly streamlined and innovative project launched in 2021 to allow users to place a minimum of 110% collateral in ETH to essentially borrow dollars, LUSD, against itself at zero interest, where they only have to pay a small amount. generation fee. Interestingly, the protocol does not have its own frontend, it is a decentralized application that relies on other users creating and sharing frontends to reduce the risk of regulation. Liquidity Providers (LPs) can deposit LUSD into stability pools to serve as a bulwark against debt liquidations and earn LQTY token incentives.
Despite all the innovations happening with stablecoins, banking restrictions are still a potential stranglehold for the industry. Very few banks are willing to partner with cryptocurrency exchanges and stablecoin issuers to facilitate the gateways. In particular, three small US banks deserve credit for taking a heroically large bet on the future of the financial world: Signature Bank, Silvergate Bank and Silicon Valley Bank. However, Signature may scale back on services to crypto exchanges in 2023. Meanwhile, Silvergate is now facing harsh scrutiny from US lawmakers over the bank’s role in the infamous FTX collapse. As long as banks view serving stablecoin users as too risky, limiting fiat exchange options, users will find very few companies and platforms that accept stablecoins outside of crypto exchanges.
At best, stablecoins are the gateway between the real world economy and the digital asset economy. We have seen fiat-backed stablecoins set transparency standards and also work with international law enforcement to ban addresses when necessary. Stablecoins are already regulated and can be used in many circumstances, depending on the jurisdiction. Whether it’s Venezuelans using stablecoins to buy food when local inflation makes fiat purchases unsustainable, or European traders using stablecoins to do business with Asian trading desks, we’ve already seen glimpses of what a borderless world would look like. can see. The Financial Stability Board (FSB), an international body that oversees financial systems and makes regulatory recommendations, is expected to finalize updated stablecoin recommendations in July 2023.
All of these examples exclude Central Bank Digital Currency (CBDC) experiments, governments exploring how to issue their own currency, often pegged to their local fiat or backed by assets such as gold. The future of stablecoins may include CBDCs, and you can track these projects by using the Atlantic Council’s CBDC tracker. China’s e-CNY is the most notable pilot version of a CBDC. But for our purposes, those experimental projects are not considered stablecoins available to global retail users.
All things considered, in 2023 it is important to know that dollar-pegged stablecoins issued by crypto exchanges are still the most popular, even though their liquidity is tied to banking services on those parent exchanges. On the other hand, stablecoins such as DAI and LUSD offer borrowing options that are not available through traditional financial institutions. As US regulators take time to warm up to stablecoins, users in Latin America, Asia, and Africa will likely remain the pioneers using stablecoins the most.
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